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A Vision for the Philippines’ Innovation Economy, & a 4-Point Plan to Achieve It (and why it does NOT include Venture Capital)

There’s an area that cuts through Makati City in the Philippines that is home to the densest concentration of emerging startups and financiers in the country.

This corridor starts at the west end of Ayala Avenue. As you head east, you’ll have easy access to parts of Legazpi Village (where the offices of Hatchd, A-Solutions, Spiralytics, Lazada, GrabTaxi, and Bridge are located) and Salcedo Village (AVA, Lenddo, LevelUp’s 1st office, TasteCentral, Pormada, and a ton of BPO companies).

Once you hit the middle of Ayala, you’ll be near the daily deal giants (MetroDeal, CashCashPinoy), Signal Data, and PLDT’s Ideaspace incubator. BPI – who is quietly building a mobile payments infrastructure with Google – is worth a mention. Of course, Tower One is just around the corner, where Jaime & Fernando Zobel are hatching innovations at Ayala Corp – such as low cost private schools.

Make your way to Buendia and you’ll hit the new Google office in the Zuellig building, and eventually Kickstart Ventures at 55 Paseo (with 15 portfolio companies, including Kalibrr – the first Filipino startup in YCombinator. Kickstart’s #raidthefridge events could be a startup in itself). Detour to Jupiter and you’ll be at the old The Spa building – now home to Rocket Internet’s Zalora. Run up the flyover to the Fort and you can visit 500 Startups-backed Payroll Hero.

Economists call this a cluster. There is empirical value to being in close proximity to each other – attracting and growing talent, accessing capital and early customers, and building a shared culture. And I daresay that the future of the Philippine innovation economy (no disrespect to our neighbors in Ortigas and QC – you are doing awesome stuff) will be centered around Makati City.

We’re still at Day Zero, though. With the Philippines ranking 90 in the Global Innovation Index (lower than Uganda or Mongolia!), what is the future of the Innovation Economy?

I can’t forecast the future better than you can – but I can postulate on what it should NOT be. It’s not about ‘replicating Silicon Valley’. It’s sexy to hear, but this is lazy thinking and reductionist logic. A truly Filipino innovation economy doesn’t need enormous government spending. And surprisingly, it has nothing to do with companies either. The main locus of analysis should be on PEOPLE.

Let me briefly touch upon these competing logics.

One thesis calls for massive amounts of government spending around research universities. Bring the bling and founders will sing, is how the logic goes. But as we’ve seen from the below-expectations performance of Skolkovo in Russia, Singapore’s Biopolis, and Malaysia’s Cyberjaya, this won’t cut it.

Does the private sector have the answer? Probably not. In the 1970s, New Jersey got Frederick Terman – known as the Father of Silicon Valley – to catalyze the state’s innovation economy. The plan was to build an innovation engine like Terman did at Stanford, backed by local companies. But RCA would not work with Bell Labs and so forth. Competitors didn’t want to collaborate.

Silicon Valley can’t be copied. Full stop. Many have tried and came up short. It took a unique combination of the people around Stanford – simultaneously competing and collaborating – with copious job hopping, information exchange, and an unbelievable tolerance for failure. The rise of the Valley is a Black Swan event.

If top-down government spending doesn’t work, and companies can’t be relied on, what can we do to jump start the innovation economy? Note that I don’t necessarily confine this piece to technology-driven solutions, as we’ve seen the ability of seemingly low-tech solutions (call centers, social enterprises like GK, etc) to contribute to the local economy.

We may never be a Silicon Valley, but what the Philippines does have is a unique set of problems that other emerging markets share: extreme poverty, high inequality, rapid urbanization, institutional voids, poor infrastructure and education gaps. These problems can give birth to innovative solutions with cross-country applications. That will be our own brand of innovation. And you know what? Problems like these excite the smartest people around the world.

So if there is one thing that can tie together our work, it can be this vision:

An innovation economy that focuses on scaling solutions across emerging markets. 

We are a microcosm of emerging markets. And with our English fluency, know-how, and huge overseas population, there’s no reason why local solutions can’t scale to solve emerging market problems. If GCash was the inspiration for M-Pesa, it can’t be too farfetched to imagine how a flood-information app can help Bangladesh, how Kalibrr can also empower India’s BPO industry, or how Hapinoy can help retail supply chain logistics in Myanmar. How can we do this?

This is my humble thesis: focus on a 4-point plan that puts People, Integration, Market Access, and Process at the focal point. Yes, you saw that right – that list does NOT include venture capital. And yes, the acronym of this plan is PIMP. Let me share a broad overview.

