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What Now? Q&A with Ex-Google China Chief Kai-Fu Lee

Kai-Fu Lee, who last week resigned as president of Google China, has launched Innovation Works, an incubator for Chinese IT startups. It has been funded with $115 million, including from lead investor WI Harper Group and individual backers like Steve Chen (co-founder of YouTube), Terry Gou (chairman of Foxconn), Liu Chuanzhi (chairman of Legend Group) and Yu Minhong (chairman of New Oriental).

I spoke to Lee on Friday, and what follows is a transcript (we had agreed to embargo the news until this evening):

peHUB: Innovation Works sounds much like a Chinese version of Idealab or Y Combinator. Are those fair comprisons, and are there other such programs already in China?

Lee: There are similar programs in China, and at least one public company based on similar ideas. But I think our model is different, for several reasons:

First, I think we are specifically targeting the spaces in which this idea works. These are the spaces were you can move quickly: Cloud computing, ecommerce and mobile Internet.

Second, I think that I bring a unique ability to draw talent. I’ve hired thousands of people at [Google and Microsoft], and many joined because of me. When I joined Google, for example, it was basically an unknown brand in China. The first people joined because of my brand, not because of the company’s brand.

Finally, I think the scale and the way we’re organized if different, in that we’re setting up an organization that we think of as a company-building platform and a parallel fund from which each of the company’s will draw capital. It also will attract different types of capital to invest alongside us.

Just to be clear, the “parallel fund” is being capitalized by the $115 million investment?

Yes, most of the $115 million will be used for the fund.

Is the primary goal of Innovation Works to generate investment returns?

Absolutely. The fund has to be run exactly the way a VC fund is run.

How large will the organization be?

Between 100 and 150 people, and it will be a very fluid workforce. As we spin off companies, people will leave, and they’ll be replaced by new people, by new engineers. Right now, though, it’s just me and my collaborators.

So that means that Innovation Works will develop ideas internally, rather than source and fund outside startups?

We’re still open to different ideas, but our current inclination is to be more internal than external. We have lots of great ideas we want to try.

Innovations Works is launching in Beijing. Do you plan to open satellites elsewhere in China?

We have no specific plans, but I think it’s a very reasonable path maybe two years down the road. A lot of Chinese metro areas have unique programs that attract companies to their cities, so we believe we’d be able to get incredible domestic assistance – from things like free rent to matching investments to loans for startups. We think it could become very lucrative and cost-effective, but will resist doing so for at least the first two years.

WI Harper led the $115 million investment. Does it have a right of first refusal on follow-on rounds for companies seeded by Innovation Works?

They certainly have some rights that make it worth their efforts, but we have to make sure that other VCs believe there is a reasonable playing ground. This thing can not work if other VCs feel that they are just funneling money to WI Harper.

Why launch Innovations Works today, rather than a year ago or a year from now?

There is a confluence of several things happening in China, and we’re at an inflection point of mobile Internet, cloud computing and ecommerce. It’s really now or never.

There is an abundance of companies here and VCs have lots of money, but there is a lack of angel funding and experienced entrepreneurs. It’s a compete imbalance. Whatever you might think of Y Combinator or Idealab in the U.S., the China market is different. China needs this type of business-building platform to hire and train people and provide angel funding, which is scarce.

There also is a worldwide economic crisis, which means that there is a bunch of strong talent out there that we want to hire, in order to start a lot of exicting businesses.

You said that the sectors you plan to focus on are at an inflection point, that it’s “now or never.” Why?

Ecommerce in China has gone from 7% adoption to 25% adoption. Payment capabilities are just happening. Really, it’s a lot like the late 90s in the U.S. Remember how quickly Amazon and eBay and even Google search took off? You have to imagine the current Chinese Internet as news and games and blogging, but a big shift is inevitable. The average Chinese Internet user is just 25, compared to 42 in the U.S. That means they are getting older, getting more money, getting married, having kids… A rising ecommerce will lift all boats.

In terms of mobile, there are 650 million cell phones in China and mobile Internet usage is growing like crazy. It’s not just knowledge workers, but it’s also growing rapidly for groups like migrant workers and people making just a few dollars a day. They view it as the only way to access information, and with usage and volume a lot of things will grow.

There also is 3G, which is the one thing the Chinese government is going after and developing this year. In China, when the government wants to do something it happens.

For cloud computing: China has never really developed a software market, and what’s happening is like what’s happening in the U.S. – moving from packaged software to online or the cloud. In that process new businesses and models are starting to happen. If you look at the success of the Amazon platform or Google apps in the U.S., it will also be true in China because there are millions or people who want easy ways to build websites.

There is incredible opportunity right now.