Entrepreneurs, Entrepreneurship, Founders, Government, Philippines, Startups

Why Would Anyone Invest in Rappler if it’s Losing Money?

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Pierre Omidyar’s fund invested in Rappler. Is he trying to destabilize the PH? Uhm, no.

 

A blogger posed this question, and posited that the reason anyone would is to achieve devious ends, in this case, to destabilize the government.

The blogger had three problems about Rappler’s financial affairs: its disclosures in its GIS and financial statements, its issuance of Philippine Depository Receipts to foreign investors, and the reasons why these investors would invest in a media company that was losing money.

Oscar Tan adequately addressed the first two in his Inquirer column. I want to talk about the third. According to the blogger, it was obviously irrational for savvy foreign investors to invest in Rappler if it generated a cumulative loss of PHP 163 million from 2011 to 2015.

Thus, there must be some other non-economic reason why these investors keep infusing their capital – to destabilize the government perhaps?

Believing this sends the wrong message to Filipino founders and is bad for promoting entrepreneurship. Full disclosure: some of Rappler’s founders have also invested in one of my businesses.   

The blogger makes a ridiculously inappropriate comparison to a sari-sari store that is losing money. Why would the store owner keep injecting cash to fund an unprofitable operation?

And therein lies the problem. Rappler is not just a media company, it’s also a technology startup. And early stage venture capital investing in the technology industry works differently.

What makes Rappler a technology company? It’s not just because it’s online or it has an app. Rappler’s built it own  infrastructure to manage and process its content, via a proprietary content management system, its mood meter, and its own data science operation.

Unfortunately, the sari-sari store analogy doesn’t capture the fundamental nature of how Rappler does business.

So why would two big foreign investors infuse capital in a money-losing technology startup?

Since people are fond of easy analogies, let me offer a more apt one.

Let’s say Ramon and Joey decide to start a company to launch a news app. They put in PHP 100,000 each of their own money. Their total capital is Php 200,000. They incorporate with 200,000 shares and a par value of Php 1 per share. So Ramon and Joey each own 100,000 shares, for a total of 200,000 shares.

Thus, their ownership split is 50-50. Ramon has 50% ownership. Joey has 50% ownership.

They use the Php 200,000 in 6 months to fund development of their app, and by the 7th month, they enter into a deal with Alibaba’s Jack Ma. Jack likes media investments. Previously, he also acquired a stake in the South China Morning Post.

At month 6, Ramon and Joey’s company is losing money.

Jack Ma’s offer is to give Ramon and Joey’s company Php 1 million in exchange for a 20% ownership of the company.

To do this, the company issues 50,000 new shares to Jack. Why 50,000? Because 50,000 shares is the equivalent of Jack’s desired 20% ownership stake in the company.

Thus, the total number of outstanding shares in now 250,000 shares, broken down into:

Joey = 100,000 shares (40% of the company = 100,000 shares / 250,000 total shares)

Ramon = 100,000 shares (40% of the company)

Jack = 50,000 shares (20% of the company)

Why would Ramon and Joey accept a deal wherein their ownership stake in the business is reduced from 50% to 40%? (We call this “dilution”).

Because the value of Ramon and Joey’s shares went up 20x. Twenty times.

WTF OLIVERSEGOVIA, how did this alchemy happen???” you might say. “In just 6 months??? For a company that is losing money??? That is magic. Or deception. Or both. You are destabilizing the stock market. I will report you to SEC Chairperson Teresita Herbosa. You must also be on drugs???”

Well, I can tell you if you aren’t so angry. (I’ve actually had reactions like this when I run my Startup Valuation workshops. The concept of equity value is so abstract for most people to understand!)

This is why. Recall that Ramon and Joey started the company by incorporating with PHP 200,000 in capital, 200,000 shares and thus, a value of P1 per share.

When Jack Ma invested his Php 1 million, he is buying new shares at a price of PHP 20 per share (P1 million divided by 50,000 shares). And because all shares in the same class must have the same value at any point in time, Jack’s investment implies that Ramon and Joey’s shares are also worth PHP 20.

Note that Ramon and Joey personally did NOT receive PHP 20 for each of their shares. Jack’s money goes to the company, not to Ramon and Joey. But Ramon and Joey each increased their net worth by PHP 2,000,000, at least on paper.

Where does the value come from? In simple terms: it comes from the past, the present, and the future.

The company created an app in the past 6 months. A customer can buy the app for a certain price. Jack is implicitly saying that the app is worth PHP 4 million.

Why? By investing PHP 1 million for 20% of the company, Jack is saying that the whole company (100% of it) is worth PHP 5 million. Minus his PHP 1 million cash infusion, their app is worth the residual: PHP 4 million.

It also comes from some estimate of the future value. Because of Jack’s investment, the app can grow its user base. It can start to sell advertising, or sell premium reports in its app. If all of these revenue streams resulted in the Ramon and Joey’s company being acquired by a bigger media company (say, ABS-CBN or GMA) for PHP 100 million in 5 years time, then Jack’s stake will be worth PHP 20 million at that point. Jack grew his PHP 1 million investment by 20x in 5 years. You can’t get a deal like this investing your savings in a bank.

At its core, borrowing money or investing money is all about forecasting the future value of something and estimating what price one has to pay for that future value, at the present time. This is what enables a bank to give you an auto loan or a housing loan – because you can continue to grow your salary and thus pay down the loan, or the house can appreciate in value in the future. This is also why the state invests in public education. Because the collective output of the iskolars ng bayan will be worth a lot to the country one day.

You might be wondering, why would Jack only invest in a minority stake? Because he knows that for the company to be worth more in the future, Ramon and Joey need to feel that they are true owners in the business, and not just employees. To achieve that, Ramon and Joey must retain a majority stake. Investors call this an alignment of interests. Otherwise, why would Ramon and Joey continue to work hard when majority of the gains go to Jack?

So, back to the original question: why would two big foreign investors infuse capital in a money-losing technology startup?

