IDG's Pat McGovern on Investing in China

Pat McGovern is the founder and chairman of International Data Group (IDG), the world's leading technology media, events, and research company with 2009 revenues of $3.05 billion.

He is on the Advisory Board of IDG Capital Partners which manages $2.5 billion in capital to invest in China-focused technology companies. They are arguably the top VC firm in China today. I asked Pat how it happened in this interview:

Q: It's not conventional wisdom for a firm like IDG to make the move into venture investing. How and when did you decide to do that?

A: Our research has shown that the rate of growth of the technology market is related to how many new products and services are being introduced into the market.

Entrepreneurial start-ups have the best record of taking the latest technology from the laboratory and bringing it to the market with better price performance or application characteristics than those already available.

Therefore, we decided to help stimulate the growth of the technology market by investing in start-up companies which results in the long run in greater revenue growth and profitability for IDG.

Q: And when specifically did you decide to go into China?

A: IDG's mission is to help people worldwide increase their standards of living, productivity, and quality of life by learning how to acquire and use information technology well. Since China has the world's largest population, we desired to enter China as early as possible.

Fortunately, we were able to establish a joint venture in China in March 1980 to offer technology publications and information services. This was the first joint venture of any type between the U.S. and China.

Q: When I travel through China, I hear about IDG Capital Partners all the time. You're arguably the top venture firm there today. How did that happen?

A: In the early 1990s, a considerable number of people who had left China to get educated in the United States and Europe and had worked for one or more technology companies in the U.S. were beginning to return to China. They wanted to start new companies based on their knowledge of the latest technology and using the marketing methods and business practices that they had learned overseas.

At that time, local Chinese investors were focused on investing in asset-based companies, such as real estate, highway builders, manufacturing equipment producers, etc. They were reluctant to invest in the business founder who only had a paper plan to show them.

If the paper plan didn't work, they could lose their entire investment. So, IDG decided to become a seed investor in many of these new technology companies being founded in China, typically investing $500,000 to $2,000,000 as a first-round investor.

The VC community in the U.S. thought we were crazy since at that time there were no stock markets in China, and one couldn't establish a stock-based company in China in order to give stock options to employees.

However, in the early 1990's, we had talked to the president and to the Premier of China, and they had told us their plan was to establish a "Silicon Valley" environment in China, so we went ahead and invested in 50 early-stage technology companies in China between 1993 and 2000. To-date, these companies have returned 46% IRR.

Q: There were many American venture investors who flailed around in China over the last decade? What was different about their approach and yours?

A: IDG established its first joint venture in China in 1980, and, therefore, we now have three decades of experience in doing business in China in the technology field. We publish the leading publications and information services on computers, communications, and electronics in China.

I made 70 trips to China between 1980 and 2000 and was able to meet with and establish good personal relationships with the heads of the key ministries and regulatory bodies of the Chinese National Government.

Thereby, IDG developed the reputation as a company that was committed for the long term to China, and we enjoyed strong support from top officials in the Chinese Government.

Q: And what has Accel's role been in all this with you?

A: IDG's VC investments are focused on start-up and early-stage technology companies. By 2005, many of these companies were in a growth stage seeking the B and/or C round investment.

Many prominent U.S. VC companies approached us to create a growth fund to support the expansion of these companies and others. We chose Accel as our partner, and in 2005, we raised IDG-Accel China Growth Fund I, a $350 million Fund, and have subsequently raised IDG-Accel China Growth Fund II, and IDG-Accel Capital Fund, which together have a total $1.4 billion under management.

Q: Within the last two weeks, we've seen a flurry of Chinese IPOs filed like Youku (YOKU), Tudou (TUDO), Bitauto (BITA), and Dangdang (DADA). Is there going to be sufficient demand from Investors?

A: China is clearly on track to become the world's largest economy by 2020 and will maintain GNP growth rates in the 9%-to-10% range. Investors are attracted to the country that has the highest GNP growth rate of any major country, and there have been many successful IPOs for China-based companies in the past.

Therefore, I believe there will be good demand for the China IPOs that have now been filed or will be filed over the next 24 months.

Q: Will we continue to see this pace of IPOs keep up with high quality Chinese companies?

A: Chinese companies now have a number of options for their IPOs. They can list on the Small and Medium Enterprise Board in Shenzhen, the Shanghai Stock Exchange, or the ChiNext Board in Shenzhen.

The larger size China companies seeking IPOs will look to list on the Hong Kong stock exchange, NYSE, Nasdaq or other international stock exchanges. In my opinion, the companies who list on international stock exchanges will overall be of high quality.

Q: There seems to be quite a difference between Chinese entrepreneurs' desire to go public and Americans' at the moment. Why?

A: Chinese entrepreneurs have more choices in that they can list on the ChiNext stock market, the SME in Shenzhen, or on Shanghai exchange. Companies listed on the stock markets in China have high P/E ratios so there is good motivation for Chinese entrepreneurs to go public on one of the stock exchanges in their own country.

Q: From the entrepreneur's or VC's perspective, why list in the U.S. when your P/E will be seemingly much higher in Hong Kong?

A: If a Chinese company desires to see its product in the U.S. and/or the European market, the visibility it would receive by being listed on a major U.S. or European exchange would help it gain mind share and subsequently market share for their company in these foreign markets.

Q: What are the big tech trends you're investing in for Chinese tech at the moment?

A: We are particularly interested in e-commerce, mobile Internet, biotech, social media, video sharing sites, and green energy companies.

Q: Any predictions for the top Chinese tech IPO for 2011?

A: No.

Q: When will we see the bigger Chinese tech companies like Baidu ( BIDU) or Sina ( SINA) start acquiring more of the smaller Chinese start-ups as we do in the States?

A: The Chinese entrepreneurs are very proud of their companies and have great determination to have the company they have started succeed in the long run. They are not attracted to being acquired by a larger company which would prevent them from achieving their personal business goals.

Q: If you had been advising Google (GOOG) at the start of 2010, what would you have told them about doing business in China?

A: Doing business successfully in China is based on personal relationships. Google should do more to develop personal relationships with key levels of the Chinese government involved in the technology industry, the information industry, and regulating the information available on the Internet.

By establishing mutual trust among the Chinese government officials involved with regulating the Internet, each side would have more clearly understood the position of the other.

If Google is able to establish better personal relationships with Chinese government officials and work out business practices that accommodate the Chinese laws, Google will be better positioned to compete with other Internet search and service companies in China.

At the time of publication, Jackson was long Google.

Eric Jackson is founder and president of Ironfire Capital and the general partner and investment manager of Ironfire Capital US Fund LP and Ironfire Capital International Fund, Ltd. You can follow Jackson on Twitter at www.twitter.com/ericjackson or @ericjackson

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