Forced Exit: The End of China's VC "Tool Man" Era

By Yi Zhang, Qian Ren

Edited by Zhiyan Chen, Jing Liu

The First Wave of Involuntary Departures

In the business world, talent mobility is the most reliable barometer of an industry's health. This year, the glacier of despair that formed at China's internet giants has finally reached the investment sector.

Recently, news of staff cuts at a fund sent shockwaves through the industry. Though the firm later explicitly denied the rumors, the reason they spread so quickly was simple: they perfectly captured the prevailing mood among investors.

Over the past several months, many investors "Waves" has spoken with — especially those below the managing director level — have expressed varying degrees of anxiety about team restructuring, including the possibility of their own elimination.

And it's already happening. We've learned that one asset management firm with over 100 billion RMB under management saw nearly one-third of its staff turn over in the past six months; one team shrank from seven people to two. After a single investment lost nearly 80% of its value, an entire sector team at a well-known VC was "optimized" wholesale. A dollar-denominated fund's GP stopped paying rent, abandoned personal belongings, and shut its Shanghai office before the pandemic. Consumer investing, which ballooned rapidly over the past two years, may be the hardest hit: multiple firms have already restructured their consumer teams, in some cases eliminating every member.

The past decade was one of relentless growth for China's investment industry. Preqin data shows that Greater China's VC/PE assets under management surged from less than $200 billion to $1.78 trillion. While the industry had seen cycles before, the overall trajectory was expansionary. After 2014 especially, VC/PE became a powerful magnet attracting what was arguably the country's best talent. An industry saying holds that by 2017, China's primary market already had 200,000 investors.

But starting in 2020, the flow of talent abruptly reversed.

"Particularly among younger investors, we're seeing an exodus," a headhunter focused on the investment industry told "Waves." After more than a decade in the business, this was the first time he'd seen the industry itself gripped by "unemployment anxiety."

Inevitably, investors come and go with industrial rotation and economic cycles. But this time is different. Previously, departures were largely voluntary — moving to secondary markets, Web3, and other fields. As one LP behind multiple dollar funds told "Waves," "this is the first time people are being forced out."

Objectively speaking, China does have an oversized, even redundant, investor population. Synthesizing research from Zero2IPO, Zhiyan Consulting, Niudata, and the National Venture Capital Association (NVCA), and comparing 2021 statistics on fund count and deal volume between China and the US, we found: US VC funds averaged 2.7 investments per year, while China's figure was roughly half that: 1.2.

Given differences in business environment and industry development, the scientific rigor of this comparison is debatable. But it further illustrates a long-standing reality: China's investment industry suffers from oversupply. So on the surface, this wave of layoffs appears to be a correction after years of expansion.

Yet this is only the most superficial layer of the story.

When Top Talent Becomes an "Efficiency Tool"

Based on "Waves" observations, the core target of this restructuring is junior staff: spreading from analysts and investment managers up to the VP level. At many funds, VP is the watershed rank in the hierarchy, also considered "the most dangerous title": generally only upon reaching VP do you gain authority to lead investments independently.

This is where investment firms diverge significantly from tech giants in their restructuring logic. For mid-tier and above funds, the goal isn't merely "cost-cutting" but improving operational efficiency. Bloated headcount can degrade information efficiency and amplify bullwhip effects — far more fatal problems for an investment fund.

Some context is needed here. For most second-tier and above VC funds, a long-standing strategy has been the "human wave tactic." For a considerable period, this was effective for expanding project coverage. Though many young investors entering the industry criticized this approach, most found it difficult to escape this self-definition.

A dollar fund investor told "Waves" that many GPs see themselves as decision-makers, "key persons," while "young, junior-level people are more like efficiency tools."

Comparing the profiles of Chinese and American investors reveals the contrast. The most common path in US VC: an entrepreneur who has achieved some success in their field is invited to join a fund as partner in their thirties or forties; or a domain expert joins and advances to partner over 2-6 years. Even MBA graduates from elite schools typically work at investment banks or consulting firms for a few years before entering VC — rarely starting from the very bottom.

In China, riding the mobile internet wave and IPO mythology, waves of fresh graduates with finance and management backgrounds went straight into VC. Even amid industry contraction, a Beijing-based FA firm told us they still receive over 100 resumes weekly, with a quarter from "Tsinghua, Peking, Fudan, and Jiaotong" graduates alone.

The fundamental reason lies in different understandings of the "people business." US VC organizations resemble aggregations of individual experience and intellect, emphasizing "brain workers." In China, large numbers of practitioners perform basic industry research and project coverage — more "tool people" leaning toward manual labor.

This directly relates to the flood of capital into primary markets after 2014 and the ballooning AUM of top institutions.

James Liang, founder of Skyline Ventures, told "Waves" that overseas capital flowing to Chinese VC "took off in 2013-2014 and peaked in 2018-2019." Data shows that over the past decade, the top 10 Chinese GPs' fundraising accounted for nearly 30% of the entire market.

Under this concentration effect, LPs tended to view China's established funds as follows: since personnel costs represented an ever-smaller share of management fees, hiring new staff to expand sector and project coverage became an "extremely cost-effective" approach.

One fund-of-funds investor calculated for "Waves": for a 2 billion RMB fund, 2% management fees equal 40 million. Supporting a ~10-person investment team at 800,000 RMB per capita, plus travel expenses, would leave virtually no surplus. But at 10 billion scale, management fees reach 200 million; even with a 40-50 person investment team costing roughly 100 million, 80-100 million remains.