Because they believe their stake in Rappler will be worth more in the future. Plain and simple.

And like ABS-CBN and GMA – media companies with foreign investors – Rappler opted to use PDRs as the financial instrument rather than common shares.

*****

The heart of the blogger’s dilemma is that most people do not understand how venture capital valuation works.

Now you might say: the analogy of Ramon and Joey assumes a venture that’s been around for only 6 months. Rappler has been losing money for 5 years!

Guess what?

It will likely continue to lose money for the next 5 years. And that’s what could actually make it a good investment.

Amazon first registered an annual profit in 2004, a full 10 years after it was founded. It continued to lose money for the next 10 years after that. It’s only today that Amazon’s started generating profits.

Why? Because Amazon continues to reinvest its operating cash-flows into new technology, platforms, products, and services. That’s brought us affordable cloud computing, Prime delivery, video streaming, the Kindle, the Amazon Echo, and more. And I don’t doubt for a second that anyone would turn down a deal to invest in Amazon circa 1995.

That’s because profit isn’t the only measure of value. In technology, it’s actually a very poor measure of value as startups need to keep re-investing its cash flows to fund the best talent and to launch new products. So rather than profits, venture capital investors also look for milestones over the long term to measure value.

For anyone in the know, digital media is also a particularly hard business to monetize. From my understanding, other media sites like Tech in Asia, e27, and Vox are also unprofitable. So Rappler isn’t doing anything out of the ordinary, investment-wise. If Maria Ressa pushed Rappler to be profitable by Year 2 – she is actually not doing her job right!

Now that is something very hard for you to fathom, if your model of entrepreneurial success has been Henry Sy, John Gokongwei, or Lucio tan.

In the 1970s, Xerox funded a lab in California, called the Palo Alto Research Center – or PARC. For many years, PARC lost huge amounts of money doing research on information systems. One early result was the Alto: an integrated desktop workstation, with a keyboard, memory, processing power, and connected to a laser printer and other workstations via an ethernet.

If that sounds familiar, that’s because it is: the Alto was the early prototype of the personal computer and the rest, as we know, is history. If Xerox purely focused on PARC’s bottom-line, you wouldn’t be reading this post in your PC, Mac, or smartphone.

Measured within this frame, the correct question is not “Why invest in Rappler when it is losing money?” but “Why can’t Rappler be investing more to build new products, acquire the best editorial talent, and expand to other countries?

Will Rappler turn out to have as big an impact on Philippine media? We don’t know yet. That uncertainty is what makes technology investing fun.

But singly them out for issuing PDRs when it is a perfectly legal financial instrument and imputing some nefarious motive on the part of its investors without first understanding how venture capital investing works or the broader nature of technological revolutions is just hilariously foolish.

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E-Commerce, Founders, Government, Philippines, Startups

Who Should Be DICT Secretary? 5 Pegs for your Consideration.

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Aside from an acronym that can be the basis of a whole generation of Facebook memes, one thing that is worth pointing out about the Philippines’ new Department of Information and Communications Technology is that it’s a startup.

And like any startup, the founding team will play a crucial role. The DICT’s founding team needs a secretary, 3 under secretaries, and 4 assistant secretaries.

Who should they be?

Let’s start with the DICT is supposed to do. Section 6 of Republic Act 10844 – the law that created the department – lists the following powers and functions as its mandate:

1. Policy and planning: creating national ICT programs, promote ICT in education along with the DepED, CHED, and TESDA, and optimize all government ICT resources.

2. Public access:  creating rules for the establishment of ICT services in underserved areas; provide for free internet access in government offices and public areas.

3. Resource sharing and capacity-building: harmonize and coordinate ICT initiatives across government agencies, develop an integrated government ICT infrastructure, and assist in providing technical expertise to government agencies.

4. Consumer protection and industry development: ensure privacy rights, support investment promotion in ICT, and form international and local partnerships to drive ICT.

These are huge tasks. #3 alone hurts my brain, just thinking of the amount of work involved. The sheer magnitude of bureaucracy, national and local needs, vested interests, fragmented technical resources, and a technology landscape moving at hyper speed make failure intrinsically built into the job.

And this is why we need only the best to be leading the DICT. Though it would be hard to pin down exactly who the best person for the job is, I can wager a bet on who should NOT be even considered.

First, no lawyers. We have enough lawyers in government. If you look at the details of the DICT’s mandate, a huge portion of its success relies on strong collaboration and coordination with a multitude of organizations: telcos, technology providers, service providers, other executive departments, local government units, quasi-judicial agencies, and international bodies.

The DICT secretary will have to balance the competing tensions of a tech environment moving faster than the starship Enterprise traveling at warp 9.9 and the slow, lackadaisical way the average local leader makes decisions. Any entrepreneur who tried to selling to Filipino organizations knows this.

I have a lot of smart lawyer friends. The smartest ones play to their strengths and know what they are not: effective managers at scale. The DICT secretary should essentially be a manager who knows how to get things done through people. His output is the output of other people.

Also: the fine print. The DICT involves the reorganization and merger of existing agencies from the DOTC (which will be subsequently renamed simply as the Department of Transportation). The DICT needs manager who has done post-merger integration work. And as any human resources chief can attest, this is no small feat.

Second, should it be a telco person? I’m torn. Though it may be tempting to think that an alum from any of the two telcos could do the job, I’m leaning that the DICT secretary probably shouldn’t be a telco alum. Providing free internet access in government offices is a tremendous and expensive initiative alone. We wouldn’t want even the slightest perception of a conflict of interest. See the rabid reaction to Mark Villar’s appointment to the DPWH as a case in point.

Also, the NTC will become an attached agency of the DICT. And with the President’s drive to force the local providers to speed up the internet, we’d probably need a DICT secretary who can be tougher, more provocative, and more strong-willed to get things done.

