InnovationWorks is a Chinese incubator focusing on early stage internet companies in China – interest in startups is exploding, and InnovationWorks saw 7,000 resumes in response to open applications for its first batch, “There’s nothing that matches the Chinese entrepreneurs desire for success,” he said.
Lee sees the future of InnovationWorks, which started out as sort of a Chinese IdeaLab, as a combination Andreessen Horowitz/Y Combinator. The incubator is moving increasingly towards VC, with a new fund totaling almost $200 million dollars. Lee wants to put a Chinese spin on Andreesen’s strategy of completing everything in house, ”We take advantage of a high valuation and low cost of building. Disadvantage is that we don’t have ten years to wait. “
Lee said that InnovationWorks currently looks for three characteristics in its Chinese startup founders in addition to the prerequisites of being hardworking, tec, a) doing their homework b) previous experience — real skillset and value add in spaces c) the characteristics of being a leader
On the “previous experience” point, Lacy brought up that Lee’s belief that China isn’t ready for an entrepreneur with a disruptive, “lightbulb on top of head” type idea — a Zukerberg, Andreeseen or even a Jerry Yang or Steve Chen.
“Chinese society is not as supportive of failures,” Lee explained, and because of that “in the current state it is very difficult to find that 20 year old dropout with the novel idea.”
Lee did not preclude the idea of a Chinese Mark Zuckerberg (a.k.a. a young kid that changes the world) but implied that Tencent founder Pony Ma was an exception and instead Innovation Works was banking on people like Renren’s Jack Shiu, Vincent Tang and Jeff Ma, “all experienced people.”
“We think our hit rate is very high,” he said “and we need to spend that time with people who will increase that hit rate.”
innovation works. So, everyone come in and take a seat. And, Kai-Fu, that includes you, come in and take a seat. OK, all right. Now, I think, one of my, maybe, one of my first or second trips to China, you and I went and had dinner, and, had Peking duck. Mm hm.And, we were talking, and, a very nervous looking young kid, college kid came over to the table and, asked if you were really Kai-Fu Lee, and I thought at the time, "He's planted that kid. He can't be that popular in China." But, since then, I took, one trip I took 7 hours of high speed train trip through the country, I saw your book in the train stations.We 're going around to a couple of different, kind of, garage cafes and those kinds of things, we saw your books there. I mean, there's a lot of Kai-Fu around China. You know, what is your, why do you think you've become someone that's sort of an aspirational figure to entrepreneurs? Because, you were kind of company guy.Well, there's a lot of Sarah Lacy's around also. I go around I see your book. I read your TechCrunch every day. Even Pony Masters, he, hundreds of entrepreneurs, reads your article to decide what to do with the start up but, as far as my own passion, it has always been about the helping young people in China. So, back when I worked for Microsoft, I was giving a lot of lectures and writing books which, was the way to reach out and, then at Google, it became starting to look at social media and, also, wrote more books, and now the Innovation Works, the social media has taken off so I use Weibu and that's something I, I like to do. So, about ten years ago, when people see me, if they recognized me, they'd say, well,I saw you on TV. Five years ago, they see me, they would say, well I read your book. But, now, people see me and they recognize me, they would say, well I read your Weibu for me to be possible to help a country of high potential, smart, hard working young people, to get what they deserve.Mm hm. Now, we were talking back stage and I asked you, do you really do all of your own Weibu entries? Because, in the United States we have people like Barrack Obama, who have Twitter pages, but, someone on his staff writes his tweets. He doesn't really write his tweets. You really do all your own? Every single one on the two major Weibu, the other ones, I do have my assistant copy and paste, but, on see now, I do my own.Okay, great. Let's talk a little about, you mentioned wanting be a real champion of young people.Yeah.
