Entrepreneurs, Entrepreneurship, Philippines, Startups

Unsolicited Career Advice Ateneans Will Ignore

Unsolicited Career Advice Ateneans will Ignore

Photo credit: Marty Ilagan

By now, you might have seen the infamous post about an Atenean’s ranting about his/her less than favorable job prospects.

Actual quote: “We’re more worried about the fact that Ateneo is a top university, so why aren’t its graduates getting snapped up like lechon at a fiesta?”

Maybe because everyone knows lechon isn’t always good for you?

It’s an open secret among entrepreneur friends that the typical Atenean fresh grad – by temperament and skill set – is woefully ill-suited to startup jobs.

This leads us to concoct non-standard interview questions to tease out clues for entitlement and a poor attitude – questions such as: “How did you find your way to our office?” (Commute? Driver?), “What’s the best gift Daddy ever gave you?” (A Prada bag?), or “Run this pivot table to filter out subs in this segment and create a Facebook custom audience out of the results” (Less than 5% get it).

My sister graduated from college this year too, so I have a big incentive to distill no-BS advice to fresh graduates, seeing that I also wasn’t there for much of her teenage years.

So in the spirit of Prof. Scott Galloway’s unsolicited career advice, I boiled down my version to 5 lessons below. You probably didn’t hear this in the commencement speeches this year. And it’s not the speaker’s fault. Graduation speakers are wired to extract an applause, not give you hard truths.

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One: Leave. And Don’t Come Back Until You Are in the Top 10% of What You Do

When I was in college in Ateneo, the debating team took up a lot of my time. I loved it not because of the constant practice and research work, but because of the travel. Over the course of 3 years, I must have visited more than 10 cities to compete in local and international tournaments (there was a lot of funding from MVP during those years).

As a Management Engineering student, my life was mostly calculus, statistics, operations research, and finance. The travel was a great counter balance. We were away for almost 30 days each academic year, not an insignificant amount of time. I missed exams and papers. My grades took a hit. But who cares. The Philippines is an island nation, naturally insular and closed off. Travel + debate was an education in the real world.

It was only when we were competing against the best teams from around the world that we got better. We were punching above our weight class. If you’re a boxer, you want to be sparring with Manny Pacquiao.

When we joined the Cambridge Intervarsity in the UK, the level of competition was insane. How can we – these prepubescent-looking brown Asian kids – debate about the European welfare state against British law students? I loved every minute of it. We made to the finals, but lost.

The following week, we flew from London to Kuala Lumpur to join the Asian Championships. I was teammates with two of the smartest people I know: Bobby Benedicto and Camille Ng (I was clearly the weakest link). Ateneo went on to win that year.

That experience made me realize that if I wanted to be the best at something, there was no way I could do so staying in the Philippines: the market was too small, the competition limited, the bosses & supervisors at local companies were mediocre at best (because of the tryouts & selection process in Ateneo, promising young debaters are incentivized to pair up with senior, more accomplished debaters to increase their chances of winning in tournaments – so my thinking was that I needed to find the right boss when I graduated – more on this later).

So that’s the first piece of unsolicited advice I’d share: leave and don’t come back until you’re in the top 10% of what you do.

When I graduated, I was optimizing for one thing: independence. I wanted to move out, get my own place, live my own life.

So I ran the numbers. No way I can afford to do that with a Manila salary. So after almost a year of trying, I worked my way to a job in Singapore.

Here’s the reality: if you’re optimizing for high compensation, you won’t get it in the Philippines. There are too many structural reasons keeping wages low (a topic for another post). Taxes are high. You can try to get that McKinsey job, the only role that pays in six digits. But good luck. The firm only takes in 1-2 analysts each year.

But here’s another reality: nobody outside the Philippines gives a damn who the Arneo is. I realized this early on. You should too. So I spent another 6 months after graduation studying, doing volunteer work and expanding my network in Singapore through a fellowship with the Singapore International Foundation. That was how I hacked my way to my first job.

Nobody from the career office will teach you that. The whole narrative is about staying and helping the country. But the best way to help the country is to be the best at what you do. And one way is to leave, compete, and collaborate with the world’s best.

I know that’s not a feasible option for everyone. You have family. You have friends. There are probably a few ways to replicate the experience of working for a top global company in Manila. Working for a Google or an Accenture is one.

