Interview: Google China's Kai-Fu Lee Debuts Innovation Works

Kai-Fu Lee became famous in 2005 when the engineering whiz left Microsoft, where he had created Microsoft Research Asia, to head search giant Google’s operation in China. Microsoft sued, charging that he violated a noncompete agreement, but eventually settled. This time, as Lee leaves Google, he’s sure to avoid a lawsuit, because he’s starting his own venture, which launches Monday morning in Beijing. Innovation Works is intended to be something of an incubator for new Chinese companies in mobile computing, e-commerce, and cloud computing. Lee (who hates the term “incubator” because of the failure of so many in the U.S. dot-com crash) intends to brainstorm ideas, find entrepreneurs and engineers to prove them out, and provide seed funding.

Lee says Innovation Works will fill a void in China today. Entrepreneurs don’t have much experience creating companies and building them to the point that they are ready to get multimillion-dollar funding from what he says is an abundance of later-stage funding sources in China. The operation is funded with $115 million from the likes of YouTube cofounder Steve Chen; Terry Gou, chairman of electronics manufacturer Foxconn; Legend Group Chairman Liu Chuanzhi; and Yu Minhong, chairman of educational services firm New Oriental Education and Technology Group. WI Harper Group is the lead venture investor.

Lee helped Google gain some ground in China, nearly doubling its share of searches. But it has continued to lag far behind leader Baidu. Lee’s departure won’t help Google, since he was instrumental in attracting talent.

In a sense, Lee’s next move is a common one, at least in Silicon Valley, where executives often become venture capitalists. But in China, Lee says, organizations of his sort haven’t yet developed. He explained his ambitious plans in an interview Friday evening from China. Here is an edited excerpt:

Q: Why are you doing this now? A: Now is really the perfect timing because of the confluence of three things. One is the tremendous talent in China that is more willing to try exciting things. Second is the growth of cloud computing, mobile Internet, and e-commerce in China. We’re at an inflection point for these three areas. Thirdly, the venture space has a vacuum with no angels in China. That leads to a dry deal flow for mid- to late-stage funds, which have a lot of money and are unable to invest.

So if we became a large, organized, successful angel and developer of early-stage companies, not only do we fill a vacuum, but also we’ll be ready to take the money from the mid- to late-stage companies when we show that we’ve got the best opportunities for them.

Q: So you see Innovation Works as an angel investor? A: We are providing angel funding and the ideas simultaneously within our organization. So we are going to hire 100 to 150 people and we are going to brainstorm a lot of ideas and prioritize them, and we’re going to have internal teams that try them out. It’s a little bit like Google’s 20% time but more organized.

The ones that are quickly shown to have potential will draw money from the fund. That fund will provide angel plus Series A investments. But the entity is really about business building. Once we build up to scale, then we plan to try about 20 ideas a year. Maybe 10 will reach seed funding level and maybe 3 to 5 will reach Series A over time.

Q: So is this an incubator? A: (Laughs) The answer is always no. If there were no incubators in the whole world, it would be a pretty good word. But it’s not one that any of us want to be associated with. But obviously we’re building companies and we’re infusing it with money and people.

It’s a unique fit for China because Chinese entrepreneurs are less experienced and more in need of this kind of matchmaking: smart entrepreneurs with smart businesspeople with smart engineers with ideas that have been vetted—and money. All matched together and optimized, as opposed to loosely and organically organized like in Silicon Valley.

Q: So is the Silicon Valley model no longer the right way to go, or not the right way for China in particular? A: Silicon Valley is actually the ideal model when you have an open system with free information flow and strong people networking. But in China, that’s not here, so it requires some matchmaking and organization and a leader who is trusted to make this happen. It’s not about the culture or the government. People are just less experienced. They need more mentoring.

The success of U.S. entrepreneurship is largely based on the abundance of angel funding. There are 250,000 angels in U.S. and they provide 40% of of all the funds—people like Andy Bechtolsheim and Mike Markkula. There are no such people in China, so we are filling a void. Then at later stages, there’s so much money sitting on the sidelines waiting to invest once we build good companies.

Q: What will the 100 to 150 people in the organization be doing? A: They’ll be coming up with new ideas and prototyping them. Some of them will be researching the American and Japanese markets. The Internet in different countries didn’t develop in the same way. So a team of analysts will look at all the ideas and hot companies and what has worked and why in the different mature markets and really project the trends in China to find the business opportunities.