Gerry Ablaza and Polly Nazareno, for instance, are both genuinely nice guys; the former is the ex-CEO of Globe (and currently runs Manila Water) while the latter just retired from Smart. But since both are above 60, I wouldn’t wish on them the grueling grind of working 80-hour weeks to get the DICT established and fully functional. They’ve both had stellar careers and they deserve an easier life. Let’s simply get them as advisory board members.

Which leads me to this part of the negative list – the DICT secretary shouldn’t be a sunset leader in his 60s who thinks this is a just a ceremonial post. At the risk of sounding ageist, we wouldn’t someone who can’t routinely work 15-hour days. There’s gonna be a lot of intense shit going to get this job done that it’s gotta be taken as seriously as a first year associate entering McKinsey or Goldman Sachs does.

But seriously, it should be someone who intuitively understands the innovation economy.

S/he must speak the language of the internet’s infrastructure, platform economics, net neutrality, cloud computing, and big data, among others.

S/he must be student of technology history, and how nations made the leap through technological advancement.

S/he must have spent time in the Valley. Or studied the technology trajectories of Japan, Singapore, Korea, or Taiwan. S/he must have witnessed the dawn of the internet in the Philippines. S/he must know the reasons why the future of the digital economy in the country rests with small businesses, not the big conglomerates. S/he must know who Ada Lovelace is.

******

The local fashion industry likes to use the word “peg” as a term to describe a look, style, or palette to imitate. So in a nutshell, here are 5 quick pegs on which kind of leaders we’ll need at the DICT founding team.

The Operator

Think Facebook’s Sheryl Sandberg. This is the uber-manager who is both a captain and soldier, a strategist and tactician, a general and a diplomat. The Operator gets things done not just within a small team, but with a vast array of often conflicting constituents in pursuit of a common mission.

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The Product Visionary

This is the young gun who boldly goes where no one has gone before. That is my 2nd second Star Trek reference in this post, so I’ll just stop right there. But seriously, this is someone like Chris Hughes, who helped create the technology backbone of the Obama campaign (and a Facebook co-founder).

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The Product Visionary gets digital media and has an intuitive understanding of how users interact with technology to make their lives better. S/he has a design & user experience background, and can for instance, design easier ways to file taxes online, or renew drivers’ licenses, or apply for passports.

The Platform Builder

Think Google CEO Sundar Pichai, who spent a more than decade building platforms such as Maps, Gmail, Chrome, and Android.

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A Platform Builder running the DICT would bring a step-change in how e-government works. For instance, imagine a one-stop Singapore-style online portal for business registration. Doing so would require integrating the back-ends of various agencies involved in the process, from the SEC, BIR, and DTI to LGUs, PhilHealth and SSS.

The Data Guy

This is the country’s chief data scientist, tying together all the data-related initiatives of the government such as Data.gov.ph,  or helping Comelec prevent another data leak. Think someone like DJ Patil, the chief data scientist of the United States.  S/he can help predict and counter emerging cyber security threats.

DJ Patil - Gigaom

The Insider

This is the career executive who has spent decades working in tech. S/he started in engineering, then moved up the ranks in management to lead teams with an ever increasing scope and complexity, and eventually becoming responsible for an entire platform.

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Someone like Minerva Tantoco – the Filipino American CTO of New York City and who spent many years in the technology side of financial services – would be perfect for this. The incoming DICT team should definitely have her on their advisory board.

Bonus: An army of Bertram GilfoylesYeah, the DICT would likely also need an army of guys who can get shit done without caring for the politics-induced BS that comes with the territory. And guys like that won’t work for the kind of guy rumored to be angling for the post.

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What kind of leader should be DICT secretary? Chime in below.

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Entrepreneurs, Entrepreneurship, Founders, Philippines, Startups

Top 10 People to Meet in the Philippines Startup Scene in 2016

2016 is particularly crucial not just because it’s an election year, but also because it’s a milestone for the early cohort of startups founded in 2008-2014 to see if they can make it to their next phase of growth.

It’s also an exciting time as Facebook is set to launch its Manila office, and Uber, Google, and other Silicon Valley giants are scaling up their operations in the Philippines.

These are the people who I believe will play crucial roles in shaping the Philippine startup eco-system in 2016. My criteria is simple, though admittedly subjective: they’re people who 1.) I’ve personally met, 2.) are incredibly competent, intelligent, and are in the top 10% of their field, and 3.) are generous with their time and genuine in their desire to help build the eco-system. You can check out my 2014 list here.

So, in alphabetical order, here are the top 10 people to meet in the Philippine startup scene in 2016:

1. Senator Bam Aquino. The neophyte senator is proving he can outperform the old guard in an institution known more for its grandstanding (those endless inquiries in “aid of legislation”) and coddling thieves of the highest level (the pork barrel scam). Bam’s the vanguard for progressive legislation. In just 3 years, Bam has authored entrepreneurship-focused laws such as Go Negosyo Law and the country’s first Competition Act.

In 2016, he’s working on a startup law that seeks to rationalize existing rules to make them more in line with the needs of the digital economy and make us more competitive with ASEAN neighbors. The ideas on the table: a limited liability company law (which requires amending the Corporation Code to allow for single-person corporations), immigration, amending the Retail Trade Law.

2. Pia Bernal & Alex Alabiso: Kickstart Ventures. In the 4th year of Globe’s experiment in seed and venture funding, Kickstart‘s practicing what it preaches by continuously iterating (disclosure: my startup is a portfolio company). Alex Alabiso comes in as head of portfolio development in Kickstart and has such a unique profile – he’s one of the investors with an engineering background. Pia Bernal, head of social enterprise investments and communications manager, has actually been with Kickstart from the beginning – but is now spending more time helping the portfolio with everything from training and development, to strategic partnerships. Mentored by Kickstart founders Minette, Dan, and Christian, Alex and Pia are undoubtedly playing a more active role this year.