Working with a local startup with an amazing founder is another. If I were a fresh graduate today, I would definitely want to work for guys like Paul Rivera, Gian Dela Rama, Dustin Cheng, Terence Lok, Jerome Uy, Mikko Perez, or Henry Munoz. You should be optimizing for a boss, not a company.

Two: realize that the ‘job’ is dead.

There’s no such thing as a job anymore. What you’ll be doing is a collection of pursuits that compound over time, each teaching you new stuff.

When my sister graduated, she didn’t let the job hunt frustrate her. Instead, she got to work: via a small project renovating an office. Doing so made her realize quickly how much shit they don’t teach in architecture school, from budgeting how much paint to use to the difference between a purchase order and a sales invoice.

The Atenean ranter mentioned how s/he was on the 40th interview. Instead of spending too much time on the job-hunt, you can spend more time gaining experience that will make you more valuable to employers: starting a side business, getting Google certified, or building an NGO’s website.

Three: spend LESS time with your friends.

The distribution of your friends probably looks like this:

– 50-60% are in your high school or college batch

– 20-30% are from outside school,

– Then maybe 10-20% who are older than you.

After college, you need to flip those ratios: spend less time with your friends and more time getting to know older people.

Older people are more interesting. They know more things and more people than you. They’re your future partners, customers, investors, and generally open up more doors for you in the workplace.

I thought I knew a lot, then I met guys like Jerome Uy, Nix Nolledo, and Richard Eldridge. And then I realized I knew so little.

Spending too much time with your college friends is an exercise in diminishing marginal returns. Besides, if they’re really your friends, you’ll still be good friends even if you see each other once or twice a year.

And while you’re at it, re-assess your relationship with your boy/girlfriend. S/he is probably slowing you down and taking up too much of your time. The best way to attract the right partner is to be the best at something, and to be the best at something, you need to have the right partner.

Four: figure out what you’re willing to do that your peers won’t.

I found my first job chatting up the lead recruiter of Procter & Gamble during my graduation year’s Loyola Schools Student Awards at the Henry Lee Irwin Theater. I did this by sitting next to him at the front row of the theater, which was reserved for sponsors.

I knew: 1) that he was recruiting for Singapore jobs (because older people told me – see above), and that 2) he would be chatting with lots of students that night, and I had to get to him before the others did. It worked. By the end of the night, he handed me his card and asked for my resume. It took several more months, but that opening gave me an advantage.

Five: accept that you were disastrously miseducated, so you need to find the right boss.

By the time you graduate, you would’ve spent 4 years reading the same books, working on the same tests, and listening to basically the same teachers.

That produces 2 things:

1) You are more or less the same as your batch mates, and

2) Because the world is moving so fast, the material you’ve ingested is already outdated by the time you graduate.

Thus, only experience will differentiate you. The most optimal way to find the right experience is to find the right boss.

Your bosses in the first 5 years of your career will teach you skills and attitudes that you’ll take for the next 40 years.

My first two bosses were strategy and analytics guys in P&G. They’ve worked in India, Singapore, and the US. Another boss was a British General Manager who started stocking shelves in the UK, went on to Africa (where he was once held at gunpoint), and to Malaysia. Another boss started Airbnb in Southeast Asia. Imagine the wealth of their collective experience.

There was literally one skill that was useful in my first job: Excel. And that was only because an M.E. professor decided to teach an advanced elective class about it (it wasn’t in the required curriculum then). Everything else, I had to learn from scratch. Python, R, and SQL should be required skills in Operations Research and Marketing classes in the M.E. program today – if not, the curriculum is dangerously outdated.

So one of the things I’m proud of doing is advising an educational program to help Filipino students experience entrepreneurship in Silicon Valley. Call it the great reset. How do we slowly recalibrate the mis-education of a Filipino college degree and re-align a generation to the real world? The idea is simple: with what I know now, what would I have taught my 22-year old self?

Bonus advice, and the hardest: figure out what you’re willing to give up

When I graduated, all I really wanted was to be independent, to work abroad, get an MBA, and start a company. I got to do all 4 before I hit 30. It cost me a relationship, being far from my family, losing touch with friends, sleeping on a lot of couches, losing my savings, failing and embarrassing myself many times.

