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Online Extra: What IDG Saw in China -- Early


Patrick J. McGovern has always been something of a visionary. In 1959, while he was a biophysics student at the Massachusetts Institute of Technology, he became an editor of Computers and Automation, possibly the first computer magazine. Sensing the emergence of a new and dynamic industry, McGovern in 1964 founded International Data Corp., a research firm that tracks the information-technology market. Three years later, he launched a small trade weekly called ComputerWorld, which became the foundation of McGovern's empire. Today, the Boston-based magazine conglomerate International Data Group publishes more than 250 magazines and 300 Web sites around the world.

McGovern isn't a flashy guy, and his company reflects that conservative ethos. IDG's titles aren't buzz machines but more meat-and-potatoes products. They dutifully cover the tech industry and rarely set the magazine world on fire with innovative journalism.

ENTERING THE OPEN DOOR. Still, McGovern's vision of a huge and profitable market for tech trade journalism has proved true. In 2003, IDG's sales were $2.4 billion, making it one of the largest privately held companies in the world. McGovern's vision as a businessman has also made him a fortune. Forbes ranked the 67-year-old as the 106th-richest person in the U.S. in 2004, worth about $2 billion.

McGovern's knack for identifying emerging markets has also made IDG one of the most successful venture-capital investors. Nowhere is that more apparent than in China. After Deng Xiaoping announced China's open-door policy in 1978, McGovern flew to the Middle Kingdom and formed the first joint venture between a U.S. media company and the Chinese government. Today, IDG publishes 37 magazines in China.

IDG's success in publishing inspired McGovern to form the first foreign VC fund in China in 1992. Today, IDG Technology Venture Investment is the most active and successful early-stage investor in China. It has invested $170 million in more than 100 companies, and its internal rate of return is an enviable 42%. IDG Technology's early entry and active support of Chinese entrepreneurs has made it the Kleiner Perkins of China. BusinessWeek Computers Editor Spencer E. Ante recently spoke with McGovern. Edited excerpts from their conversation follow:

Q: Where did you get the idea to set up a China venture fund?

A: The original purpose was to establish the media business in China, where 22% of world's readers were. As soon as the open-door policy was announced, I went over and started the first joint venture between U.S. and China.

I negotiated an agreement with Ministry of Computers & Electronics, which oversaw business in that area. I also was approved by Ministry of Information. People thought it would take three to four years, but we were approved by the government in 60 days. Within six months we were publishing a weekly newspaper, and we had our own building with a staff of 35 people.

We could move quickly because we started right at the top. By 1992 we had enough cash flow from other publications and trade shows and research to form a venture fund. If you reinvested profits in China, the government allowed you a 50% reimbursement on corporate taxes. So we started a venture fund in 1992.

Q: Did you need to get any other government approvals?

A: We needed a local government partner in each province we operated in. We struck agreements with the science and technology commission of each province. We each chipped in 50% of the capital. In 1995, we started to invest directly because of the liberalization of investment controls.

Q: What was your vision for investing in China?

A: There were a number of objectives. To have interesting media you need to have interesting things to write about. State-owned companies were slow to introduce products.

The government was investing in technology. Expatriates were returning with modern business-management skills. What really got us excited was the quality of human resources. People would line up and ask for money. We didn't have to negotiate with four or five other VCs banging at [the] door. They all laughed at us in 1992.

Q: Given the opportunity, why did so many investors ignore China?

A: People would only invest in tangible assets. International investors were looking at infrastructure projects like roads, bridges. Also, venture people need clear exit in five to seven years. When the VCs looked at China, there were no local stock markets and buyers.

We agreed, but we saw the rate of change. We knew they were planning to set up stock markets. When we wanted the exits in 1998, 1999, 2000, we thought it would be possible. We made that bet.

Q: What lessons did you learn in the early years?

A: We expected the government to be the customer. One of our first investments was a company that made biodegradable plastic film. We wanted to sell to the government, but it said it needed to set up a study committee. So we sold that business to another company. We realized we were always in better shape if we sold things to people with a profit motive.

Q: Did you make any mistakes?

A: We were premature on Sohu.com. Our first exit was Sohu.com. We invested 22 cents a share. We sold it at $1.50. Shares went to $44. We learned to be more patient.

Q: Why has IDG Ventures been so successful?

A: Chinese companies often had good technical people. But we developed a team of 30 people in China focused on mentoring, strategy, HR, recruiting, distribution, sales, ads, marketing. We're very active coaches of the companies. When entrepreneurs are interviewed in China, they say IDG is their preferred partner.

Q: How important are connections?

A: I just came back from my 91st trip to China. I go five or six times a year. Since 1980, my staff has held 625 banquets with government officials. You have to keep these relationships strong. It will always be important to have [face-to-face] contact. That's a mistake Western companies make. Even if the provinces become important, they will become small versions of China -- and you'll still need to deal with people.

Q: Are concerned about growing competition?

A: We look at 100 deals a month. We choose one or two. Of our rejections, a third of them find someone to invest. We haven't found we've lost a deal that we tried to invest in.


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