3. Lawrence Cua: Uber. In the city with the world’s traffic, Uber has helped shape regulations for on-demand transportation apps. The app is undoubtedly loved by Filipinos, but 2016 will be a crucial year because it’ll help answer the question of whether Uber actually helps worsen or improve the traffic situation in Manila. The simple reason: unlike US cities, most Uber drivers aren’t car owners themselves but employees of entrepreneurial Filipinos who purchase small fleets and then plug them into the network. We’re waiting for Uber to publish more data to answer this question.

4. Diane Dugan Eustaquio, Goldy Yancha, Dustin Masancay, Kat Chan: IdeaSpace. With the new funding model in place (no equity!) and a new location along Arnaiz Avenue, the next iteration of the Ideaspace program will likely feature bolder and more diverse ideas that can attract a wider base of first-time entrepreneurs. With their grassroots reach across colleges and universities all over the country, the team’s crucial in spreading the gospel that there is an alternative path to a corporate job.

5. Mohammed Malik, GM, Thumbtack. The US-based local services marketplace employs over a thousand Filipinos to help grow operations. Why does it matter? The kinds of career opportunities Thumbtack presents to young Filipino workers is helping them realize that a call center job isn’t enough: that they can be part of a creative and entrepreneurial class of innovation-driven companies.

6. David Margendorff: Founder & CEO, Pawnhero. The country’s first online pawnshop has been super busy the past year, from winning Echelon in 2015 and the 2016 Osaka pitch contest in Japan, to securing funding from Softbank. With this background, David could choose to be anywhere in Southeast Asia – like the bigger market of Indonesia. But he’s chosen to bank on the potential of disrupting the technologically-challenged pawnshop industry in the Philippines.

7. Matt Morrison: CEO, A Space. With new co-working facilities in Makati, BGC & Cebu, A Space is evolving not just as an office leasing play, but as a hub for communities in tech, fashion, music, and the arts. Among their anchor tenants: Endeavor Philippines, Canva, and Grab. The creative mind behind the movement is Matt Morrison, a transplant from London who’s spent his career in media and advertising.

8. Henry Motte-Muñoz: CEO, Edukasyon.ph. Fresh from being named as one of Forbes 30 under 30 social entrepreneurs, Henry isn’t about to stop as he rides the momentum of building the first comprehensive database of classes and scholarships in the country. Don’t let the banking and private equity background get in the way – Henry’s also one of the nicest, most thoughtful, and most down-to-earth founders you’ll ever meet.

9. Jerome Uy, Founder MedGrocer. What do you call a product category that makes Php 100 billion+ a year, with a market leader that has 80% market share, yet with overpriced drugs and 80s-era IT? Ripe-for-disruption. To say that this is low-hanging fruit would be understating the opportunity. More like a huge, juicy, sweet mega-tasty round piece of fruit just yearning to be plucked. MedGrocer is the first to reach out before the lazy farmer notices someone is actually there. Plus: Jerome has a “never say no to a first meeting” policy.

10. Orlando B. Vea: CEO, Voyager Innovations. The co-founder of Smart has been driving the digital arm of the PLDT group for the past 3 years, and has been on a hiring spree as Voyager beefs up its diverse product portfolio in fin tech, e-commerce, and digital media. It’s an ambitious play, at a time when the core business is navigating a 3-year digital pivot. Among it’s flagship products: mobile money platform Paymaya, and Lendr, an online marketplace for loans.

Anyone else you want to mention? Drop their names and organizations in the comments section!

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Entrepreneurs, Entrepreneurship, Founders, Philippines, Startups, Uncategorized

How the Next Philippine President Can Win the Entrepreneur Vote

Mar is probably the most business-friendly of the bunch, though he is no entrepreneur. Jojo will find it hard to claim to be an entrepreneur because it runs counter to the narrative that he didn't get rich off Makati. I don't believe Grace had any business experience at all. Photo credit: Rappler.com

Mar is probably the most business-friendly of the bunch, though he is no entrepreneur. Jojo will find it hard to claim to be an entrepreneur because it runs counter to the narrative that he didn’t get rich off Makati. I don’t believe Grace had any business experience at all. Photo credit: Rappler.com

When Johannes Guttenberg invented a printing press based on movable type, it set off a chain reaction of events with profound consequences across the world. For the first time in human history, books could be printed in large quantities, versus being copied by hand. It was bound to unlock the sum of human knowledge to the masses of people still reeling from the Black Death and living under a system of feudalism and serfdom.

This was in 1445.

By the 1460s, the printing press could be found in France and Italy. In 1476, William Caxton established one in London. It was soon in Spain. Books were printed. People started reading. Writing blossomed. Thoughts were reproduced.  The media was born. Ruling a country would never be the same.

The Guttenberg Press

The Guttenberg Press

It was a different story in the Ottoman Empire. In 1485, Bayezid II ordered a decree forbidding Muslims from printing stuff.

“What the fuck is this machine?” he must have muttered to his aides. “No way will I have these pieces of paper circulating all over the empire.”

Unlike Emperor Palpatine who so graciously embraced technology of planetary scale to annihilate his enemies (albeit failing to solve the fly-by-the-trench problem), Bayezid II viewed the new technology with fear and distrust.

The geopolitics of it all was understandable. There were revolts all over the empire. A few years later, Bayezid would tussle with Ferdinand of Aragon and Isabelle of Castille for kicking Muslims out of Spain as part of the Inquisition. Any tech out of Europe was to be seen with suspicion and distrust.

It was only in 1727 that the printing press was allowed in the Ottoman Empire. Ibrahim Müteferrika was granted a royal decree allowing him to have a press.  Still, its use had a lot of restrictions.  Müteferrika needed the approval of a panel of Muslim and legal experts before publishing anything.

I'd look pissed too if I had to ask for CBCP permission for this blog.

I’d look pissed too if I had to ask for CBCP permission for this blog.

