Who's Standing on the Founders' Side in the Buyback Wave?

By Zhiyan Chen

Duane Kuang finally couldn't sit still anymore.

The founding managing partner of Qiming Venture Partners, with 25 years in the industry, published an essay this morning titled "Some Thoughts on Current Investment Terms in the Venture Capital Industry." It focused on his views regarding "redemption rights" — now rampant in the primary market — with a direct message that the premise of such clauses must be "not driving companies and founders into a corner."

Kuang's core arguments roughly break down into five points:

1. Redemption clauses originated with dollar-denominated funds. There are two core use cases: when a portfolio company has been profitable for years but neither goes public nor distributes dividends; or when a startup's trajectory shifts and operations no longer require the cash on its balance sheet.

2. The original intent was to protect investors, but it must never come at the cost of harming the company's operations. And the clause applies only to the company, not the founder.

3. Paradoxically, Silicon Valley — where these clauses originated — looks down on performance-based betting and initiating redemptions. First, it signals poor judgment; second, it inevitably creates misalignment between investors and founders.

4. When RMB funds emerged, redemption clauses expanded to make founders personally liable, while abandoning the prerequisite of not harming normal business operations.

5. Over the past decade, the domestic market neglected proper due diligence and pricing, making abusive betting-on-the-future terms standard practice. Against the backdrop of tightened IPO approvals, this has ultimately produced the current "stampede" of redemption demands.

Facing the thousands — even tens of thousands — of companies under redemption pressure, Kuang appealed: "In an era when listing channels were open, these were all star students that investment institutions took pride in... They absolutely should not be destroyed by a stampede of redemptions."

In today's primary market environment, redemption, exits, and liquidity — these tightly interwoven issues — are undoubtedly a collective anxiety. For Qiming Venture Partners, a top-tier firm, to step forward and attack the abuse of redemptions seems like a move that "goes against its own interests." Some might even say that with Qiming having just raised 6.5 billion RMB in 2023, it's far from the survival line.

But in today's climate of knife's-edge tension between entrepreneurs and investors, this move is both necessary and rare.

If Allen Zhu's stance four months ago — "recouping principal through dividends within five years" — was a pledge of allegiance aimed at LPs, then Kuang's arguments today essentially point to the other side of the investment industry chain: investors must stand with entrepreneurs.

This was once gospel among mainstream primary market investors. Whether Neil Shen, Kathy Xu, or Liu Qin and Wang Qiong — the most celebrated investment hero stories are inseparable from supporting and accompanying great entrepreneurs, from sharing hardships and successes together.

But somewhere along the way, inflated valuations, slowing funding rounds, and difficult IPOs became everyone's "original sin." "Being responsible to LPs" has been invoked countless times as justification for investors to stand opposite entrepreneurs. Yet when people press further — why were once-hot companies so overvalued? why should three to five years be the expected timeline for a successful IPO? — answers remain elusive.

Incident after incident in recent years has transformed what should be a relationship of shared destiny into something more like a bitter couple who can't stand the sight of each other. First there was Zheng Gang's public attack on Luo Yonghao; more recently, Liu Guangyao's "kept son-in-law" controversy.

Days ago, Lefeng Law Firm published a report noting two simultaneous realities: first, actual exit proceeds for domestic private equity investors amount to less than one-quarter of the US equivalent; second, 130,000 projects will face mounting exit pressure, with "tens of thousands of entrepreneurs potentially facing hundreds of millions in redemption risk."

Investors are trapped in exits and DPI; entrepreneurs are trapped in redemption clauses. As An Yong Waves ("暗涌Waves") analyzed in detail in its early-year piece "Investors Trapped in Redemption Agreements", in GPs' quest for exits, the widespread resort to redemption as the simplest solution is actually incapable of truly stopping losses. This is a "death loop" with no winners.

Under the "distorted" terms Kuang describes, "stampede" redemptions cannot become the cure for GPs' DPI woes — they may instead be the final straw that breaks the camel's back. In a toxic relationship, mutual blade-wielding only produces mutual loss.

So, do entrepreneurs and investors still need each other?

From the early-stage entrepreneurship perspective, faced with current multifaceted funding challenges, market-oriented investment institutions remain the more risk-tolerant option across the entire financial system. From the investor's angle, the answer is even simpler: continuously emerging and growing companies are the foundation upon which the investment industry itself thrives. The value and returns created by investors and entrepreneurs together are the enduring path to effective exits.

It is precisely for this reason that Kuang — known for his low profile — has made a rare call to arms, mobilizing the entire financial ecosystem to change for the sake of "companies and entrepreneurs":

"Through greater patience in the primary market, moderate loosening in the secondary market, more active M&A policies — especially further relaxation of policies allowing listed companies to acquire unprofitable enterprises — greater regulatory support and encouragement for overseas listings, and more pragmatic standards from LPs in evaluating whether GPs have fulfilled redemption obligations, we can give these companies and entrepreneurs breathing room, and greater possibility to continue growing and contributing to society."

This may indeed be an overly idealistic cry. But today's primary market, and today's world, desperately need such idealism.

Image source | IC Photo

Layout | Yao Nan