When you had your job with Microsoft and your job with Google, a lot of parents of Chinese kids loved you because, you would give them this very prestigious jobs, and, it was, you know, a great sign of success to get a job at one of those companies. Mm hm. Right.When you left to do Innovation Works, you were making a bet that the best and brightest, you know, there was a cultural shift happening in China and the best and the brightest no longer wanted to just work for Microsoft or Google but they would want to come on this journey to start something new. Has it gone how you anticipated? Were you able at the same kind of talent?I think as far as the caliber of people we are able to attract in engineering, in terms of engineering, absolutely. But they may not be the same people. I think people who want to work for foreign companies tend to be those who are more conservative, want a safe job and want to be well paid. And those people who want to join a start-up are those who find the excitement to do what they really loved to do and work really hard along side other people who own their destiny and who are willing to take a substantially lower pay for potential future upside. So, the caliber of people's engineering talent is equivalent, but I would say that the overlap of the actual individuals is probably not very large. But there's a lot of people. I mean, I know when you guys first opened up, you were flooded with resumes. Has that i continued your your opening a new space in Shanghai tell us a little bit about how you have expanded your effort with all of the talent coming in to you. right so i think you're talk about engineering talent. Right. Which is critical to all of the companies we start. Innovation works is an early stage internet company building plat form. So we certainly need [xx] engineers. When we opened the first day, we got seven thousand resumes and that continues to come in. We have almost five hundred thousand now and we go on campus recruit [xx] and we hire three hundred new hires every year and basically a ling them [xx] with the companies xxxx so they pay mutual choice, but i think that more important is the enterprenurers that we find. The calibre of the enterprenurers was actually a lot higher than i had expected, even though the entrepreneurs of China are not as broad, don't have as many years of experience they are incredibly hard working and there's nothing that can that matches chinese entrepreneurs desire for success so we're were able to find serial entrepreneurs. Director level people at local companies and multinationals who were willing to let go of their previously very successful career in order to go after what they really want to accomplish in a direction that appeals to their heart and in a company that they are determining the destiny of.You know, i think there's been a real honey moon period for Chinese entrepreneurship there's been a ton of money coming in. Last year we saw a lot of exits. it there probably was a time started to look easier than it really is we're certainly in that phase in silicone valley as well when we start to see some sort of correction do you expect a lot of younger kids saying not what i signed up for. do you think china is ready to accept failure and keep building companies or will there be sort of [xx] entrepreneurship if the IPO window closes and we start seeing more failures. I think the pendulum will in a very similar way to Silicon Valley and at tougher times, clearly people will have more reservation about doing a riskier thing. But I think, also in a early stage is not an effect because even when all these billion dollar ideas are happening we are very clear to the engineers and entrepreneurs its a five to ten year journey you're taking on and they understand that and when things are not looking good that's still that long a journey. So, in terms of the evaluations, the availability of capital, is not as much a factor that early stage that at the late stage. And also i think it not a bad thing if two people have cold feet because maybe they really aren't the right people Right.To do start-ups anyway.Well you definitely see that in Silicon Valley. The strongest companies are almost always started in the down times when someone has to be so crazy..Yeah.or so passionate about their idea cause no one in their right mind would be starting a company. We're going to see a great example of that Hopefully, in just a bit, with Steve Chen, when he and Chad Hurley started You Tube, it was a period of time where no one wanted to do consumer internet, at all, and, you know, but, people wanted it. People always say you're a big company guy not an entrepreneur, but, in the last couple of years, you have been an entrepreneur cause, you've been building this incubator, and, you've been creating it from scratch. Right.You know, we were talking back stage about how the focus of what you're doing is changing, and, I think it's interesting to kind of walk us through that. You know, initially, when we did our first interview when you launched it, you know, you saw a hole in the