It’s like asking the local parish priest, Fr. Joey, for his approval before posting a Facebook status update. You had to enter the confession box, phone in hand, supplicating to Fr. Joey. He may say no. He may say yes. He may ask for a hug. Maybe a little more than a hug. It sounds ridiculous but that was in effect what Müteferrika faced.

The effects were damning. Müteferrika only got to print 17 books. And by 1800, only 2% of the Ottman Empire were literate, versus 60% of adult males in England.

The rest, of course, was history. Great Britain would lead the Industrial Revolution and Europe would soon follow. After a long period of decline, the Ottoman Empire fell after the First World War.

*****

In the book Why Nations Fail (from where the example above was lifted), the printing press was a critical juncture in history. The printing press was technological innovation that, along with other technologies, would form the backbone of literacy, knowledge, and education that gave rise to the Industrial Revolution.

The way that nations respond to technological innovations are shaped by their political and economic institutions. England, France, and a young colony in the Americas embraced technology. Others, like the Ottoman Empire, blocked it.

We’re at that critical juncture today. Today, the Philippine Republic is the Ottoman Empire. The printing press is the Internet. The Industrial Revolution is the legion of empowering technologies that the Internet enables, from e-commerce and social media, to artificial intelligence and data science. And it’s the way our political and economic institutions are structured that hinders their adoption.

ActionStack.org


Entrepreneurs, engineers, and students at Action Stack’s Data Means Business workshop. The deluge of data is giving rise to new technologies that can form the backbone of a new industry in the Philippines.

Perhaps that’s the legacy of the Aquino administration: remarkable progress in our macroeconomic growth (GDP, credit ratings, fiscal & monetary policy), but without significant institutional reforms of a critical scale to ensure that technological innovation happens across the economy.

*****

We’ve been at this critical juncture before. Twice actually. The first was when the Americans took over and we had the chance for a Great Reset in our political economy (that didn’t happen as I’ll explain later). The technologies of that time were electricity, the automobile, aviation, industrial machinery, and more.

The second was more recent, during the EDSA Revolution, when we had the chance to do a wholesale revamp on how we as a country pursued free enterprise. It was only in the early 2000’s that the BPO industry picked up steam. What we should takeaway from the BPOs is not that it is on track to bring the economy $25 billion in annual revenues, but the fact that it could’ve happen sooner in the early 1990s. In tech, the 10-year head start matters. Look at India. While we were getting our act together in the 90s, India was already rapidly surpassing us in information technology, building upon their strengths built since the 1970s. Today, the CEOs of Google, Microsoft, and soon SoftBank trace their origins to India.

The pace of technological change will only accelerate, and it’s not just about playing catch up in a linear rate of growth anymore. That’s why you have initiatives like the DOST’s 256k Internet plan being the laughing stock of the local tech community. When we have neighbors like Singapore planning for 2030 (led by a Prime Minister that knows how to code), it’s not fun that we’re planning for the world of 1998.

*****

Sure, we allow free enterprise on paper. Article 12 of our Constitution demands it.  Our media celebrates it. Our leaders extol it. But underneath the surface, there exists a wide gap between rhetoric and reality.

There are several facts to support this, and i won’t rehash them in detail for they are widely known:

1. Our Internet speeds are the slowest in the region.

2. Our ease of doing business is horribly messed up. We rank 165th in the world in starting a company. It’s easier to start a business in Afghanistan and Mongolia than in the Philippines. This World Bank Report is actually remarkably optimistic. For instance, it says it takes 3 days to register a corporation with the SEC. Anybody who’s gone through that process will attest that this is impossible.

3. Even if you’re successful in registering a business, getting electricity, acquiring property, getting a construction permit, accessing credit, paying taxes, getting import / export permits, and paying taxes are all messed up.

4. The complexity of complying with the law means you are bound to fail, and that creates opportunities for corruption. Every now and then, you’re victimized by petty low level corruption, from the local fire department requiring you to buy a fire extinguisher from a preferred supplier, to the immense syndicate at the BIR.

5. Our infrastructure remains substandard. We rank 8th out of 10 ASEAN economies in infrastructure.  Laos and Cambodia did better in that list.

7. You’re faced with cultural dogma that celebrates being rich, but looks down on getting rich – because of our a) disdain for failure, and b.) distaste for young people who display ambition and intelligence.

*****

Why are the stuff above happening?

One big reason is that our political institutions aren’t set up to unleash the power of free enterprise, and by extension technological innovation. Why?

To answer this question, we have to briefly detour back to the end of the Filipino-American War.

In 1902, the United States slowly began to devolve power to their little brown brothers. But there was a catch. Only members of recognized families – the principalia – could be nominated to stand election in the Philippine Assembly, the lower legislative house established by the US Congress’ Philippine Organic Act of 1902.

And so the Assembly was filled with rich landowners, former encomenderos, already established businessmen. What happens when you give the powerful more power? Well, that’s like asking what would Hydra do if given the ability to combine Zola’s algorithm with precision-guided laser beams from three satellite-linked helicarriers.

That too was perfectly understandable. If you’re an old man with 300 hectares of farm land, very low productivity, four kids to feed (maybe three more from that nice young mistress from the other barrio. She reminded you of that Maria Clara character from that Rizal novel in the 1890s.), peasants who joined the Katipunan a decade ago, and constant fear that remaining guerrillas like Macario Sakay could commandeer your land, you wouldn’t want some other young guy in the other barrio discovering a new way to plant palay and sell more grains than you. You would rent-seek as much as you can to get more cash flow while keeping your expenses and investments (i.e.: new technology) down.

Landed lovers of Maria Clara. Photo credit: PCIJ

Landed lovers of Maria Clara. Photo credit: PCIJ

And so that state of affairs – our extractive economic institutions, preferential Filipino ownership in theory but oligarchic control in practice,  the persistence of political dynasties, the collusion of big business and politics, and our distaste for foreign competition and investment – enshrined itself into the affairs of the State.

