Allen Zhu knows everything.

By Muxin Xu

Edited by Zhiyan Chen

Allen Zhu is once again at the center of the storm. At a time when industry practitioners widely believe the hard mode will persist for years amid a gloomy atmosphere, Zhu is loudly proclaiming "don't leave the table," and pointing the VC industry toward a path to a DPI of 1 — dividends. "Get your principal back in five years through dividends." This tantalizing hypothesis for LPs quickly drew rebuttals from peers. David Zhang, founding managing partner at Matrix Partners China, has been issuing continuous and forceful refutations, from WeChat Moments to media interviews. His argument boils down to two points: it's neither possible nor desirable. Some investors launched into mockery mode on social media, calling the approach "mock Drip Capital, become Drip Capital, surpass Drip Capital." Others cut ties directly, declaring "the road ahead is long, we'll go our separate ways." In an era when exits are universally difficult, it's easy to see the tension and anxiety of the primary market in this dispute: on one side, a major player who wants to remain at the VC table tells LPs he will return their capital through dividends; on the other, investors who still cling to the VC dream are resorting to every possible means to achieve exits in practice. Looking back at Zhu's career, he may be the most media-savvy figure in the VC industry. In the consumer-facing era of Didi and Ofo, when user numbers could directly determine a portfolio company's survival, Zhu's declarations that "Ucar is fake sharing economy" and "the bike-sharing war will end in 90 days" still echo today. Now, as state capital and government funds with distinctly conservative risk appetites have become mandatory options for fundraising, and market-based capital's motivation to invest in VC has frozen, Zhu — who still wants to stay in the game — has clearly changed his core audience. From "not bullish on Chinese large model companies" to "dividends are more stable, safer, and more reliable," his series of pronouncements all say one thing: investing in VC can still make money.

One Answer

First, let's simply address whether "getting your principal back in five years through dividends" is actually viable.

Zhang's response largely represents the thinking of those who oppose the idea. For a VC firm to recoup its principal through dividends in five years, it would need to satisfy at least three conditions: 1. The fund size must be very small (smaller than the typical $300-400 million); 2. It must invest early, at low valuations, in excellent companies that will have strong profitability at the mid-to-late stage; 3. These excellent companies must also be willing to sign dividend clauses. One investor ran a more detailed simulation using the condition that a single investment must achieve payback through dividends within five years — the most suitable targets would be companies currently unprofitable or losing money, yet able to distribute 25% of annual profits as dividends starting one year later. Such "miracle" companies might exist, but they are extremely rare. Alternatively, one could invest in already-profitable companies. Take a company with annual profits of 30 million RMB: if you hold 20% equity, and excluding the effect of profit growth, you would receive 30 million over five years — roughly equivalent to a typical early-stage VC investment. But using Zhu's stated criterion of "only investing at below 10x PE" to reverse-calculate: for a company with 30 million profits valued at 300 million, a 30 million investment would only secure 10% equity, stretching the dividend payback period from five years to ten. At 5x PE, it could work. This investor's conclusion: "At the VC stage, investing angel-sized checks using PE standards" is the only way this target could be met. Beyond this, once a company is already profitable, it's hard to resolve one founder's puzzlement: as a company capable of repaying its investment in five years, why would it raise capital at the cost of dilution? And in most cases, corporate profits need to be retained for continued expansion — would a company with such healthy cash flow abandon this growth possibility? Of course, it must be noted that in the original interview with ChinaVenture, "getting your principal back in five years through dividends" was itself a hypothesis Zhu presented to LPs, one that requires time to validate. He also qualified it with the following conditions: early-stage VC, consumer investments. Among the scattered voices supporting Zhu's view, the blogger "Primary Market Gossip" calculated that if one invested at the angel round in the Lanzhou beef noodle chain "Majiyong," with sustained stable performance and company agreement to dividends, the five-year dividend payback condition could be met — fitting the early-stage + consumer profile precisely. Under these constrained conditions, an early-stage consumer investor told Anyong Waves that the dividend payback approach can indeed work. For example, by negotiating priority payback in the investment agreement, or combining it with priority share redemption clauses, this can be understood as a form of "partial buyback." "Actually, priority dividend rights aren't new — during the TMT era, companies generally had no profits, so this clause was effectively void, but consumer is a very suitable track for dividend investing," Tong Jie, founding managing partner of Shangcheng Investment, which focuses on early-stage consumer, told Anyong Waves. It's impossible to expect every deal to achieve five-year dividend payback — "companies that can achieve this need to be at 85 points or above" — but priority dividend payback can be understood and accepted by strong cash flow consumer enterprises. From another perspective, dividends aren't merely the investor's unilateral wish. In the dividend process, it's not just investors who benefit; founders also gain returns simultaneously.