market for mentor-ship, you know, kind of a white combinator style incubator. Mm hm.What was right about that premise, and, what was wrong about that premise?Yeah, when, when Innovation Works first started, I think, we were probably closest to the ideal lapse model. My friend Peter Leo, sitting there, introduced me to Bill Gross, and, who was very, very helpful to us. And, I think, that model is more a group of very smart people, who will inspire young people start companies, and, take a substantial share of their companies. We actually ran the first 9 months that way, and, I think, it was pretty successful, the hit rate was pretty high, but, we saw that, that model could not attract the best entrepreneurs. Entrepreneurs don't want a mentor teacher who tells him or her what to do. But, they want to control their destiny. They want their own, the great majority of a shares of their companies, and, then, we switched models to be a little like the white combinator, but, not the massive internet application. We still get referrals, because, China is so big, if we did a massive open application, we'd be flooded with fifty thousand applications. Mm hm.So, we chose the, we sort of, chose potential company the BC style, and, then, we coached them white combinator style, and, we added on top of that, human resources recruiting, setting up VIE structure, finance and, all those other aspects that entrepreneurs aren't good at. And, we find that was the right formula, because, We really believe in the Ling start up process. Build a small company and iterate and improve, using the internet to experiment. And to do that you need a very strong, powerful, independent minded entrepreneur and once you have that, all the services we provide it adds more fuel to the fire, but you got to have that fire to start. So we find that was the right model to take a very small percentage of equity fifteen to twenty percent and make a substantial investment for that experienced or very high potential entrepreneur to do the six to nine month experiment, prove that it's worth while and we find the hit rate again to be very, very high with that model and more recently we realize that, okay once they're done, you need to have more capital to get them going before Series A and perhaps even at Series A. Because fund raising is very time consuming. Probably the most time consuming thing three things with entrepreneurs are hiring all the mundane work have to do and in fundraising. That if we really spot the great talent and we could save them most of the time they spend on these three still have to do it but minimize it we find that they can focus on that xx xx process and really accelerate time to market for their products and also [xx] risk. So that's kind of our latest revelation. And that's why we decided to raise the fund and increase the size to be almost two hundred million dollars. So that we could - we pick out that magical company, we could take them all the way through series a and through the [xx] [xx] may be at series A or B after So we're moving, so i think the model we have now is probably close to some combination of why [xx] plug and play. and andreesen and Horowitz. You have some elements of each and i think that fits China the best.And for people who may not be familiar with [xx] and Horowitz they've modeled their firm almost off of A Hollywood talent agency where they sort of provide all the things in-house that an entrepreneur might need. They have a fairly large staff for a VC firm and it's not just a model have your partner who sits on your board who might make some phone calls you have a whole team who can help you hire some one a whole team who can help you with PR an incubator of intra-capitalist now what are you. I think we have to be a venture capitalist with a substantial incubational value add. So we do most of what Andrew's and Horowitz [sp?] do. We provide that value add and because we're in China we can provide Provide more extensive help, so we actually have about 45 people on staff. With substantial human resources. [xx] head hunter kind of a department. And the campus recruiting machinery that can generate 300 great college hires to choose among our entrepreneurs and companies and also the reason why i mention plug and play is we also host all of them in one premise which neither [xx] [xx] and [xx] too. And i think that's very important for the chemistry and for the understanding the start up culture. And for mutual help for the port folio companies that we help build. So really we are a cross between incubator and venture capitalist.Right.But probably in the last year we're shifting from more of an incubator incubator to more of an intra-capitalist with out losing any of the value that we provide as an incubator as working or not and then pull the plug try to do something else not getting through too wet into these babies. You do see those products that just don't take off immediately they take a while to find their market and then become very big companies and i know you guys aren't doing a lot of hard ware but you know the example