Today, these dynamics result in some really weird stuff going on at the grassroots level:

1. Close to 80% of GDP growth being captured by the top 40 families.

2. Science, technology, and entrepreneurship getting almost zero mentions in the President’s State of the Nation Address, despite the rhetoric of jobs and inclusive growth.

3. The US Secretary of Commerce showing more personal interest in technology startups any high official from the Philippines, with the remarkable exception of Senator Bam Aquino.

4.  A Startup Conference where a glaring majority of speakers are not from startups.

The bottom-line is that we have created two worlds of free enterprise.

In the first one, it’s easy to do business because you’re part a big conglomerate. Want to set up a new division because the Investment Committee just approved Php 500 million for a new venture? Sure, just get the legal department to handle the papers. It’ll be back in less than 30 days. We do have a directly line to the SEC, BIR, DTI, SSS, Pag-Ibig, and Makati City Hall.

In the second world, starting a business is a struggle. You’ve worked ten years and have managed to cough up meager savings. Now that you’re ready to set up a business, you have to endure months registering it. That’s not counting the hours you have to stand in line at the SEC, BIR, DTI, the local Municipality, the Barangay Hall, and other agencies to get your permit. That’s not counting the days traveling back and forth in Manila traffic. And even when you get all your documents, that’s not counting the cumulative time it takes to get an internet connection, a construction permit, financing, or other special permits. This doesn’t even count the time spent in your actual business.

The goal of the next president is merge these two worlds, and bring the second one closer to the first.

******

There are over 1 million business enterprises in the Philippines. That is at least a million people who are business owners. 99% live in the second world. They’re influential. They have employees. They have customers, suppliers, partners.

They might seem invisible because they’re not the most vocal on social media. Instead of ranting about the productivity drag of traffic and the huge number of government-mandated holidays, they just buckle down and get to work.

This is a large base and there are two ways the presidentiables can win the Entrepreneur Vote.

The first one is to do it the old way. Write some fancy sounding slogans. Hire a “PR expert” to craft the right messaging. Make a jingle. Get celebrity entrepreneur to sing it. Make a music video of the jingle. Air on TV. Post some catchy updates on Facebook. Blame the current administration.

The second is a new way. Simply, it means candidates putting themselves in the shoes of the entrepreneur. And not in a superficial way like visiting Aling Nena’s sari-sari store or manning a Jollibee counter for an hour.

This idea will sound completely ridiculous to the political establishment and their campaign handlers.  It’s brazen and has never been been done. And that’s the point.

This is how it’ll work.

1. Each presidentiable will have 38 days to register a corporation. Why 38? Because that’s the World Bank measure of how long it takes. They have to get as far into the process as they can within that amount of time.

There will be milestones – in the form of 3 public events, live streamed to the public.

2. The first day will be a publicly-held event. During this day, we’ll even make it easy for them. I’ll give each candidate all the forms they need, and Php 5,000.00 each as initial paid-in capital. They have to fill up all the forms themselves in that event – no accountants, no lawyers.  Broadcast this live in front of the people. SEC Articles of Incorporation. By-Laws. BIR Forms. DTI. SSS. Pag-Ibig. City Permit. Barangay Clearance.

3. Some of these steps can be done electronically. We’ll leave it up to them to figure out which ones by finding it online. We’ll give them laptops. And a few thousand pesos for a portable broadband connection. They can choose which provider they want.

If they want, they can pick a Negosyo Center of their choice to begin the registration process.

4. At the end of that day, we’ll have a panel check who filled up the forms correctly.

You get the drift: the idea is to make each presidentiable feel what every Filipino entrepreneur has to go through. It doesn’t have to be exactly this process below – I leave to that to the media or academics who can probably design a better simulation. But since we’re at it, humor me for a few more minutes.

5. Once they finish the forms, the candidates will have to visit the various government agencies for the next 38 days. They’ll have to file the forms themselves. Go to the SEC and BIR and line up like everyone else. No aides. No assistants.

6. They’ll have to collect the output – such as the SEC Certificate and BIR Form 2303 – themselves. They’ll have to go back to each time on their own.

Their progress will be tracked online in a dedicated website.

7. Once they get the necessary permits, that’s not where it’ll end.

I’ll give each candidate a free TackThis! or Shopify account. In a second public event, they’ll have to use these services to set up an online store from scratch.  They can choose whatever they want to sell online. At the end of the day, we check who was able to sell the most.

Why selling online? Because it’s a great way to truly understand young entrepreneurs who are likely to use the Internet to enable their ventures. Selling online brings all of these skills together – from knowing your target customer, selecting & managing inventory, understanding the cloud, social media, and digital payments.

8. On the third public event,  all the presidentiables will be invited to a public forum to discuss their experience in front of small business owners.  This won’t be a debate format. Instead, we ask each candidate to answer the following:

  • Describe your experience in registering a company.
  • Diagnosis the process of starting the company. What were the bottlenecks? What worked? What didn’t?
  • Recommend the changes and how you would implement them.

The “how” part is going to be crucial one. It’s easy to write into a campaign speech that we need better internet and easier ways of doing business. It’ll be the hard implementation-related questions that will be worth pondering.

For instance, it’s tough to get the SEC to adopt electronic registration because its employees’ cooperative is dependent on selling paper forms. How do you make it easy for businesses while at the same time combatting organizational inertia?

Another is slow internet. Sure, it’s easy to say that we should hold telcos accountable. But how? Do we reclassify internet services as a public utility? Do we liberalize the auctioning of spectrum? Do we staff the NTC leadership with engineers instead of lawyers? How do we make it easier for telcos to build a physical network, with the current plethora of national and local permits?

This isn’t a perfect exercise, of course (you can imagine most trying to game the system, by asking for expedited processing from some agencies, for instance).

This is 100 times better than simply asking the presidentiables how to encourage entrepreneurship and getting the standard answers in response. That’s also the purpose the public forums serves – you can kinda guess who gamed the system based on the level specificity and empathy of their answers.