And it was worth it. What are you willing to give up?

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Naked plug: If you or anyone you know feel like they can really benefit from a “great re-set” in their education, do check out Reach Labs. Reach Labs is an educational travel program for college students and recent graduates in the Philippines to experience entrepreneurship in Silicon Valley.

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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.

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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.

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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.

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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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Netflix, Philippines, Startups, Uncategorized

It’s Likely that the Philippines Will Block Netflix Too

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Today, the Wall Street Journal reported that Indonesia’s biggest telco has blocked access to Netflix.

State-owned Telkom concluded that Netflix didn’t have a permit to operate in Indonesia. Netflix also apparently contains violent and sexual content objectionable to Indonesian censors. Hey I’d feel violated too watching Francis Underwood do this to Zoe Barnes. Please don’t think of our very own Francis (Escudero) and Heart. Oh wait, now you just did.

Anyway, the big question is could the same thing happen to the Philippines?

Quite possibly… and in my opinion, very likely. There’s a weird set of interests that are at stake here. ABS-CBN and GMA would obviously want a strategic hedge, no matter how nascent the streaming market is. Bayan Muna and their leftist pals will decry the further encroachment by American capitalists (and do their loudest shouting, ironically, on Facebook). The BIR will want its cut. Congress will grandstand. The telcos will face a dilemma.

How could access to Netflix be blocked in the Philippines?

Here’s how I speculate this might play out.

One, in a rare display of haste, urgency, and cross-agency collaboration, the NTC, SEC, BIR, and MTRCB will band together to invoke Article XVI of the 1987 Constitution, which says:

The ownership and management of mass media shall be limited to citizens of the Philippines, or to corporations, cooperatives or associations, wholly-owned and managed by such citizens.”

They will argue that because Netflix broadcasts movies and TV shows, it must be considered mass media.  The framers of the Constitution clearly did not imagine the impact of the internet, which the Philippines connected to just 7 years after 1987.

Blockers will also use a strange SEC opinion that argues that any activity that in effect “disseminates information to the general public through the internet” may be considered mass media. This leads to a possible bizarre interpretation of the Constitution that because your Facebook feed disseminates information, this is considered mass media and Facebook should thus be 100% Filipino owned.

Two, Netflix will argue that it is breaking no laws because it neither owns nor manages any local company engaged in mass media. It can say it’s not mass media because it doesn’t need broadcast frequencies to operate. One needs to pay a subscription, unlike free-to-air TV.

It is also possible to argue that the framers of the Constitution intended to protect public opinion and news media from foreign interests and foreign propaganda, and since Netflix is not a news organization dipping its hands in local politics, it should not be considered mass media. I’m no constitutionalist, so I’ll leave it to guys like Oscar Tan to dissect the legalities. Suffice to say that there are enough gray areas to give the blockers legal ammunition.

Three, the BIR will want its cut. It could try to impose the 12% VAT or a 15% final withholding tax. As far as I know, neither Google nor Facebook pays either when they receive programmatic ad revenue. I don’t see anything on my ads receipts that indicate that they do so.

Netflix will do its best to comply until they fully realize the extent of red tape they have to go through to comply with local tax laws. They’ll realize that the BIR is on the losing end of enforcement anyway and will go on business as usual.

Four, some honorable gentlemen in Congress – possibly the same guys that want to give Pia Wurtzbach a tax exemption because they don’t have anything better to do than fantasize that they get a chance of dating her by passing this law – will file a resolution blocking Netflix, similar to what these guys tried with Fox International.

Five, the TV and cable networks will join the fray, in a bizarre alignment of interests with leftists like Bayan Muna. They will naturally argue that Netflix is a long term threat to the domestic entertainment industry and to thousands of jobs. They’ll be on a wait-and-see mode, perhaps licensing some parts of their library but not too much to prop Netflix up. A young guy who gets it like Carlo Katigbak might be willing to play a smarter accommodation strategy. An older guy like Felipe Gozon might want to block them altogether. Or he might not care or be digital savvy enough to realize how big a thing streaming is in the first place.

Six, the telcos will be caught in a dilemma. Admittedly, it’ll be a more complicated tradeoff for the telcos. Each has its own streaming platform. But the lure of higher data revenues would be too enticing.