we had with Java and a company that took really ten years for the market to be right for them to get everything in place and now their valued close to a billion dollars huge success they sort of pull the plug early on, they wouldn't be there. So how do you know that it is time to pull the plug and it's not just product that might need some more time to find it's mark get.Well we believe in the capital market being efficient. So we're gonna put in our capital and that entrepreneur will have the freedom while the money lasts to steer the company in different directions. And we will be supplying ideas. Hey, that thing doesn't seem to be working out, may be this thing could take off. Like one of our port folio companies companies with our help they were sort of looking for direction, but with our help we suggested they go after ecoupons and that has become a big success [xx] three million customers in just three months so we like to see that we can add that kind of value we don't really pull the plug, we do obviously decide whether to invest next round or not and undoubtedly there will be mistakes that we make I think the model we have the strength is that the cost of starting a company is at a historical low world wide if it's an internet software based company and its even low we're in china because of the cost of labor and the valuation is very good for china so we are sort of in that sweet spot the benefit of our model is that we take advantage of the high valuation and the low cost of building the disadvantages we probably can not possibly have ten years to wait for a company to find it's direction so will [xx] you know we talked you talked a little bit about the quality of the entrepreneurs that are coming to your organization, do you know a great entrepreneur when you see them? I think we have higher confidence of someone whose probably not a great entrepreneur. So we, our model is that we we have a large investment team of maybe a dozen people who can judge people who are maybe not ready or not suitable to be entrepreneur. So that really limits the number of people that my partner and i have to talk to.What are some other [xx] So first i think all the entrepreneurs we look at, they generally [xx] are very hard-working. Huge are for success and passion for what they do and that's wonderful. Some of the problems we've seen, the red flags that have caused us finally not to invest in them, some times they don't do the hard homework. we look for them to know more about the domain their working on more than we do and we are relevant [xx] speaking among the venture capitalist community more technology and product experts, but we want our entrepreneurs to know a lot more than we do about where they're building not just saying hey a light bulb went off, I'm gonna do this or that. Right.We want them to have done the homework. Secondly, we would look for people with real skill set and value add in spaces that they worked in some related domain past experiences additive in value to the company they are starting and thirdly and perhaps most importantly want to make sure that they are they have the characteristics of being a leader of a start-up because in China, even more than in Silicon Valley, changes CEO is a huge price to pay. Right. So when we bet on a founder we really want to be fairly confident they'll make it as a CEO through both stage or maybe even beyond. And for that we look for leadership qualities that people will follow. We also look for integrity, if there's any questionable issues about their personal character, about their any sort of previous sleezy things they may have done or perhaps any risks that they might t hey steal source code from some company. We don't - if there's any doubts we just don't invest in that company. You want a sleaze-free zone. We try Do you think - One thing you said, the previous domain expertise, sounds like you're not looking for the prototypical college kid drop out, never had a job Job before brilliant wonder can't mess up the worried on fire.No.That's I think a major difference between entrepreneurism and in China and the US. That in the US you see Mark Zuckerberg, Larry [xx], Marc Andreessen, yeah.Andreesen who found their passion and calling in college. I wish, I think Chinese people have the potential to find that magic calling in their, when they're twenty years old also Because a lot of the peoples names I named, Jerry Yang Steve Chen, are Chinese in origin. Nothing in the blood of Chinese people that can't do that. But the reality is I think that society is not as supportive of failures in China. The educations tends to be more road to in China so as in the current state it would be very difficult, not impossible, but very difficult to find that twenty year old drop out who would Build the next ten cents or. So you wouldn't have backed Tony [xx]. I wouldn't have to. He would be that exception. And that - yes one could go after but the ration is hit is so small Right.that with a team of a dozen investment professional we can talk up to fifteen thousand people to find one [xx], but