While President of Google China, Kai-Fu Lee had front-row seat to China”s technology scene, but he also watched as some 50 employees left to launch “wildly successful” businesses. Today, Lee”s venture firm, Beijing-based Innovation Works, backs similarly motivated entrepreneurs by providing them capital and matching them with high-growth investment theses.
In an exclusive interview with Privcap, Lee discusses what he learned while at the helm of Google, how he selects the startups that he backs, how he partners with other VC firms on seed and further rounds, why Chinese entrepreneurs are more focused on solving real problems than on “truly breakthrough ideas,” and how Innovation Works will distinguish itself in a crowded venture market. (You may view Lee”s Chinese-language analysis of venture”s economic impact here)
<strong>Privcap: What did you learn while President of Google China that shaped your vision for Innovation Works?</strong><strong> </strong>
<strong>Kai-Fu Lee, Innovation Works:</strong> Probably the single most important thing was that about 50 people left Google China to become entrepreneurs. And they are wildly successful, no failures that I"m aware of. Several already near a billion valuation in the short four to seven year period. And my conclusion from that was that if you have really smart people at a very vibrant, high-growth market with a Google-like telescope that shows you what the future might look like and with some mentorship, that"s the fastest training that these smart people need to become successful entrepreneurs.
And that I thought, at Google, this was done serendipitously, accidentally. I actually tried to-- had to try to retain these entrepreneurs to not leave Google. But actually now, looking back, I saw that they"re destined to be great entrepreneurs. And that can we create, on a permanent basis, an environment that gives them that strategic telescope, that mentorship? And find the smartest people and help, really, the next generation, great entrepreneurs, to find their calling in this high-growth market in China.
<strong>Privcap: Were you surprised to see employees leave a company as prestigious as Google to launch start-ups?</strong>
<strong>Lee:</strong> At first it was a little surprising. But then I saw the market really had so many opportunities. And people with a strong background and the intelligence had such an advantage, if they could see something that others don"t. I think an early stage start-up, just like early-stage investing, in order to be successful, I think you got to be willing to take risks.
You"ve got to be pretty smart. And you have to either know something other people don"t know or the guts to do something other people don"t have the guts to do. And that"s really what I saw in those people and now in the people we"re funding at Innovation Works.
<strong>Privcap: What is distinct about China"s ecosystem for innovation and venture capital?</strong>
<strong>Lee:</strong> I think the Chinese entrepreneurs in early-stage start-up are amazing in their dedication, and hard work, willingness to listen to customers, iterate, and get results much more quickly, than perhaps anywhere else in the world, maybe with the exception of Silicon Valley. But what"s lacking, I think, is the truly breakthrough ideas, and the vision and the passion to change the world. I think the entrepreneurs, as much as they have desire to make a difference, I think it"s more important to most entrepreneurs in China that they build a great company, make a lot of money. And that"s perhaps more important to most entrepreneurs than changing the world. And I think that, perhaps, will change will happen over time. And as a result, the companies that are founded tend to be very market and user-focused, solve real problems, can get large user base, and even make money relatively quickly. But that groundbreaking, paradigm-changing idea, in the Chinese start-up, is something we rarely have seen or perhaps even have not yet seen.
<strong>Privcap: Will Innovation Works be looking to back companies that aim to _change the world," or are you more focused on start-ups that aim to tackle more identifiable problems?</strong>
<strong>Lee:</strong> Well, in theory, we"re open to both. But in practice, it"s really the latter that"s the predominant part of our investments. I wouldn"t rule out the possibility of a company that"s targeting a real problem, trying to solve it, and make money. And over time, developing something that"s great in changing in the world. That"s also possible. Our Innovation Works" model is we find great, highly-growing trends. And we find entrepreneurs who have ideas that can ride the wave up, and we fund them.
<strong>Privcap: Your firm gets deluged with applications from hopeful start-ups. What helps a team of entrepreneurs stand out?</strong><strong> </strong>
<strong>Lee:</strong> We still receive a lot of applications. But frankly, the great majority of the companies we fund are people who are well-established, or introduced to us, or those we seek out and hope and ask them to maybe consider starting a company-- not the large volume of unsolicited applications that comes through. Rarely do we fund those.
So it"s not the volume that matters, but it"s really the quality and the experience of the people. So what we care the most, I think, are three things. One is being consistent with an explosive, growing, exponentially-growing trend. Second is having exceptional leaders as founders. And third is great execution skill by the founding team.
<strong>Privcap: You think your own firm distinguishes itself in an increasingly crowded field of Chinese VC firms?</strong>
<strong>Lee:</strong> We actually work with many of those great VCs. We co-invest with them in Series A and B. The way Innovation Works is set up is not that we do purely very early-stage seeding. Seed, obviously, is a big advantage we have. We get in at a much lower valuation, investing a few hundred thousand dollars for 15 or 20% of the company. And then, if it works out, it gets to Series A, we will potentially find other VCs to co-invest.
So we"re actually a nice part of the ecosystem and are able to remain friendly with many of them. Now having said that, Innovation Works itself, as an investment vehicle, is also a venture capital fund, in the sense that about 70% of our fund goes into Series A and B like other VC funds. But we co-invest with them. The other 30% are pre-A.
And the way we see our core advantage, from a limited partner or investment standpoint, is that we, so far, have been able to find the top VCs to co-invest in Series A and B. Therefore, it"s reasonable to conclude for that 70% of the capital, we should have a comparable return to the other VCs, the other good, top VCs, top quartile VCs. Now the other 30%, we get in at a much, much lower valuation, potentially 1/10th or 1/20th the valuation of the Series A valuation.
And the failure rate is not all that high, so far only about 10%, over time, maybe 50, 60%. So if you do the math, I think it"s entirely conceivable that our 30%, pre-A funding will return three to four times higher than our 70% A and B funding. And if that happens, we may be one of the highest returns offered in early-stage investment. And for limited partner, return is really name of the game. And we hope this will appeal to them.