Kai-Fu Lee, former China chief for Google Inc., raised $180 million from a group of prominent investors for his company aimed at helping Chinese tech-industry startups, a sign of continued interest in the sector despite a range of recent challenges that have pushed down share prices for Chinese Internet firms listed in the U.S.
Investors in the new fund run by Mr. Lee’s Beijing-based Innovation Works include Sequoia Capital, Silicon Valley investor Ron Conway–who was among the early backers of Google, Facebook Inc. and Twitter Inc.–and Yuri Milner, whose firm Digital Sky Technologies invested in Facebook, Groupon Inc. and Zynga. The fund will use the money for new Chinese Internet projects, Innovation Works announcement said in a statement Thursday.
Innovation Works, which Mr. Lee founded in 2009 after four years running Google in China, backs early-stage start-ups in China’s fast-growing Internet sector. It has helped nine companies obtain funding from third-party venture capital funds, including a smartphone operating system developer and a mobile application distribution platform.
Mr. Lee said in an interview Thursday that the nine companies raised an average of $8 million each and have an average valuation of $40 million. “The Chinese Internet will undoubtedly grow in usage, mobility, monetization, e-commerce—all faster than the U.S. market, so this is clearly one of the best investment opportunities,” he said.
But the sector has been confronted recently by growing concerns about a possible bubble in Chinese tech stocks, worries about the regulatory environment in China, and broader concerns over corporate governance practices at smaller Chinese companies.
A string of new Chinese Internet listings in the past year have performed badly. Shares in social-networking site operator Renren Inc. are now trading on the New York Stock Exchange around half their initial public offering price in May, and NYSE-listed stock in online-video company Youku.com Inc., which more than doubled on their first day of trading in December, are now back below their IPO price. Shares in Nasdaq-listed Tudou Holdings Ltd., a Youku competitor that listed last month, closed on Wednesday 10% below their offering price.
These companies, as well as China’s top Internet companies including Baidu Inc., Tencent Holdings Ltd. and Sina Corp., have multi-billion dollar valuations comparable to some U.S. Internet companies, despite competing for significantly less market revenue. Total revenue from online ads in China reached $4.3 billion last year, according to research firm Analysys International. The U.S. online ad market last year reached $26 billion, according to research firm eMarketer.
Market enthusiasm for Chinese Web companies has also been damped by increased government supervision of information online. It also follows the controversial handling of an ownership restructure by Chinese e-commerce company Alibaba Group Holding Ltd., of which Yahoo Inc. owns a roughly 40% stake, in which Alibaba transferred a key business to its chief executive without approval from its board of directors.
Mr. Lee, who is also a former Microsoft executive, said the Chinese Internet sector still has much to offer. “The overall trend is still exciting,” he said. “Some public companies are bubbles, but the same is true anywhere.” It’s “all the more reason” to invest at an earlier stage “before the valuation gets too expensive,” he said.