we can talk to a few dozens of Jack Shea [sp?] who was under one of the leaders that edited. [xx] is Tom who started his own company. John Lei [sp?] [xx] and Jeff Ma, whose at the entrepreneur battle field here. They're all experienced people that we think our hit rate will be very high. And we need to spend our limited time with people - I think with groups that have a higher hit rate. Now having said that we do feel as China's, one of China's top in cubating grounds for entrepreneurs. We have certain social responsibility to help the fled geling first time entrepreneur. So we do have a program called the Jump are program. Which is some what similar to [xx]. And there is a program where we look for social responsibility and training with the higher priority that we look for, return on investment where you've made your name,i think,is being some one who was very experienced at doing business well in Silicon Valley and working with some of the biggest Silicon Valley companies companies, and helping bring them to China and helping sort of navigate that [xx] in between the two ecosystems. In your current role of really supporting entrepreneurship in do entrepreneurs in China need Silicon Valley? Is it as important to be able to navigate that? I think it's incredibly important. All the entrepreneurs we read your articles. Read TechCrunch. That's an example why they look for not just the brilliant companies and successful ideas, but also the inspiration and then role models some of whom you're bringing to China. So, i think that's extremely valuable. We also have a lot, we're also working we're fortunate to have a lot of friends and LPs and investors. Steve Chen is one of our investors, Uri Milner, Ron Conway.I think this is about the tenth time we've pointed to Steve Chen. Right, right.We're doing his advance team here.That's right. We're the advertorial team. So we have a lot of access to what's exciting and hard in Silicon Valley. And we tried to learn and connect. I think a lot of people in Silicon Valley look to China as a curiosity and excitement and some want to enter China. And entrepreneurs here look to Silicon Valley as an inspiration and we want to help become part of that bridge that connects them. So we are also talking to a number of Silicon Valley companies that want to enter China and we're happy to potentially partner with them. Right. Now, you and I were both at summer Davos in Tianjen last year and I took issue with something you said on a panel, you said that there wasn't real innovation yet in China and China wasn't ready to have a Marc Zukerberg or a Steve Jobs. That there was still you know, too much copycatting. But, a lot of people in China say that, Innovation Works, funds, develops just as many copycats as anyone else. That you guys are one of the ones doing that. So how much of that is the entrepreneurs who only want do a copycat idea? And how much of it is the venture capitalist who are very familiar with And we'll fund some one who says I want to be the fill in the blank of China. And if a entrepreneur comes in with a really guys new idea do they have a harder [xx] time getting funding.No, not at all. We are, i mean as i said we are venture capitalist, right. So entrepreneurs come to us, we have certain beliefs on what strategic directions are important and we will look for great entrepreneurs in those directions. Some of those project ideas are completely out we some of those are inspired by american or other innovations and we will be irresponsible to investors not if we don't evaluate all of them based on their business potential. We're not a research lab. We're not going to measure how many patents you have in order to fund you. We measure, we instead measure How much value are you potentially providing to your users? Is this a good business plan? Are you a good entrepreneur? Like, any venture capitalist would do. so we actually have several very exciting new companies that will be, some of which will be coming up in the battle field this after noon and hopefully you'll judge, they are quite innovative.Right.Now, back to my Davos comment though.Uh huh.I think, companies like Apple, [xx] and, probably Google, are the kinds of companies will be hard to do in China. But, I think, taking Tencent is an idea. I know there's a lot out of, you know, controversy and different comments, on Ten Cent. But, I think, they have become very successful, and, I think, by some measure, There are quite innovative companies. Yes, they have a tough business approach. They started by being inspired by American innovation. But there are some products that they build that through micro innovation have become quite innovative and I think there's nothing wrong of building a company that's [xx] with a idea, that may be, someone else already had.Right.or, several ideas combined, and, then, growing new ideas on top of you might say facebook was like. I would say google was. I mean, apple also did not make the first mp3 players. They make the best mp3 players and i mean some of the company we consider very innovative in the U.S.
