“Our basic idea is that firstly IDGVC must be a successful venture. Secondly, what IDG should do is to find a suitable role and space to put its advantages into full play.”

McGovern, founder and chairman of IDG, started his 99th trip to China in early February of 2007. As usual, McGovern visited IDGVC’s invested companies in China besides his meetings with some Chinese Government officials.

What is slightly different with his many previous visits is that this time he spent the Chinese Spring Festival with IDGVC’s partners in Beijing. The reason why McGovern did this seemed very simple that China has become IDG Ventures’ most import market worldwide. McGovern himself has tried not to be isolated with the cultural life in China.

A Bumper Harvest Year in China

A complete venture investment cycle can be divided into three stages: financing, investment and management, and exit. An outstanding venture firm can make excellent performances in these three aspects after a certain period of time.

IDGVC, as one of the earliest international VCs that have entered the China market, has been in a leading position.

After IDG set up IDG-Accel China Growth Fund (IDG-Accel Fund) that had successfully raised over US $300 million by the end of 2005, IDG again established Media Fund by raising US $80 million from its media partners in 2006 in video, music and media industries, of which US $50 million would be injected to the China market particularly.

In 2006, IDGVC had two funds being invested in the ever increasingly competitive China market: IDG’s Fund III (Seed) and IDG-Accel Fund. Their performances were far better than IDGVC had planned. IDG-Accel Fund has made dazzling performances. In 2006, it invested in 18 companies with an amount of US $65 million.

Li Jianguang, partner of IDGVC, indicated in January 2006, “Each of the seven general partners will try to use IDG-Accel Fund to invest in one relatively mature company and use IDG-Seed Fund to invest in a relatively new company. This is a basic requirement. Totally we shall invest in about 15 companies with about US $60 million from these two Funds.”

IDG’s Fund I and II that have completed sowing seeds have also made visible achievements. Soufun, Home Inn (NASDAQ: HMIN), YGSoft (Shenzhen Stock Exchange: 002063) invested by these two funds under IDGVC in 2006 had become hot topics in the investment area either because of their operation size or their exploratory efforts.

“Our investment returns did not mainly come from the invested companies mentioned above in 2006, because the stocks held by the institutional investors usually have a lock-up period for six months or so.” McGovern revealed that IDGVC’s major profits in 2006 came from Baidu listed in NASDAQ (BIDU) in 2005 and Ctrip (NASDAQ: CTRP) listed at the end of 2003.

IDGVC obtained a profit of nearly US $200 million by transferring the stocks of companies such as Baidu, Ctrip, and Soufun, but the total investment in these companies was only US $8 million in the initial period.

Partnership VS Corporation System

By December 31st, 2006, IDGVC had invested in over 190 companies in China with a total investment of US $400 million. IDGVC had exited from 50 companies, 12 through IPOs in the NASDAQ, Hong Kong and Shenzhen stock exchanges.

The average annual internal return rate that IDGVC obtains from the exited companies exceeds 49 percent. More importantly, IDG’s Fund I has become the first one in the Chinese VC history that has experienced a complete VC fund cycle from financing, investment, investment management, exit and clearance. From the establishment in 1993 to the clearance in 2003, IDG’s Fund I had obtained a 36 percent internal return rate.

Though the economic results of IDG Fund I are lower than the overall return rate of IDGVC’s investments in China, they are still much higher than the average annual return rate of 20 percent achieved by Warren Buffett, the legendary investor, from the stock market.

“Buffett’s has not made as much investment in China as we have done.” McGovern smiled with much confidence. “We had entered the China market for more than a dozen of years from 1980 when IDG set up our first joint venture in China to 1992 when Deng Xiaoping made his trip to south China. With his experiences and observations in these 12 years, McGovern had felt that China was eager to have VCs. “There are too many bright people who are ambitious of successes. The market has grown extremely fast. The governmental organizations at different levels in China have made great efforts to promote the emergence and development of VCs.

In June 1993, IDG and the Science Committee of Shanghai Municipal Government formed PTV with an investment of US $20 million. IDG was the only LP then. This is also IDG’s first fund in China.

Quan Zhou still has a clear memory that “we could not have the same views about the goals with our partners from the Science Committees in Shanghai, Beijing, Guangdong, etc. There was a lack of legal environment adaptable to the VC operation mechanism. There were traps as well. The private economies were still not mature.” Quan Zhou is the next person to Hugo Shong that IDG had found in China for investment business. In fact IDGVC that had registered in the United States was an investment department of IDG and all the staff came from IDG. When PTV was founded, the Company started to recruit professional investors.