PEOPLE
Entrepreneurship is in our blood. Despite the oligopolistic economy, it’s worth reminding ourselves that everyone who settled these islands – from the Sultanates of the Middle Ages to the European colonists are entrepreneurs. Rizal’s dabbling in ophthalmology, writing, teaching, history, architecture, and woodcarving make him probably one of the first serial entrepreneurs. The Katipunan was essentially a startup – its purpose was to solve a huge problem, it attracted top talent & investors, and it went viral in a relatively short time. We lost a lot of ground to rent seeking monopolists and politicians through the decades, but this doesn’t change our history nor our appreciation for it.

I’m borrowing a lot from Brad Feld‘s work in building startup communities: put the entrepreneur first. The goal: build a pipeline of talented founders – whether they’re pinoy or not. This is a long term goal. We’re talking a generational time frame here: 30 to 40 years long.

  • Bring in entrepreneurs from overseas. Free up immigration and business-formation policies to make it easy for any foreigner to set up shop. I’m seeing leading indicators: three years ago, startup events were mostly attended by locals. Now, up to half of some events are attended by expats. That is a GREAT thing because it spurs innovation, creates competition, and transfers know-how. This uses colonial mentality to our advantage: the more local pinoys see expat founders, the more entrepreneurship gets sexy. (Don’t believe me? Check in with the Younghusbands and local football).
  • Self-select the right entrepreneurs by highlighting the huge problems we face. This sounds counterintuitive, but the best founders are motivated by problems, and this is what this country has. I postulate that the multiplier effect of bringing in one amazing entrepreneur who can build a great company is greater than the impact of bringing in 1,000 tourists from the “It’s More Fun” campaign. And we have the basic macro story: 100 million people, fastest growing GDP in Asia, double digit internet user growth, the biggest English-speaking internet market in East Asia, and the #1 social media market in the world.
  • Create a massive 10-year program to bring overseas Filipino skilled professionals back home. Give preference to those working in the sciences and engineering.
  • Spread access to tech education like crazy. Drastically revamp our computer engineering programs because only 1 out of 10 IT grads are employable. And with cheap tablets on the horizon, increasingly free resources like Coursera and Code Academy, and the generally cheap cost of tertiary education (unlike the US), there’s no reason this can’t happen .
  • Sustain inclusive grassroots events. We’ve got lots of bootcamps, hackathons and Startup Weekends. But where we need to do a better job in is making them more inclusive. For instance, despite being a high-gender equality country, we don’t see a lot of women founders. I meet a lot of talented entrepreneurs in the fashion and retail industries. But they rarely show up in startup events. To them, it’s a different world. It’s time to bridge the divide.
  • Build our management pipeline. I’m starting to see this problem creep up. Entrepreneurs often don’t make great managers. And 4 to 5 years into a startup’s life, having a solid management team that can execute will become a bigger problem. This solution: educate our top managers from the best local companies on the opportunities in the innovation economy and get them seconded to promising startups. We need our Sheryl Sandbergs and Eric Schmidts.
  • Get people to understand the nature of EQUITY. Equity is the biggest wealth creator in a startup but most people don’t ‘get’ that. When I was recruiting a potential founder-CEO for a startup idea last year, we made a generous offer: 70% of the candidate’s salary PLUS a double-digit % stake in the company (at no cost). Nobody took it. I am effing serious. Everyone wanted a premium of at least 20% to their current salary. People need to understand the nature of equity and how to make tradeoffs vs salary and short term perks.
  • Celebrate failure. We have TONS of awards ceremonies recognizing top entrepreneurs. A simple change for next year: make a HUGE failure be a part of the criteria of celebrating our best entrepreneurs.

INTEGRATION (domestically and internationally)

Building our talent pipeline isn’t enough. We need to get our people connected with the rest of the world. William Gibson, who coined the term cyberspace, once said “The future already exists. It just needs to be evenly distributed.” The future is outside the Philippines. We need to bring it here. The success of initiatives such as Hack2Hatchd demonstrates the benefits of integrating with the global startup community. It’s time to scale this up.

