Ex-Google China chief’s dream factory

By Wei Gu
September 14, 2009

Google’s former China head Kai-Fu Lee wants to create China’s next internet giant in a factory. He believes that by combining the smartest entrepreneurs, the shrewdest business people and the brightest business ideas, he will be able to create five highly sellable companies a year. That sounds like an ideal model for venture capital, but is he being realistic?

Lee’s plan, formulated while he spent time in hospital over the summer, follows a battle with Beijing regulators who wanted to censor Google  searches that lead to pornographic sites. It has drawn strong support from investors.
Lee has managed to raise $115 million in just one month, winning support from YouTube Inc. co-founder Steve Chen, as well as Foxconn Electronics, Legend Group, New Oriental Education and venture firm WI Harper Group.
They believe that as China embraces a start-up culture, Lee’s business, which is a mix of venture capital and development lab, will be well positioned to capitalize. Lee’s plan is to hire 100 to 150 young engineers, help nurture their ideas, then spin off 50 to 75 of them a year with
funding from his venture, whiling hiring new people to make up for the loss.
However, it looks as if his company, called Innovation Works, has yet to line up ideas or engineers. This kind of “incubator” model became popular in the U.S. and Europe during the dot-com boom, but most of them just burned through a lot of money and then folded.
Lee and his backers believe that China’s market is more favourable, as it is at a crucial point regarding “cloud computing” and mobile technology, and there is a strong need for early-stage funding.
The new fund is still starting off, but Lee plans to expand from its base in Beijing to places such as Taiwan, the Asian hardware manufacturing base and his hometown.

Investors are attracted by Lee’s reputation as the single largest magnet for talent in China. Lee, who went to school in the United States, has won a loyal following from Chinese students
through his numerous coaching books, public speeches and blogs, although critics say he has spent too much time promoting his personal brand.

An expert in speech recognition technology, he founded Microsoft’s China research lab in the late 1990s. When he left to join Google, Microsoft sued him for violating a promise not to join a competitor.

Nimbler local rival Baidu now dominates China’s search market with 75.7 percent in terms of total search queries, dwarfing Google’s 19.8 percent share, according to iResearch. At Google, Lee was caught between the Beijing authorities who insist that foreign web companies censor the
Internet and his U.S. bosses who demanded he drum up more business in China.
He has wanted to break away from his corporate role to start his own company for a decade, but it looks as if he is stuck in the corporate mindset. Lee is adopting an almost a planned
economy approach to an industry that has always relied on markets to determine who is the fittest to survive. Indeed, he is even promising to tailor-make companies for interested
foreign investors.
A factory model lowers the risk for investors as they will enjoy more control, but that also means less incentive and ownership for entrepreneurs, since their roles are reduced to
that of employees. Why would young people take their ideas to Lee rather than make a go of it themselves?
Unlike Silicon Valley, China does not have an ecosystem where start-up companies can easily find angel investors. Even though China is a hotspot for venture capital, with $50 billion
chasing mid- to late-stage projects, less than $1 billion in total is earmarked for early-stage projects.

Lee prides himself on his doggedness in chasing after talent. One year while at Google he made offers to graduates, only one of which was initially rejected. He called the student, found out that his girlfriend thought Google was a bit of a start-up, then asked for his girlfriend’s number and called her up. That year he achieved a 100 percent offer acceptance rate.
Nevertheless, it remains to be seen whether Lee can retain his ability to attract and inspire the best young people now that he is no longer at Google. He needs a lot of them to make his dream come true.

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