According to a 2003 report from Stanford’s Center for Entrepreneurial Studies on 28 search funds, average aggregate yields to investors have exceeded 30 percent. “But there’s a really wide range,” cautioned Mr. Koo. “There are people who’ve lost it all, and people who’ve doubled their money.”
1Verge is backed to the tune of “a couple of million dollars,” said Mr. Koo, by three investors. Search funds are typically backed by a variety of sources, including angels and endowment funds from the United States.
Mr. Koo anticipates the new model will draw fire from skeptics in China. People will see the “search fund” label as an effort to paper over a lack of solid direction. But Mr. Koo insists that he’s not flying by the seat of his pants.
“I have backers. I trust the team I’ve put together—a core team of a dozen people—and we are looking at several projects, both acquiring companies and starting our own projects,” said Mr. Koo.
1Verge will announce its first concrete projects “in six to nine months,” said Mr. Koo.
China’s Coming-Out Party
Having headed Sohu’s move into wireless services—a strategy that brought the ailing portal back from the brink to a state of profitability by the third quarter of 2002—Mr. Koo believes the intersection of the traditional and wireless Internet in China will be the center of action in coming years, whether in devices, content, or value-added services.
“The timing is extremely important,” said Mr. Koo. “The Olympics is coming in three years, and the Shanghai Expo in five. This is China’s coming-out party.”
Mr. Koo cited an Internet user base of over 100 million, and mobile subscribers fast approaching 400 million.
“This is the time window when we’ll see real convergence of PC, wireless, and television,” he said. “Broadband users already account for over half of Internet users. And we all know that there will be 3G [third generation wireless service] in China in 2007. You can bet the government will make it happen.”
Mr. Koo is keen on another type of 3G: what he calls the “third generation” of China’s Internet companies.
“The first-generation Internet companies, like the portals, derived revenues from banner ads, from SMS [short message service],” he said. “These were mature markets with clear leaders. The second-generation companies are in segments that are highly competitive. You know the players, but you can’t call the winners in areas like auction, search, and blogs.
“The third will see high growth in the future,” he added. “The opportunity has been identified, but no one has figured out the biz model yet for things like IPTV or online entertainment. We can figure it out, and find convergence businesses.”
However, interagency battles between China’s Ministry of Information Industries (MII), which regulates the telecommunications and IT sector, and the State Administration of Radio, Film, and Television (SARFT), which traditionally regulates the broadcast business, continue to hamper convergence in China.
The two agencies are contesting control of IPTV, cable Internet service, and wireless broadcasting. “We’re not betting SARFT and MII will sort this out immediately,” admitted Mr. Koo.
Sohu Experience
Mr. Koo reflected on his departure from Sohu. “At the end of ’04, I looked at my ’05 calendar and found there wasn’t much I wanted to do,” he said. “I had promoted a bunch of people to VPs, and they were now senior VPs who were all very good at their jobs. My time was up, and I decided I should move on and let these guys grow.”
But insiders suggest that Mr. Koo’s departure may have been fueled by disagreements between Mr. Koo and Sohu founder and CEO Charles Zhang over Sohu’s focus and direction after wireless revenues began to decline steeply in late 2003.
The portal has consistently lagged behind archrival and fellow Nasdaq-listed company Sina.com in advertising revenues.
In addition, Sohu has watched one-time portal competitor NetEase, also a Nasdaq-listed company, remake itself into an online gaming giant with its share price consistently three to four times above Sohu’s.
Meanwhile, Sohu’s own forays into games—developed in-house rather than through an acquisition or licensing arrangement—have flopped.
After his resignation, Mr. Koo was rumored in the Chinese media to have been approached by Yahoo and was apparently close to joining Google, which formally launched operations in China in July.
“By September I had narrowed it down to two or three choices,” said Mr. Koo. “I had two criteria. First, it had to be a startup company of less than 100 people—what I call a ‘Series B’ stage company. And second, I wanted to be No. 1 this time.”