  • Establish R&D centers anchored by tech giants. Revise DTI’s mandate in Silicon Valley. Instead of focusing on getting BPO clients, let’s have them focus on getting tech companies to start R&D centers in the Philippines. This is a mobile-obsessed country. Why can’t we have a large scale mobile R&D center here anchored by Facebook? Payments are huge problem here. Why can’t Square set up a research facility? (I believe the answer partly lies in our lack of investor marketing over CNN or CNBC – Indonesia does a remarkable job in this). Ernest Cu of Globe is helping change that and his new partnership with Facebook is a great example.
  • Create massive founders-abroad programs. Imagine hundreds of Filipinos each year spending 3 to 4 months working on products in Palo Alto, New York, Boston, or Singapore. They’ll gain new technical skills. Meet new people. Benchmark their products vs the best startups in the world. Maybe even work for some of the best startups in the world. Learn the tacit rules of engagement. MassChallenge already does this with Israeli startups, with winners of a local competition spending months working out of the MassChallenge facility in Boston. No reason that Filipinos – with our ability to assimilate to new communities abroad – can’t do this.
  • Launch a content marketing campaign to share our story. When I met with a partner from Kleiner Perkins last year, she correctly observed that there was a lot of social media traffic from the Philippines: virtually every top social network from FB, Twitter and Instagram was seeing HUGE traffic growth from pinoys. So she asked some basic questions. What’s going on there? What’s the population of the Philippines? That dawned an insight: we haven’t been particularly great in selling the story. That’s changing. The Philippine Startup Report is a fantastic example. And I’m amazed it took someone like Ron Hose – and not local pinoys – to crystallize how special this story is. Another great example: Singapore Sessions uses a lot of content to evangelize.
  • Get Ateneo, UP and DLSU to WAKE UP. I’m focusing on Ateneo here because it’s the university I’m most familiar with. I love alma mater and I want it to succeed, so I’m calling it out here: the stories of internal squabbles that prevent the science and business schools from collaborating are shameful. There’s been no sustained effort to support tech innovation and Ateneo’s concept of entrepreneurship is setting up food businesses. Rationalize pay. I heard of an absurd rule in Ateneo that professors in the liberal arts need to have same salary grade as science & engineering professors – preventing the school from attracting the best educators. And I bet you that more money is spent on the Blue Eagles and Green Archers than on the Ateneo Innovation Center.

MARKET ACCESS
I believe that the biggest opportunities lie in platform businesses that can fill institutional voids. Think about sectors where there are enormous inefficiencies in providing opportunities for producers and sellers to interact. Market access – and the empowerment it seeds – must be the overriding problem that local entrepreneurs should focus on. Sulit did this by bringing classifieds to everyone, vs paying a hefty price for a newspaper ad. Ayannah does this by creating stronger connections between overseas Filipinos and those back home. Rappler is doing this by helping people access the best news and journalism. AVA empowers design brands who have a hard time finding retail space by helping them sell online.

At this point, I hope it’s becoming clear why spurring venture capital is not a focal point of this 4-point plan. VC investments are a by-product of talent and powerful ideas. 90% of VCs are herd investors – they will dive in only when they see leading indicators of financial returns, and talent is often a leading indicator. Create an ecosystem of alpha leaders and the herd will follow.  Money is like water – it’ll find its way to the best ideas.

PROCESS
This is worth mentioning again because it’s the most common feedback that founders have on company formation. I’m not even talking about foreign ownership restrictions – there are a number of fixes that can be done without changing the constitution:

  • Simplify taxation and reporting burdens.
  • Allow for LLC-type structures to be formed at the SEC
  • Easy entrepreneur visas
  • Consistent implementation and interpretation of labor laws
  • One a one-stop shop for all regulatory approvals for tech startups, regardless of municipality.

Going back to the Makati tech cluster: As with any plan, we need milestones. Here are some sensible ones:

2016: 500 innovation-oriented companies in Makati. Facebook & Twitter establish mobile R&D centers.

2020: 2000 innovation oriented companies in Makati. SSS and insurance companies start allocating large sums of institutional funding to local VCs.

2023 (10 years from now): The first billion dollar IPO from this cohort of companies.

2030: Technology revenues = 20% of Philippine GDP.

2035: A company from this cohort acquiring a dying local conglomerate, in what could possibly be the biggest triumph for this generation of  entrepreneurs.

2034 Elections: A Philippine President from this generation of founders.

It’ll be interesting to see how this story unfolds. What else does this plan need? Happy to hear your thoughts.

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11 thoughts on “A Vision for the Philippines’ Innovation Economy, & a 4-Point Plan to Achieve It (and why it does NOT include Venture Capital)

  1. Great vision, and something we all came here to achieve. This is spot on, the makati and fort clusters are slowly becoming a melting pot of innovative companies. We definitely need to import or grow management talent for companies and have an example of non founder hire that got equity, and ended up being equally as rewarded as the founders, like what happened to eric schmidt and google.

  2. Michael says:

    Many of the observations/recommendations are spot on! A few comments: 1) I agree – Silicon Valley cannot be replicated ; 2) As part of people development, we desperately need to upgrade our university science and engineering research so we have a large pool of university researchers and graduates who are tech-savvy. The one clear determinant of high-tech innovation is access to great university talent (Stanford in Silicon Valley, etc.)