Q: Do you anticipate finding entrepreneurs with ideas, or developing ideas internally? A: Over the next 20 years it will shift, but for right now we’re going to be more internal. A few of us have a lot of ideas already and we’re ready to go with them. Over time, as Chinese entrepreneurs mature, they will need less hand-holding and will have their own ideas they’re passionate about. And the shares that we will take at Innovation Works will be lower over time as people have their own ideas, teams, and standing in the community.

Q: What sorts of ideas do you have so far? Mobile computing seems like a natural in China given the rapid rise in use of cell phones. A:. Mobile computing, especially entertainment and gaming, is very exciting. Mobile is hugely taking off. The thing the government wants to happen is 3G, and when the Chinese government wants something to happen, it happens. And competition is happening with the three mobile operators. And smart phones are entering.

Q: How will e-commerce develop in China differently from in the U.S.? A: It’s got to be done the local way. If you go back and see what problems eBay had in China (before it exited the market in late 2006), it was really that they assumed the American model would work. E-commerce will develop quite differently in China than elsewhere.

It’s partially caused by the lack of credit cards or good payment systems. And it’s also caused by younger users not having disposable income to spend. But all of that is changing. The Chinese people are getting wealthier, the Internet users are getting older, payment mechanisms are being developed, and e-commerce usage has tripled over the last few years. I think that’s really going to take off. There’s only 25% e-commerce penetration today. That will go to 75% in five years.

When I say e-commerce, I don’t mean just the eBay-Amazon type of commerce. It could be a social networking site that could promote products or a real estate site that could make money through referrals or advertising, or a way to promote new electronic products or charge for downloads. Even a search engine will benefit from e-commerce because that will allow advertisers to track the sell-through of their advertising inventory. So when I say e-commerce, I mean any Web company that will benefit from having underlying infrastructure of e-commerce.

Q: What’s the opportunity in cloud computing in China? A: Now if you have a legitimate business idea, you can build it as cloud product and then you have a way to get paid (online). In cloud computing, there’s a very interesting infrastructure play because neither the Amazon platform nor the Google App Engine is yet in China. It may not be the right thing for my company to build, because it’s a larger effort, but entrepreneurs in China are challenged with a high cost of building a Web application or e-commerce site. The need to reduce that is significant.

Q: Innovation Works sounds ambitious. How many people can you hire and mentor and how many ideas can you deal with? A: The size and scope of the organization is limited by two things. One is how many great people can you hire and mentor. And second, how many ideas can you generate. We’re not hiring all the people Day One. We’re going to grow over the next year. In one or two years, I think we can scale larger.

Q: Who are your partners? A: They are smart venture-type people, smart people who have done well in companies, who are generally mid-level execs at various companies in China, some local, some multinational. They haven’t joined me officially, so I can’t get specific yet.

Q: Have you been thinking about doing something like Innovation Works for awhile? A: Not too long, maybe a year or two. I’ve thought about starting my own company for the past decade or so. But this one feels like it’s right for me.

Q: Why has there not been something like this before in China? A: With all due humility, this needs a very unique kind of leader who can at the same time figure out the business opportunities, attract the right people, and also get the funding. This is an unusual thing to fund. It’s not the typical startup—give me enough money to go for three quarters and I’ll show you so much progress that you’ll fund me another three quarters. This is something where you need a long-term vote of confidence and patience.

Q: Have you identified particular companies to create yet? A: No, I’ve just been developing the plan and getting funding. We’ll need to start each one later. We’re going to need a few months to hire a critical mass of people. The ideas will incrementally be tried. You probably won’t see anything to come out of Innovation Works for another 12 to 15 months in terms of companies or products. Right now, it’s just me.

Q: We’ve heard a lot about entrepreneurs in China, such as Alibaba’s Jack Ma. Why is there a need for a different mechanism for entrepreneurs? A: If you look at the typical profile of entrepreneurs, they have changed a lot. The startup companies today have pretty much been the people who survived in a very tough, Darwinian environment. It’s really a one-in-a-million thing.

Now, a new breed of entrepreneurs is emerging. Some of the recent companies are typically started by a smart engineering manager with five to seven years of experience. This is the new profile that’s emerging. Right out of college, you don’t have any experience. We’re targeting the young, successful tech leads and product managers.

Q: There’s concern about high-profile people leaving Google. Is there anything Google should be doing to keep people like you? A: I don’t want to get into giving Google advice. Officially I’m still an employee. I’m certainly not leaving Google or repelled by Google or feeling I need to go. I am attracted by this opportunity and the confluence we talked about.

If it weren’t for this opportunity, Google would be the company I want to work at. Give me the choice of working at Google or any other company in the world, and I would still pick Google.

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