Aug 13, 2012 · 2 minutes

Several tech industry people I spoke to in China were less than enthusiastic about Innovation Works, the country's highest profile incubator, which operates on a model similar to Y Combinator and is headed by Kaifu Lee, former president of Google China.

Considering the incubator has the word "innovation" in its name, it has been churning out an awful lot of copycats, said these critics. Two of the most obvious examples of that are the Quora-like Zhihu and the Tumblr-like DianDian.

When I visited the Innovation Works headquarters in Beijing, partner Chris Evdemon told me that because China still lacks a lot of core Internet services that are available in the US, it makes good business sense to adapt them for the local market. In fact, said Evdemon, there is a need for such services in China.

Now, in a new video interview with private equity publication Privcap, Kaifu Lee has said that Innovation Works isn't focused on chasing big ideas. Asked if the incubator wants to back companies that hope to "change the world" or will simply stick to startups that tackle more identifiable problems, Lee said he's open to both.

"But in practice it’s really the latter that’s the predominant part of our investment," Lee told the interviewer. "I wouldn’t rule out the possibility of a company that’s targeting a real problem, that’s trying to solve it and make money, and over time developing something that’s great, and changing the world. That’s also possible. Our Innovation Works model is we find great, highly growing trends, and we find entrepreneurs who have ideas that can ride the wave up, and we fund them."

Lee praised Chinese entrepreneurs as amazingly dedicated and responsive to customer needs, but he said there is a shortage of truly innovative entrepreneurs. "What’s lacking is the truly breakthrough ideas and the vision and the passion to change the world," he said. "The entrepreneurs, as much as they have desire to make a difference, I think what’s more important to most entrepreneurs in China is that they build a great company and make a lot of money." As a result, Chinese startups tend to be very market and user focused, which can make them a lot of money quickly. "But that ground-breaking, paradigm-changing idea in a Chinese startup is something we rarely have seen, or perhaps even have not yet seen."

Innovation Works partners with top-tier venture capitalists to fund startups' Series A and Series B rounds, which constitutes 70 percent of its fund. The other 30 percent of its money, however, goes to seed-stage investments in young startups. According to Lee, it pays "a few hundred thousand dollars for 15 or 20 percent of the company," and then ushers the companies through to the advanced rounds of funding, where it has the option of putting even more skin the game. The failure rate for its seed-stage investments has so far been astonishingly low. So far, it has invested in 47 companies, only four of which have been deemed write-offs, according to the Wall Street Journal. Innovation Works, however, has only been around for three years. Over time, reckoned Lee, that failure rate might hit 50 or 60 percent.

At the end of last month, Innovation Works announced that it has raised $148 million for its second fund. Its focuses for the fund will remain on consumer Internet, mobile Internet, and cloud computing. The incubator plans to open a 10,000 square meter Shanghai office before the end of the year.

[Screencap via Privcap]