  3. Rodec says:

    Great article. Since you mentioned that 90% of VCs are herd investors, i’m thinking that 90% of scientist are also herd entrepreneurs. There are cutting-edge researches being done by Filipino scientists and engineers but they don’t commercialize it because.. there has yet to be a success story of a Pinoy scientists turned entrepreneur making it in the global market. We don’t need 500 tech startups by 2016. We just need 2 or 3 that can make it big and inspire and make other scientist, engineer or programmer believe that it could be done.

  4. Nathan Chua says:

    Very nice insight. I agree with you that nobody seems to be appreciating the potential of the Social Media Market our country has. The value of money you can make from analytics and metrics from apps and websites, could generate insights for other corporations as well, and it will create a ripple effect to our economy. It could be a great help for marketing on different corporations. Surveys could be sold in big bucks.

    I wish the Philippines will amend its laws in regards to expats and foreign companies. We also have a lot of taxes that are unnecessary. Philippines is not also making advantage of ASEAN Free Trades where we can work together with Singapore, Malaysia, and Indonesia.

  5. Good insight, though I really don’t quite understand this statement :
    I heard of an absurd rule in Ateneo that professors in the liberal arts need to have same salary grade as science & engineering professors – preventing the school from attracting the best educators

  6. Nice read but rather a myopic view on establishing an innovation economy in the country. your PIMP seems to be literal in the sense that it is PIMPING rather than creating home-grown innovations. you left out the power of the academe in your equation. like most emerging experts in philippine innovation today, you hold the view that it is innovation if it is from outside the country. you mentioned a lot of startup examples, but most of them are from other countries finding their way here in the country where there is cheap labor. i fail to see in your examples real philippine startups run and owned by filipinos. makati wont be like silicon valley or where startups will eventually become tech leaders if not in the country, but in the world as you predict. for innovation to prosper and be cultivated, academic research facilities need to be strengthened and innovation policies need to be enacted or in what we, technology managers call National Innovation System. A national innovation system is thus an innovation system that encompasses elements and relationships, either located within or rooted inside the borders of a nation or state (Bengt-Åke Lundvall, 1992). It only becomes an ecosystem when it grows and evolves through policies and institutional changes. VCs are just a speck of such changes. a facebook research center in the country is a slap on the face. you would rather say, if you can’t beat ‘em, join ‘em. it is not innovation to be the limbs of tech giants. let them be our limbs instead. but what i do agree with you is the importance of clustering. You may have come across Michael Porter who defined clustering as “a geographically proximate group of interconnected companies and associated institutions in a particular field linked by commonalities and complementarities.” But Dr. Roger Posadas theorizes that clusters should be the local version of a regional innovation system which in turn, be the state-version of a national innovation system. There are frameworks on NIS that is available out there and it is then a matter of how we can move forward with it by implementing one for the Philippines since there is none at the moment. And while we are at it, it is also imperative to come up with a technology catch up plan since like you said we are behind in the Global Innovation Index. SoKor which was a war-town country 50 years ago managed to be a tech leader in mobile technology and electronics, ship-building and car manufacturing. So it boiled downs to NIS and I believe it should be the crux of our discussion but I laud you for opening up the dialogue.

  7. Thank you for this article. Just found this article from a friend of mine. I agree and share your vision and how you desire to have a healthy tech industry here that can share contributions in a global scale (than just food cart businesses). And for me, when I read the comments and some criticisms… (of course you can’t put all what’s needed in this blog right?), I say, we just need to do more and talk less.

  8. André says:

    To reply to JJDIAZ:
    Didn’t he say mention involving the academe to be centers of R&D in this point: “Get Ateneo, UP and DLSU to WAKE UP?”

    Indeed, we definitely need to support the development of local R&D, but I don’t see any harm in bringing in innovation from outside? Who knows what will stimulate the imagination and scientific curiosity of the locals? They would be able to see things in a different way, as they do not hold a historically/socially/culturally biased point of view.

    To comment on RODEC’s comment:
    I think this is where the business community in the country, with our pool of marketing, advertising, management professionals and the like will be able to help out. The inventors might not necessarily have the business savvy to bring their innovations to the market that the business professionals have. This is where a partnership between the innovators and the sellers is a good thing. (I just studied this idea of using the network through the Jerry Sanders case at the Harvard Business School, which you can read about there).

  9. Otula Owuor says:

    It is quite a reading and indeed opens up much needed dialogue that should spread other developing nations.Was in your country in July and it was my second time. Thanks for the bold effort needed that has resulted in this article that is likely to generate more discussions and hopefully actions.

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