And neither is all this limited to national candidates when arguably local politics matter way more in welfare of local vendors and sari-sari store owners. The accomplishments of Leni Robredo and Rodrigo Duterte are proof.

When the dust settles, we’ll have a treasure trove of data and insight about each candidate. We’ll know who can win the Entrepreneur Vote.

*****

In the late 1920s, Stalin led the drastic reformation of the Soviet economy. The whole economy was to be planned by the state. Factories and farms were given targets. Prices were controlled. Agriculture was nationalized by the state. That meant no free enterprise. Part of the plan meant killing kulaks: independent, relatively affluent farmers who owned property and businesses and threatened Stalin’s regime. They even had a word for this: dekulakization. Over 6 million were killed or sent to labor camps.

100 years later, young Joseph Stalin could be mistaken for an entrepreneur from Brooklyn

100 years later, young Joseph Stalin could be mistaken for an entrepreneur from Brooklyn

Thankfully, nobody’s getting murdered for opening an eatery in Quezon City. But it’s still death by a thousand cuts. If we want inclusive growth, then it’s high time we elect leaders who appreciate and have gone through the struggles of free enterprise.

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Entrepreneurship, Founders, Philippines, Startups, Uncategorized

Top 10 People to Meet in the Philippines Startup Scene in 2014

On a Sunday morning in early January, I got a text from Manila Angels‘ Christian Besler. Nope, it wasn’t a drunk message sent at 3am. It was about grabbing coffee at the Pen with two Bay Area executives vacationing in Manila. Both got a hold of Christian via Twitter.

"Dirty Kitty" is a fixture at the parking lot of the Peninsula Hotel, a centrally-located meeting spot for intros and deals

“Dirty Kitty” is a fixture at the parking lot of the Peninsula Hotel, a centrally-located meeting spot for intros and deals

Despite the booming local scene, there’ still a lot information asymmetry between what’s going on-the-ground, and what entrepreneurs and investors from Silicon Valley know. After all, the Philippines really isn’t a mainstay on Techcrunch or Mashable. When I met a partner from Kleiner Perkins, her first question was “What’s going on out there? I’ve never visited, but all the social networking and digital media startups we’ve looked at always gets a ton of traffic from the Philippines.”

The country’s startup scene has generous servings of good news: 7.2% GDP growth, double digit internet + mobile user growth, investment grade ratings, and growing cohort of tech entrepreneurs.

So how do we bridge the gap? In a lunch forum hosted by the Harvard Business School Club, Sheila Lirio Marcelo, the Filipino founder of recently IPOed Care.com (which popped 43% on its first day), mentioned that the key is always through PEOPLE.

The goal is to make Manila a social hub for tech startups in the region – an alternative launchpad into Southeast Asia vs expensive, big brother, and tiny Singapore.

So…. for investors and founders who are likely to first discover the Philippines as a.) tourists, and b.) as relatives (a Filipino spouse or in-law), we’d like you to stay a few days, fall in love with the country, and in the process, also discover the vast potential of its nascent innovation economy.

The goal of this post is to make it easy for you to get seamlessly plugged-in into the local scene. So, on this Sunday afternoon, I sat down for 20 minutes and scribbled the top 10 people you should meet based on:

  • Execution: A track record of getting things done. No talking heads on this list!
  • Immersed in the local community: Understands local dynamics and gives back through their time and resources
  • Well-connected: Has a quality network across different stacks.
  • Accessible: Responsive, and generous with their time

There are players, of course, like ICCP Ventures, but none of them have demonstrated serious interest in high-risk, early-stage startups and preferred to stick with more mature plays. There are a ton of successful entrepreneurs, of course, more than this list can handle, but 99% of them are either focused on brick-and-mortar or may not be as accessible.

So if you’re new to the scene, these are the top 10 people to meet in the Philippines tech scene, in alphabetical order:

1. Amazon Web Services: The ASEAN team led by Anne Salada-Chauffaille and Franco Eisma has been quite active in evangelizing across the technology spectrum, providing not just cloud computing infrastructure but educational events for local conglomerates and seed-funded startups. Check out the next AWSome Day this February.

2. Ayannah: Mikko Perez and Dicky Alikpala. Ayannah is a digital platform play focusing on the unbanked in emerging markets. Mikko and Dicky are the funniest couple-preneur in the country. They’ll probably kill me for saying that. But I’m sure they secretly enjoy it. Times with these guys are never boring. Lose the serious face and prepare for a one-hour meeting to turn into a four-hour laugh fest.

3. Hatchd: Manny Ayala & Nix Nolledo. Hatchd is a startup studio that builds companies “from ideation to operation.” Its portfolio includes Rappler, the leading social news network in the country, and Purple Click, a digital advertising firm. (Disclosure: Hatchd is an investor in my company). Manny is an experienced media and tech executive, while Nix founded Xurpas, a leading mobile content provider. Both are pretty active in Entrepreneurs’ Organization.

4. Ideaspace: Earl Valencia. The incubator of the Metro-Pacific / PLDT Group is led by former Silicon Valley executive Earl Valencia and has invested in a number of small, mostly pre-revenue ventures. Shucks, you just missed the application for the 2014 cohort so stay tuned for the next one.

5. Kickstart Ventures: Minette Navarrete. Structured as a 100% subsidiary of Globe Telecom, Kickstart is a seed capital fund that “enables startups to achieve a faster launch and a better business trajectory through a combination of funding, infrastructure and facilities, mentoring, and market access.” Though launched less than two years ago, Kickstart now has the biggest portfolio (close to 20?) among local startup investors.  Minette and her team are experienced investors, operators and community builders, and are plugged in to the broader Singtel Regional Seed Network. (Disclosure: Kickstart is the lead investor in my company)

6. Manila Angels: Christian Besler & Paul Rivera. Launched just this January, the country’s first angel network now boasts of close to 50 angels and is currently screening its first cohort of 25 pitches. If you’re popping by Kickstart, make sure to check in with Christian (who is also VP Community at Kickstart) and Paul (Co-founder of Y-Combinator backed Kalibrr), whose company is co-located at Kickstart HQ. .

