New IDG Capital Fund Thinking Big, Thinking Global

No press release. No fanfare. Just Pat McGovern talking to VentureWire. And so, the existence of IDG Capital was brought to public attention yesterday.

The IDG chairman is forming the new organization to centralize a large portion of his far-flung venture operations. And he’s beginning with the goal of raising $1 billion, as the fund prepares to invest in ventures in emerging markets worldwide.

As news of the organization emerged, we caught up yesterday with Steve Kahn, the veteran venture capitalist McGovern has tapped as managing partner of IDG Capital, which will operate out of One Exeter Plaza in Boston, home to IDG’s corporate headquarters. Notably, Kahn said the new body had little, if anything, to do with last month’s splitting-off of IDG’s Boston venture arm to form Flybridge Capital Partners. Rather, he says, it reflects an effort to be more efficient and centralized about the way IDG raises and manages investment funds as its venture activities spread to more nations abroad.

Kahn has had some experience with big funds that operate in international waters. In 2005, he left Advent International, the large private equity firm with U.S. operations in Boston and other offices in Europe, South America, and Asia, after some 17 years with the company. He says he departed as the firm evolved away from venture investing and became a buyout specialist. He spent much of the next two years at Prevail Capital, a boutique placement agency that he co-founded with a colleague at the end of 2005; Kahn worked out of his Bedford, MA, home while his partner worked in Palo Alto. After being approached by a headhunter last year, Kahn signed on with IDG Capital in mid-February.

With its Boston affiliate now operating separately, IDG has five remaining venture arms, in San Francisco, China, Korea, India, and Vietnam. (Only three of these will be funded through IDG Capital—more on that below.) Each of these funds is typically kicked off with sole funding from IDG, but operates independently. If a new fund is raised, IDG usually puts in a percentage but leaves it to each operation to raise the rest. Under the new organization, though, a central fund will be raised under Kahn’s auspices, with the money then available to the participating local arms for investment. The idea, says Kahn, is to free the partners in each local office from the fundraising aspect of their jobs so they can concentrate on investing. “The objective of the group is to provide funding and oversight for the venture network that IDG has developed,” he says.

That funding won’t be insubstantial. “I think our target is around a billion dollars,” Kahn says, noting the aim is to complete the raise by year’s end. IDG, as has been McGovern’s practice, will play a big role in getting it started. “In general he’s up for putting in between 15 and 25 percent of what we end up raising,” Kahn says. He calls that “the sweet spot” for McGovern’s involvement: much more and he’s seen as too big a player, much less and he might not be seen as committed to its success. (As noted above, IDG typically funds virtually the entire first round of its new venture arms, then opens them up to outside investors in subsequent rounds—which this is, since the IDG Capital fund is essentially a follow-on fund.)

Only the India, Korea, and Vietnam operations will actually get their funding through IDG Capital. Kahn says the San Francisco office, IDG Ventures SF, is in the process of raising its own fund. “They’re almost done, so we just thought it made sense to let them finish it rather than confuse things,” he says. The China arm, IDG Technology Venture Investment Partners, which has some $1.4 billion of IDG Ventures’ total $2.2 billion under management and operates a fund in partnership with Accel Partners, was also left out of the new structure.

Kahn says he does not believe there will be any attempt to rebuild a Boston venture arm to fill the void left by Flybridge’s departure. “The venture market in the U.S. is a fairly mature market at this point,” he says. “There’s probably more consolidation than there is expansion.” IDG Capital, he says, “is really an Asian fund, minus China, at the moment.”

But that won’t be the case for long. Kahn says the “broader plan that Pat has is to expand into a number of other markets that we think are good opportunities. And probably the first one that he’s got in mind is Poland, but there’s a long list after that.” Kahn says that McGovern would probably like to see the Poland operation get underway this year, “but I don’t think that’s definite.”

And despite the central pool of money, McGovern’s philosophy of having local investors on the ground to invest in emerging growth areas remains the same. “That hasn’t changed at all,” Kahn says. “The idea of IDG Capital is just to make it so they can focus on investing. We’re not trying to change anything about the way the funds are set up, or the team, or the focus, or anything like that.”

The fund’s initial investment focus will be on early-stage ventures, but Kahn says he expects to move up the private equity ladder. “The longer-term plan is to move up-market into growth venture, ultimately even later stage,” he says. “It could be pre-IPO and possibly buyouts eventually.” He says that in this regard, IDG Capital will follow the China group’s path. “They’ve been very, very successful with their early-stage ventures, and they’ve moved from that into growth capital, and now they’re doing what they call a capital fund, which is more like buyouts.”

Bob is Xconomy's founder and editor in chief. You can e-mail him at bbuderi@xconomy.com, call him at 617.500.5926. Follow @bbuderi

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