"Funds with large AUM make serious money on management fees alone," this investor said. "So they don't even need to hunt precisely for LPs — just ensure they don't miss anything."

Lightrock Advisors, which focuses on LP/GP ecosystems, studied domestic and foreign GP compensation structures in 2019. They found that foreign PE firms like Blackstone and KKR use 90% of management fees for base compensation, effectively using half their carry to incentivize teams.

This clearly differs from most domestic institutions where "personnel costs are only half of management fees." After RMB fundraising, the "boss" typically takes the lion's share of management fees. Another portion goes to the management company for administrative or PR expenses. Any profit may even be distributed to management company shareholders. Some go further, using management fees to cover the GP commitment they're supposed to contribute personally.

Under these conditions, the "human wave tactic" was born. Chinese equity investment developed an ironclad "golden rule": the mainstream of primary market investing is a people business built on maximizing AUM.

In 2014, for example, Matrix Partners China's nearly 60 "wolves" met with nearly 6,700 startup teams and invested in 120 projects. One media outlet described Matrix's "wolf pack tactics" as: when you can't bet on specific projects, bet on the racetrack.

"Cover everything" and "internal horse racing" strategies made some top institutions increasingly personnel-heavy. Meanwhile, as tales of investors and internet mythology mutually reinforcing each other proliferated, more young people joined with dreams of "one hit, financial freedom" and "personally creating entrepreneurial legends."

One investor recalled that when he entered the industry in 2010, GPs required not only elite domestic or foreign university pedigrees but also industry expertise, professional backgrounds, and consulting capabilities. "The typical investor profile was a highly educated talent with composite experience." But after 2015, barriers to entry dropped markedly — fresh graduates, single-track professionals, finance novices, and deal brokers flooded in.

A significant portion of these newcomers were assigned "tool person" missions from day one: dispersing decision-makers' research burdens, trading extreme work intensity for firm-level sector coverage. Thus for a long time, "VC involution" became a form of "healthy competition" that GPs welcomed for achieving short-term coverage.

This phenomenon may exist in many industries. But it's particularly pronounced in investing. At the height of consumer investing frenzy in 2021, one PE firm had five teams simultaneously covering consumer projects. When Hongshan and Hillhouse Capital became aircraft carriers of the primary market, industry insiders could encounter their investment managers in virtually every sector.

"If a large fund's investment team were cut in half, they'd probably invest better," more than one investor and LP told "Waves."

The Root Lies in Changing China's VC Model

As investment hotspots shift to harder-edged domains like B2B, hard tech, and advanced manufacturing, do "tool people" still work for venture funds?

At least some institutions have recognized the shift. "Waves" learned that one top-tier fund recently conducted an internal review, explicitly delineating focus areas for investors at different levels and in different groups — "down to very specific sub-sectors."

"This also prevents turf wars between sector teams and avoids pointless internal friction," assessed an FA founder who works closely with them.

Behind this change lies a transformation in China's VC model. This shift stems not only from migrating industrial focus but also from changes in how VCs hunt, return distributions, and every operational link from fundraising to investing to management to exit. "The result: the value of base-level talent to GPs is declining."

One industry veteran with over 20 years' experience analyzed for "Waves" why large, diversified institutions rarely implement effective internal transfers, preferring to hire headhunters. The core reason: internal investors developed along "tool person" value lines struggle to complete sector transitions quickly. For hard domains emphasizing industrial knowledge and network connections, "spending money to hire new knowledge and new connections" is easier and more efficient.

How to adjust tactics for the new industrial cycle is the hidden thread behind current VC restructuring.

In 2020-2021, multiple top institutions including GGV Capital, Qiming Venture Partners, 5Y Capital, Gaorong Capital, and Source Code Capital completed their latest fundraising rounds, with dual-currency totals exceeding 10 billion RMB. During this period, firms' original weaknesses and gaps were filled by adding personnel. 5Y Capital, uncharacteristically, expanded by bringing in external investors focused on late-stage deals. Source Code Capital, with stellar RMB fundraising results, also hired intensively to address more locally distinctive investment styles.

For over a decade, China's investment industry never stopped actively absorbing talent — only the "taste" changed. What they now prioritize: those who can expand into emerging sectors for the firm, or experienced practitioners with genuine expertise in specific domains.

A headhunting firm principal told "Waves" that VC/PE hiring demand has become highly polarized: either seeking investors who can independently run deals to lead a business line — likely VP level and above; or seeking analysts with strong research capabilities — likely analyst level. "A huge gap forms in the middle."

Xu Qinglin, founder of 01 Talent, offers a more granular observation. He says three types of investment talent currently qualify as "in demand": first, "research-oriented" — strong logical thinking, systematic training; second, "industry/sector deep-dive" — years focused on a single industry or direction, having lived through cycles with successful cases; third, "scarce resource" — deeply embedded in an industry with exceptional access to underwater quality assets.

"The broad picture is oversupply, but locally there's still unmet demand," Xu told "Waves." The candidate profile GPs most covet — "Tsinghua/Peking/Fudan/Jiaotong STEM background + MBA + corporate experience + investment experience" — remains "genuinely rare as phoenix feathers."

Thirty years into Chinese venture capital, the low-hanging fruit for speculators has vanished. Facing a harder era to scale, systematically rethinking organization and human efficiency will become a challenge every GP must tackle. "Who to use" and "how to use them" will join "where does the money come from" and "what to invest in" as existential questions for future fund managers.

The VC personnel optimization currently underway or imminent is merely a local weather vane. Everything has just begun.

Image source | Visual China

Layout | Yunxiao Guo