7. New Leaf Ventures: David Bonifacio. NLV regularly hosts Better Business Brunches in the Bonifacio Global City and is positioning itself as a hub for B2B investments and technologies. David is an energetic entrepreneur and storyteller who handles multiple roles for CBTL Holdings – the local franchise owner of the Coffee Bean and Tea Leaf. And no, BGC wasn’t named after him.

8. PhilDev:  Phildev is a foundation of US-based Filipinos who are passionate about creating linkages between local entrepreneurs and the world. Chaired by Tallwood’s Dado Banatao, some of its trustees include Eric Manlunas of Siemer Ventures (who has invested in a few local companies) and Sheila Lirio Marcelo.

9. SGV: Winston Chan. Winnie runs the advisory group for SGV, the country’s largest professional services firm. Winnie’s been key to helping several multinational clients establish BPO operations in the country. There are valuable synergies between tech startups in the BPO space – from US-based companies setting up outsourced operations (TripAdvisor, Amazon, etc) to well-funded startups staffed with local, talented engineers (Bright.com, Lenddo, etc) to startups focusing on BPO clients (Kalibrr).

10. Sulit.com.ph: RJ & Ariane David. The biggest classifieds player is run by the friendly husband+wife team of RJ and Ariane. RJ’s a wonderful supporter and mentor to younger founders throughout the country, and maintains a regular presence in local entrepreneurship and tech conferences. Make sure you’re updated with your gadgets and gaming news for a fun chat.

The good news with these groups? Eight are mainly present in the Makati-Fort Innovation Strip. Ayannah and Sulit.com.ph are pretty close by in the Ortigas district – a quick twenty minute drive from Makati.

Who else should be on this list? Which events should visiting founders look out for? Let me know below.

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AVA, Entrepreneurship, Founders

Considering a Start-Up? Think Again.

This post was originally published in the Harvard Business Review blog on April 30, 2012. You can find that article here. 

It’s been a banner year for start-ups. With the JOBS Act, the rise of international accelerators, the upcoming Facebook IPO, and the mind-blowing $1 billion Instagram acquisition, you can be sure that droves of young, ambitious founders will be jumping on the start-up bandwagon.

The refrain is all too familiar: If you want to change the world and get rich in the process, then just go for it. In fact, in our book Passion & Purpose, several stories from young leaders involved start-ups. The problem isn’t what the message says, but what it doesn’t. What it fails to say is that the start-up life isn’t for everyone.

In The Lean Start-Up, Eric Ries talked about vanity metrics — numbers that create the illusion of success, rather than validate actual progress. In the same way, vanity entrepreneurs have deeply held illusions and misconceptions about the realities of start-up life.

Vanity entrepreneurs start new ventures for the wrong reasons. They start companies because it’s the cool thing to do. They’re hypnotized by the enormous myth-making apparatus of modern mainstream media, the coveted slot on Techcrunch, and the likes on their Facebook updates. They overestimate the glamour and underestimate the grind. And as ubiquitous stories of success spread in social media, these illusions become powerful self-delusions. All founders have this vanity within them, in varying degrees. In a way, it’s what drives them to succeed. What matters is the extent it takes hold of their judgment.

As founders can attest, what you encounter deep in the start-up trenches will be far from your mental projection and expectations of the future. The harsh reality is that being a founder is more an exercise in psychological readiness. In the intense ups and downs you’ll be going through, your emotional maturity will matter more than your skill set. It requires having the social intelligence to pick the right cofounder. It’s learning to live with lower pay and higher sacrifices in exchange for a very uncertain future benefit. It’s being responsible for the people in your team, taking the blame when they screw up, but sharing the credit when they succeed. It’s juggling to manage your team, customers, investors, and strategic partners all at once. It’s learning to balance the freedom creativity required to prosper with the operational discipline to hit the next milestone. Layer this on top of the usual personal and family pressures, and it’s hard to see how any sane person would choose this path.

So how do you know if you have a vanity entrepreneur in you?

You are attracted to titles. If you were always concerned about being “Managing Director,” you’re probably not ready to dive into a path that requires you to worry about everything from closing that deal to taking out the trash. A simple way to verify: See if that internship you had freshman year had an over-the-top title.

You need constant affirmation. As my coauthor Daniel Gulati pointed out, the typical corporate job is filled with variable rewards in the form of promotions, praise from peers, and publicity. In start-ups, you lose the vast majority of these positive reinforcement mechanisms. Validations of progress aren’t as clear cut. You need to be ready to endure the complexity when some pieces of data tell you that you’re wrong, while others say you’re doing a great job.

You believe a start-up is “good on the resume.” In a recent Techcrunch article, Geoff Lewis talked about the MBA who felt a start-up stint would be good for his growing list of achievements. “Even if the startup ends up going nowhere, graduating from Y Combinator would be such a great credential,” the MBA supposedly said. Think twice if your resume gets more share-of-mind than building great products.

Your lifestyle is keeping you from diving in. If the major stumbling block keeping you from founding a start-up is the need for financial security to buy that latest designer bag or go on that trip to New Zealand, then you’re probably not in the right mind-set yet. Not only will you need to take a pay cut and spend less, you’ll have to push your employees to do the same by thinking of creative solutions to conserve cash in order to stretch your runway. Bootstrapping is an art form, and your lifestyle choices will get in the way of that. Don’t force it.

We’re all susceptible to myths. The new zeitgeist is that entrepreneurship is the be-all and end-all path. But the first step in deciding whether to be a founder is to manage the vanity that’s in all of us, and not be blinded by the herd.

Key Takeaways

The first step in deciding whether to be a founder is to manage the vanity that’s in all of us. Tweet

Vanity entrepreneurs start new ventures for the wrong reasons. Tweet

The harsh reality is that being a founder is more an exercise in psychological readiness. Tweet

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