Yep.You know, they're not the first to come up with a category. Right, exactly.You know, you, again, are sort of, known as someone who initially came to China working with some big companies, and, big Silicon Valley companies that have a waful track record China, you were at google that they had a lot of issues right after you left. your friend was friend with Jerry [xx]. Yahoo is very in the news for spurring with Jack Ma. Do you.. think that big companies are getting any better at navigating China? Big Silicon Valley companies?I think, it's a blessing and curse. I think, because, these companies have been so successful in the U.S., Europe, and, sometimes, Japan, it's hard for them to imagine why China should be different. And, I hope, that, some of the failures of the past, will be a lesson. And, that the next xx great American company will find the humility to learn China can be a different market and is large enough to do things xx xx and it's important once you find some one you can trust in China to run your business to really empower that team because, it's a very tough, scrappy, market place here. And, I, I think that, I, I, I believe that China's increasing market, and, recognition of the value of this market will draw, eventually, one day draw, a great American company to come to China, and, to do it successfully. And, and, I I think that they will come, but, probably not today.So, what about the flip side of that? Alibaba, Tencent, some of your biggest companies are now trying to expand in the U.S. is there any reason to think they're going to do any better than we've done? I think U.S. is a very tough market for Chinese companies to go to for the exact same reason. The two markets are extremely different. American markets tend to start from the top, and, become viral. Chinese markets are often, start from the grassroots, and, then, go up. Chinese competition is a lot tougher and scrappier. And, I think, it's, the models are different. Right.So, if a Chinese company tries to go to U.S., or Japan, Japan, or Europe for that matter. I think that would be really tough. Right.But, I do find a few of the larger Chinese companies are taking an approach of going to a developing market for or even an underdeveloped market, such as Southeast Asia, Indonesia, and I think Thailand, Philippines, Southeast Asia, I think, that's the sweet spot.Yeah.Because, Southeast Asia is perhaps, a little closer to China than to U.S.
Yeah.on the average, and, it's large enough a market, not enough indigenous companies. So, the Chinese companies should fare better, Yeah.going after south East Asia first, and, then, gradually, they can move to the Russia, Eastern Europe, and, maybe eventually, maybe south of America, maybe even Africa, but U.S. and Europe really should be last in the mind of a chinese company trying to go outside China. Yeah i think that's really good advice because a lot of American companies are trying to exploit some of this nations economies and we're so far from understanding what the problems on the ground are in places like southeast Asia and places even less developed in terms of infrastructure as China but you guys are so much closer to it and we've seen this with India and telecom. India's really taken what it built out of telecom infrastructure to Africa because very similar challenged. Well then Chinese companies have been quite successful in Africa currently mostly in traditional enterprises. but gradually made the internet. But one of the Achilles heal for the Chinese company why they mind not do as much as they could in southeast Asia or other countries. This chinese market is so large and it's so easy and natural to do focus it's on China. It's the same challenge as the American xx. It's the same as U.S., it took so long for companies like yahoo, google, and ebay to really pay attention to the China and just kind of too late. You're seeing now a company like group on which again is said to be really struggling here but they had felt pressure to get to China faster than any U.S. company I've ever seen because that competition is happening so fast. Yeah well they tried. Woman 1: Alright well you've got 35-seconds left on the clock any last piece of advice for some of the entrepreneurs in the room, who are the dreamers who want to start companies but aren't I think the Chinese entrepreneurs tend be one founder only. I love to see companies with more co-founders with complimentary skills.And I think, by coming to this conclusion conference. You're making a very good taste, and, good choice. Learn more from TechCrunch, and, I think, that I hope one of you will build a great company in China.Well, yeah, it's interesting you say that about teams. What I hear over, and, over, again, one of the biggest challenges, is, how do you find a good co-founder? People want to be co-founders but how do they find a good one? any advice on that? Well ideally someone you've known and worked with because CV's are grill you on that. If someone you just met at TechCrunch Disrupt, Oh, no. You'll still get funding. You should still come here and meet people.You should still do that, but, it's not You know, I The very first time I came to China, I did a really casual meet up at a bar. I just said, "I'm gonna be here, come out." Nothing like all of this and when I came back two guys were in your office who met at that event. That's right. Do you remember that? And they are no longer working together oh. Sorry. You could've lied, you could've made me feel better. But they're both doing well, they're both doing well. Do theywoman 1: Irresponsible?Man 1: Not at all, not at all, they were good friends still. But I think that long term connection and trust between co founders is ideal. But if you need someone today you can build that relationship that maybe over time you can couple years. yeah couple years ideally. alright well thank you so much not only for helping aspect even on theosophy but also being here with us today.Thank you.
