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There appears to be a boutique industry developing around companies wanting to help US startups get set up in China. InnoSpring, the first US-China tech incubator, has been at it for a year and a half. Yodo1 is a studio that helps Western gaming companies adapt their products for the China market. In hardware, Boston-based Dragon Innovation and Shenzhen-based Haxlr8r provide deep ties to Chinese manufacturing and supply chain partners. And China’s largest Internet company, Tencent, is investing in Silicon Valley startups.

Here’s another name to add to the list: Innovation Works, China’s largest startup incubator, which is also a $500 million VC fund and the nearest equivalent the country has to Y Combinator (Update: some people contest this assertion – see the comments below for Chinaccelerator‘s point of view). It was established by Kai-fu Lee, former president of Google China.

Innovation Works partner Chris Evdemon will be moving from Beijing to Silicon Valley in the coming months. He brings with him a $10 million seed fund for investing in US startups that want to get established in China. Innovation Works actually started investing in US startups back in February and has already made 10 seed investments. Evdemon says if things go well, it will increase the fund and perhaps establish a small team in the area.

Innovation Works has in the past faced criticism in China’s tech industry for spinning out companies that are mere clones of existing companies from the West. Among its startups, there’s been the Chinese Instagram, the Chinese Tumblr, the Chinese Quora… You get the picture. However, Innovation Works makes no apologies for its approach. It argues that that the country lacks many of the core Internet services enjoyed in the US, and so there are a lot of opportunities for startups to fill out some of those basic needs.

The incubator’s activities in the US are an extension of that thesis. Evdemon says Innovation Works is focusing on areas that Chinese entrepreneurs are not addressing, either out of lack of interest or lack of expertise. That’s a similar approach espoused by 500 Startups’ Rui Ma, who has said “boring” startups can be good investments when it comes to China.

So Innovation Works is looking at startups that provide developer and enterprise tools, particularly in productivity and real-time communications. Evdemon says that although Chinese people have a long-held aversion to paying for software – a legacy of rampant piracy – he does see a future for Software as a Service models, albeit with lower subscription payments than those seen in the West. He believes there will be a new generation of managers that will at least accept micro payments. “We feel that SaaS, little by little, is going to start taking over.”

Innovation Works also sees online education and connected devices are key areas, partly because Chinese entrepreneurs don’t have deep experience in anything that includes an offline component.

The incubator’s first group of US investments include Kamcord (shared mobile gameplay), Distill (online interviews), Moxtra (collaboration tools), OneMonthRails (online education), and Swivl (hands-free smartphone video).

Innovation Works invests between $100,000–$350,000 of seed money in each startup, and gives them access to its co-working facilities in Beijing and Shanghai, as well as its mentors and services, including financial, recruiting, and legal advice. It also has experience in helping to set up China-based teams for American companies, including for YouTube founders Chad Hurley and Steve Chen’s AVOS Systems (Chen is an investor in Innovation Works), and Strikingly, which provides mobile optimization for websites.

US Internet companies have a history of failing in China, with eBay, Yahoo, and, most recently, Groupon, among the most prominent examples. In general, the American companies failed to recognize the importance of giving its China operations full autonomy, including the ability to make the biggest decisions themselves.

Any American company hoping to get started in China these days should follow Evernote’s example and set up a separate China office that controls its own destiny, Evdemon says. Evernote is seen as one of the few US Internet companies to have taken a smart approach to tackling China. Flipboard is another, and LinkedIn is apparently considering a similar approach.

Those barriers, which are mostly cultural but also extend to economic and regulatory, still exist for US companies hoping to enter China. Evdemon says Innovation Works can’t make them go away. But it can help make them smaller. “What we are saying is that there are many ways to mitigate a lot of these risks,” he says.

An example of one of China’s unique challenges is playing out right now for Innovation Works founder Kai-fu Lee. He has been subjected to a media assault by a writer for a magazine run by Chinese Communist Party’s Propaganda Department, who, according to the New York Times’ Didi Kirsten Tatlow, has called Lee a “loser” who sexually harasses underage girls and charged that Lee faked his recent announcement that he has cancer. The attack has since been republished in China’s state media outlets.

It comes as part of a broad government effort to undermine the most influential voices on social media in the country. Lee has more than 50 million followers on Sina Weibo, China’s equivalent of Twitter. Billionaire American venture capitalist Charles Xue, another so-called “Big V,” has suffered worse. He was arrested in Beijing and charged with having sex with a prostitute. He was then shown on television in his jail clothes. Given the focus on social media, the new government’s crackdown does not bode well for the Internet in China in general.

Evdemon says the attacks are unfortunate. “It’s very sad to see how the state-run media has republished and retweeted what some random individual initially wrote.” It’s doubly sad in Lee’s case, he said, “because he’s a seriously sick person at the moment.”

Meanwhile, Lee is undergoing treatment for lymphoma in Taiwan. Evdemon says he is progressing well and is in very good spirits. Because he caught the cancer, early, his probability of recovery is “quite high.” His recovery, however, is expected to take a number of months.

[Image Credit: moonlightbulb on Flickr]