Dividends as Consensus

Setting aside the payback period, signing dividend clauses has indeed become industry consensus. Beyond consumer, for companies with potential for strong cash flow that face extreme difficulty going public for various reasons, investors will also sign dividend clauses as a "replacement" for exit — gaming companies, for example.

So, how are dividend clauses structured?

Liu Hongguo, founder of Dadi Law Firm's Qingyushi team, stated: "Dividend ratios depend on multiple factors, including the company's development stage, profitability level, and capital needs. For example, for mature companies without major capital expenditure plans, the cash dividend ratio may be no less than 80%; with major capital expenditure plans, no less than 40%; for growth-stage companies with major capital expenditure plans, no less than 20%." But if the goal is to recoup principal within five years, proportional dividends would be difficult because the investor's stake is too low — at this point, special dividends may need to be set. This becomes a negotiation. Liu Zizheng, founder of Yongchuan Capital, told Anyong Waves: in practice, many equity projects don't start with dividend discussions. Rather, when capital market plans fall through, facing buyback pressure, or when companies have profits but growth is difficult, they reach compromise-based renegotiations to convert to dividend form — this is essentially a compromise of equity investment. There's another dividend clause scenario: investors require in the investment agreement that principal be fully returned through dividends within five years, and on that basis, equity gradually steps down. This gradual equity reduction method brings to mind the much-discussed Drip Capital in recent years. The dividend-based payback investment approach shares similarities with Drip Capital (or RBF investment): both establish payback periods and take proportional cuts of profits. The difference is that Drip Capital's investment model mostly targets individual franchise locations rather than brands. But indeed, some GPs are contemplating a combination of equity investment with the Drip Capital (RBF) model. Drip Capital investors have observed that recently, more and more VCs in discussions with them have focused on learning how to forecast revenue. Everything indicates that venture capital, once famous for "risk," is increasingly pursuing "certainty."

The Mismatch Between Growth and Value

While the vast majority of investors hold negative views of Zhu's hypothesis, his actual audience — LPs — display notably ambiguous attitudes. Whether or not LPs believe this payback method can be achieved, among the capital providers Anyong Waves contacted, there is consensus that "Zhu speaks practically." Clearly, Zhu has skillfully grasped LPs' sentiment toward allocating to the primary market. "Being able to stand from the LP's perspective and treasure bullets, rather than continuing to gamble with LP money." Multiple LPs view this attitude as a "virtue" for primary market GPs. Compared to classic VC expressions of buying into dreams and reaching for the stars, LPs' thinking is closer to "getting something back is better than nothing." One LP also told Anyong Waves: dividends for growth-stage projects are acceptable too — "equivalent to this money not exiting through secondary markets long-term, but becoming a fixed-income investment; demand in this area is growing." The "August 27 Policy" and "March 15 Policy" have been successively promulgated and implemented, and the new "State Nine Articles" were recently released. Changes in domestic IPO rules and continued overall return declines are already reality. This is undoubtedly why LPs express understanding toward "using dividends to recoup principal." But some LPs also raise a more fatal question for the primary market: "Does the original VC investment model still work? This is debatable." In the view of Xiang Shang, vice president at advisory firm Lightstone, the core problem facing VC today is that the soil it relies on for survival no longer exists — "the disappearance of growth investing." The objects of so-called "growth investing" are enterprises that "have no value from a business perspective, cannot obtain loans through traditional channels," but are believed by VCs to have tremendous future growth potential and the opportunity to bring hundred- or thousand-fold returns. Such investment targets typically capture markets by burning capital, "eliminating" competitors, and achieving de facto monopoly to extract excess returns. This indicates that compared to "value investing," "growth investing" actually bets on market expectations. "And now, the blank spaces brought by the information revolution are basically gone." Xiang told Anyong Waves, thus creating a "mismatch": those who should be looking at growth are instead looking at value, and VCs who should be pursuing high explosive returns are instead pursuing certainty. So when VCs universally begin pursuing certainty, how do they differentiate themselves from other asset management products and wealth management products in the eyes of capital providers? If there are still investors who hope to participate in the most cutting-edge, most development-potential emerging enterprises in the business world through primary market fund allocation, can these "certainty chasers" under mismatch conditions satisfy their expectations? Clearly, Zhu has merely provided a way for wobbling players to temporarily remain at the table. For the primary market, there are clearly more critical questions — is this game still worth playing? And what new way should it continue to be played?

Image source | IC photo