“We cannot wait until the market conditions become mature.” When the computer industry was very young in 1964, McGovern founded IDC that was involved in provision of reliable market information (IDC is now a subsidiary of IDG). With the great support from McGovern, Hugo Shong, Quan Zhou and others, after three decades, had invested in over 30 companies within three years since the founding of PTV. “Of course we had more cases of losing money than making money.”

Hugo Shong, executive vice president of IDG and president of IDG Asia, was a director in PTV at that time. The other two directors of PTV were Patrick McGovern and John Breyer who represented the minority shareholders (John Breyer is the former IDC president).

“VC was a completely new business in China. You could not expect too much.” McGovern felt quite normal when Quan Zhou and his colleagues were grateful to McGovern. Zhang Suyang, another partner of IDGVC, commented McGovern by saying that “he is nice and a person with vision.”

PTV’s name was changed into IDGVC in 1996. IDGVC applied a corporation system at that time, but not partnership as of now. Hugo Shong said with a smile that the reason why they changed the name is that first some people always thought PTV was related with television business. Second the name of Pacific is confusing as too many companies are named with this word. On the contrary, the name of IDG echoes greatly.

Before 1995, VCs had started to use the mode of BVI share controlling company (red chip channel) to invest in China. International private companies have had new channels to enter the China market.

In October 1998, McGovern visited China and met former China president Jiang Zeming, promising that he would invest US $1 billion in this market.

“To reach this grand goal, we have to make institutional investments in an authentic way.” Hugo Shong recalled that IDGVC changed the corporation system into partnership in 1999. In the same year, IDG Fund II with a size of US $100 million was formally established.

IDGVC formally formed a structure of partnership in 2000. In accordance with the principle of partnership, the Company also restructured its projects including those invested by PTV previously.

Since then, IDGVC has become an independent VC firm with a partnership system in the China market.

The Spirit of Small-sized Enterprises

“In order to make successes, IDGVC has to be an independent venture firm with a partnership system, but not like Intel Capital in a form of corporate venture capital.” McGovern indicated without excitement, “It is very simple why we have made this choice. A person who does the same job in a corporate venture capital can only earn US $200,000 annually, but he can have US $2 million in a VC firm with a partnership system. What choice he would make?”

The reason is also very simple why a person doing the same job does not have the same pay. In a corporate venture capital, they are employees, but in an independent partnership VC firm, they are partners and bosses.

The phenomenon of “doing the same job without the same pay” cannot last long under the conditions of a market economy. “I do not hope IDG Ventures including IDGVC is like a cradle Intel Capital.” McGovern said that it is obviously natural that IDGVC should operate with a system which has been proved successful.”

Zhang Suyang indicated that when the Company operated in the corporation system, the members of the IDGVC’s management could share 20 percent of its profits. One big advantage to apply a partnership system is to effectively avoid double income taxation (partnership enterprises are not income tax payers).

Within IDG, people would like to use the term of “acting locally” to describe McGovern’s management structure of “decentralization.” IDG has many business units. Each unit has the full power of recruitment, incentive bonus and development of new businesses. McGovern firmly believes that all the staff members can put their potentials into full play when they are respected.”
IDG Ventures is a typical example of decentralized management.

At present, IDG Ventures consists of five independent partnership fund management institutions located in Boston, San Francisco, India, China and Vietnam. These five institutions use one brand -- IDG. Each firm operates independently by its own partners.

It so happened that Sequoia Capital with a title of “Gemini in the VC Circle” in 2005 also used the same development mode as IDG Ventures, “independent teams, applying the same brand” during the course of globalization.

“I am not very clear about the specific roadmap for globalization set by Sequoia Capital.” McGovern smiled “but I think they should have noticed our results by doing so. In terms of the time, we started our globalization business 15 years ago.”

Since Sequoia Capital entered China and India markets, McGovern has focused on the top entrepreneurs in five countries including Poland and South Korea. Within a short period of time, it is very hard for any other market to replace China’s role in IDG Ventures.

With a development history for 15 years, IDG Ventures has become the only VC firm in the world that has mainly targeted the China market.

Growing Up

IDG-Accel Fund accomplished raising US $310 million in November 2005. “More than US $600 million would be pooled.” The new fund is managed by the present partners of IDGVC. Quan Zhou, Hugo Shong, Zhang Suyang, Lin Dongliang, Yang Fei, Guo Yihong, Li Jianguang, the seven GPs are joint decision-makers. Meanwhile, Jim Breyer, an Accel partner and Patrick McGovern, chairman of IDG, are the members of the Consultant Committee of this Fund.
IDGVC has entered the China market as a mainstream international VC.

