January 31, 2008 21st Century Business Herald by Lei Zhonghui

This is his 102nd visit to China.

Since 1978, McGovern, Chairman of IDG, has visited China several times each year. In 2007, he spent the Spring Festival here. His trip at the beginning of 2008 is an unusual one. He came to China to receive the award of “CCTV 2007 International Investment Achievement Award”. In the last 8 years, this is the first time that this award has been given to a “Laowai”, a person from a foreign country.

“We founded the first foreign-funded media China Computerworld in China 28 years ago. Since then we have grown up together with the economy in China.” On January 30, McGovern said in his interview with the reporter from 21st Century Business Herald, “Fundamental changes have taken place in China in the areas of science, technology and industrial production. The number of engineers who graduate from universities in China is four times of that in the United States.”
The great changes of course also include IDG’s venture capital in China. “We had felt the changes that would take place in China. We established the first foreign-funded venture fund in China as early as in 1993.” McGovern said that up to the end of 2007, IDG had developed and managed a total fund of US $1.6 billion and had been involved in over 200 projects.” “We have also exited from 60 companies through various ways.”

Today China has become IDG’s most important market. IDG’s media business in China is just next to its business in the US market. IDG’s venture fund in China has taken up a half of the Group’s VC.

“By 2020, we hope to invest up to US $60 billion. McGovern hopes that IDG will achieve an even bigger goal.

A big plan of US $60 billion

“21st Century”: Since 2006, many changes have taken place in the VC environment. Many overseas venture funds have come to China. The local funds have also developed in a rapid speed. How do you think of these changes?

McGovern: IDG founded the first venture fund in China as early as in 1993. In fund and management, we have helped entrepreneurs grow up. So far, our fund established at the early stage and the two funds founded in the past two years have reached US $1.6 billion. We have invested in nearly 200 companies and exited from 60 companies.

As you mentioned, there have been more and more new comers to the venture market in China and the amount of the fund has become bigger and bigger. This is a good thing for IDG that has focused on new entrepreneurs, because more money will go to the companies that we have invested so as to help the targeted companies grow and the prices of our equities will become higher and higher.

It is also good for entrepreneurs as there have been more and more businessmen in the venture business, more money is available and higher prices can be asked. Of course, we do not think money is the only important thing in this market.

“21st Century”: As there are so many newly established funds, are they competitors to IDG that wants to invest in more enterprises in good quality? How will IDG cope with?

McGovern: Of course, competition is fierce. We, however, hold the view that enterprises need not only money, but also more other services including management, partners both in and outside China, recommendation of management people and market developments. We have the abilities to provide such kind of services.

What is more important is that VC is an industry that experiences are required. We have a 30-year venture history in China. We know China very well. We have over 50 professional people in the venture business. This is a big group of professional people. Entrepreneurs like to find venture investors more suitable to them. This is the advantage of IDG.

Both IDG and other venture investors face the same changes. Therefore we are not worried. We have also made our plans. I hope that with the present growth rate, IDG will manage and invest funds of US $60 billion including the fund we established in the early stage, venture funds that have been growing, Pre-IPO, and Buy-out Funds.

“21st Century”: As for the investment plan of US $60 billion you mentioned, does it mean that IDG will change its investment tactics?

McGovern: I do not mean the changes for investment tactics. We shall continue to make more investments in new venture enterprises and actively support development of the growing enterprises, but we also hope to invest more in enterprises in their later stages including Pre-IPO. The sizes of these funds are very big. Pre-IPO funds and Buy-out Funds may have a size of over US $10 billion.

At present, the economic development in China is very healthy with a GDP growth about 10 percent every year. By 2025, China will probably become the biggest economic entity in the world. China has many hard-working and bright talents. We are optimistic about the Chinese economy. There are also many investment opportunities here.

We have investments in the United States, Viet Nam, India and South Korea. We have managed funds of US$3.2 billion dollars, of which US $1.6 billion are in China. The year of 2007 saw IDG new investments in 20 projects. We have exited from 6 enterprises. Our highest return is from Dragon Net.

“21st Century”: Many VCs in China have been involved in PE. So has IDG. How do you think of this?

McGovern: This is our change. Our single investment was around US $2 million for a venture in its early stage. We now also make investments in their expansion and mezzanine stages. The Chinese market has been growing. So have we.

New business will bring about by Growth Enterprise Market

“21st Century”: Many VCs have complained that their exit channels from the China market are not so good. This year, China will establish a Growth Enterprise Market. How do you view this market in China?

McGovern: The establishment of the Growth Enterprise Market is a very good piece of news for both entrepreneurs and investors, because entrepreneurs can raise money for their developments through IPO in China. The cost will be lower than IPO overseas. Meanwhile, they can also build up their brand image and make market developments. Investors can exit from this growth enterprise market to obtain more returns. And they can also reinvest in other enterprises with their returns.

Many enterprises with IDG’s investments are growth enterprises. We shall have more opportunities to help them be listed in the growth enterprise market. When they are listed in the stock market, their growth period can be shortened. Chinese enterprises can become more competitive in the global market that has been more and more competitive.

“21st Century”: The standards for growth enterprises to be listed have not been promulgated yet. How do you expect these standards?

McGovern: We hope that after the enterprises are listed, we can have better chances to exit so that we can use the money to invest in more enterprises. We hope that the standards can be more attractive than other parts of the world so that more good companies can go public in the domestic market.

“21st Century”: The stock markets from Singapore, London and Tokyo have opened offices in China to get more Chinese companies. Will the growth enterprise market in China be competitive enough?

McGovern: The thresholds of NASDAQ, London AIM, growth enterprise market of Hong Kong Stock Exchange and Singapore are lower than the existing Chinese stock markets. When China establishes the growth enterprise market, the governmental department should compare the standards of these markets and set more attractive conditions so as to attract more Chinese companies to be listed in China. To international investors, there should be a number of favorable conditions for exit.

No doubt, the establishment of the Growth Enterprise Market will bring about more investment opportunities. This market will also provide Chinese investors with opportunities to enjoy investment value from quality companies with growth.

Subprime Mortgage crisis will help VCs raise more money

“21st Century”: Since the second half of 2007, the American Subprime Mortgage crisis has shaken the global stock markets. How will the Subprime Mortgage crisis affect venture investments?

McGovern: I think the Subprime Mortgage crisis will mainly affect Buy-out Funds and hedge funds. In NASDAQ, the share of these funds is very big. They have borrowed a lot of money from banks. The Subprime Mortgage crisis has mainly affected banks’ demand for cash. These funds cannot get enough cash from banks. The impact will be continuously evident in the coming one year and a half.

But the impact will not be too big to venture funds for equity investments.

However, the Subprime Mortgage crisis has brought about more risks to the stock markets. The market environment is not good. Some enterprises that are prepared to go public might change their plans. The impact of the Subprime Mortgage crisis on the venture funds is that their returns will be prolonged.

“21st Century”: Is the Subprime Mortgage crisis an opportunity for VCs to raise money?

McGovern: Yes. A number of institutions such as university funds and pension funds will consider risks of various funds when making investments. The Buy-out Funds and hedge funds will possibly put more money in venture funds. This is also an opportunity for venture investors to increase the size of their own funds. It is easier for venture funds to raise more money.