IDG and Accel Partners as the joint sponsors of IDG-Accel Fund, each made an investment of US $25 million, “taking up 10 percent of the previously targeted scale in IDG-Accel.”

“As an LP, our investment in the new fund has dropped from 100 percent as previously promised to the present level of eight percent, but we are still the largest single LP in IDG-Accel Fund.” McGovern said the rest of US $260 million came from the world well-known LPs of which 80 percent are Accel Partners’ own long-term partners. Each LP puts a maximum fund of US $15 million.

The establishment of IDG-Accel Fund symbolizes that IDGVC has grown up. “If we are still the only LP in IDGVC’s new fund, it means that IDGVC still depends on IDG.” McGovern said “That is not what I hope to see.”

From an LP with a 100 percent control to the present eight percent, IDG’s control over IDGVC has become weak while IDGVC has grown up gradually.

McGovern’s reaction on this point is quite quiet. “Our basic idea is that IDGVC has to be successful. Then what IDG should do is to find a suitable role and space that it can put its own advantage into full play.” McGovern asked “if the result is not of a success, what is the meaning of controlling 100 percent?”

An enterprise like a human being has its own ideas when it grows up, but its blood relations cannot be changed.

“Under the precondition that certain criteria are met, theoretically IDG-Accel Fund can put 100 percent of its capital into the enterprises that IDGVC had invested previously.” But so far in IDG-Accel’s investments, there is only Allyes AdNetwork has been invested by IDG Fund.

By the end of March 2007, Allyes AdNetwork invested under the guidance of Zhang Suyang will be acquired wholly by Focus Media and will become the first company having conditions for successful exit in IDG-Accel’s investments. It only lasts less than 12 months from IDG-Accel’s investments in Allyes AdNetwork to the time when Allyes AdNetwork is acquired wholly by Focus Media. After Frame Media (It only takes 9 months from the investment made by IDGVC to the acquisition made by Focus Media), Allyes AdNetwork has created the second miracle in terms of the speed of exit from IDGVC’s investments.

Advantage of Acting First

The establishment of IDG-Accel Fund is in line with the trend that many growth enterprises have come into being in the China market in recent years. But the difference with the past is that when IDG-Accel was founded, many major international VCs, growth funds, and PE had tried or were trying to find a place in the China market.

“The focus of competitions among VCs has been shifted from financing to investment abilities. To Zhou Zhixiong’s mind, the former partner of SAIF, a very important reason why IDGVC can become No. 1 in the VC area in China is that its Chinese team has independent decision-making power in investments and they can react rapidly to the changes in this market.

Can IDGVC continue to maintain its absolute leading position in the China market with the emergence of many local GPs and international LPs funds and the shift of decision-making power to this market?

“We have experiences in the China VC market for over 15 years and have trained a great number of graduates (referring to the entrepreneurs invested by IDGVC, and those companies that IDGVC has exited by helping them being listed in the stock markets, and the key members of the managements.) McGovern holds the view that IDGVC will probably take the lead in introducing the practical experiences in the United States to China. “For instance, we invite our own graduates to be partners in our invested new companies or entrepreneurs in residence. (Please see details in “IDGVC: To Live Longer and to Live Better is More Important” in Issue No. 1, 2006 of China Internet Weekly.)”

Besides using the way of “taking it first”, IDGVC has also made explorations according to the development in the China capital markets. In August 2006, YGSoft (Shenzhen Stock Exchange: 002063) invested by IDGVC was listed in Shenzhen, becoming the first one that IDGVC has exited from the public capital market in the mainland.

“IDGVC with much influence has become a famous brand in China’s VC circle.” With only one project “Winning in China”, IDGVC has received over 5,000 business plans of which 120 have commercial values. McGovern thinks that one of the enormous advantages of IDGVC is its strong connections.

Now IDGVC has a team of over 30 investors in Beijing, Shanghai, Guangzhou, Shenzhen, Hong Kong, Boston, Silicon Valley, etc. IDGVC is far more advanced than other VCs active in the China market in terms of the number of investors and offices in China’s mainland.

“With the development of the China market, IDGVC will possibly set up offices in Nanjing, Dalian, Chongqing and even Changsha, but of course, the decision will be made by Quan Zhou and Hugo Shong,” McGovern said with a smile that he himself is only an “adviser”, instead of the boss of IDGVC.