I’m wishing all this actually happens. No real damage will come out of it in the long term anyway. It’ll bring about the much needed public anger and discourse to push Congress to finally revise our absurd foreign ownership restriction limits. Maybe it’ll open the public realm to candidates like Bam Aquino who actually understand digital. Maybe it’ll push the next president to appoint our first cabinet-level CTO.

Streaming video is here to stay. A growing Filipino middle class with more choices will opt to pay that Php 370 a month. It’s tough to bet against a change of this magnitude. And we’re not even talking about the entry of that other streaming behemoth – Amazon.

So yes, let’s get the ball rolling. Filipino dinosaurs, let’s seek to block Netflix.

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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.

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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.

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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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E-Commerce, Entrepreneurship, Philippines, Retail, Uncategorized

A Blueprint for SM’s Digital Future

tessie-forbes_EEAFD24251CB4203BFB426C4D97FEAF1

In 2014, TSC announced that SM will slowly grow its e-commerce business. Photo: Rappler.com

 

In 1846, Austria’s Vienna General Hospital had a maternity ward that was notorious for killing mothers and newborns. The deaths were caused by puerperal fever. You see, Vienna General was also a teaching hospital where doctors trained by cutting up cadavers. After handling corpses, doctors would head straight to the maternity ward to deliver babies.

One of the doctors, Ignaz Semmelweis, wondered if puerperal fever was transmitted from the corpses to mothers during delivery.

This was an era when doctors let blood stains on their gowns build up over time like a badge of honor. Like that old boyfriend of yours, hygiene wasn’t really a thing. When Semmelweis convinced some doctors to wash their hands, the death rate dropped enormously from thirty five to two percent.

The medical community vigorously rejected Semmelweis’ hand washing idea, despite the clear evidence that hand washing saves lives.

Semmelweis’ observations challenged two millennia of dogma that ruled medicine since the time of Hippocrates. The first is humorism, the belief that the body is composed of four fluids – black bile, yellow bile, phlegm, and blood – and that good health meant the balance of the four. The second is miasma theory, the belief that diseases are caused by inhaling “bad air”.

The idea that diseases could be transferred from cadavers to humans contradicted these strongly held beliefs. One doctor reacted that the idea of something being transmitted from doctor to patient could not possibly be true because doctors are gentlemen and a “gentleman’s hands are clean.”

Semmelweis was confined to an asylum where was has placed in a straightjacket and beaten continuously. He died after two weeks. With no one to supervise Vienna General, the doctors stopped washing their hands and the death rate went back to previous levels. It wasn’t until the time of Louis Pasteur did we discover germs and their role in diseases.

As we’ll see later, it’s dogma that prevents retailers from embracing their digital future.

*******

SM fascinates me. I think it holds the key to the digital economy in the Philippines. No other local company can bring our e-commerce future to fruition in the same way SM can.

Let me explain why.

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Imagine you’re a 25-year old Filipino. You’ve been working for four years now since you graduated from college. You work in Net Plaza in the Fort. The business process outsourcing firm that employs you just handed your first promotion. That’s a big increase in pay, and in your credit limit on your BDO credit card. You seriously consider a car loan for that new Vios model. You eat out more. You buy more groceries. You upgrade your wardrobe. You watch movies on Imax more often. You’ll reluctantly make the weekend trip to City of Dreams because your girlfriend sees Leo’s face all over town. There’s that concert too at SM Arena.

As the years go by, your savings grow and you finally have enough to make a down payment on that condo. And when you do, you’ll need to buy furniture, of course. You marry said girl and next thing you know, the kids spending your cash at Toy Kingdom. When vacation time hits, you take a trip down to Cebu, and stay in Radisson. During Christmas, the visting pinsans from abroad want to buy some handicrafts at Kultura. You’re in your late thirties now, and you decide to start a business. You hear Chinabank is offering loans for working capital, and that Citymall is offering new store space for tenants.

In every single transaction above, SM made money.  SM’s business spans many industries: retail, property (mall operations, residential, commercial and hospitality), banking, gaming, and even mining.

SM business units 031615_0

An overview of SM’s business. Source: http://www.sminvestments.com

If you peek at the official government stats on household expenditure, you’ll see that SM makes money on every single line item of consumer spending with the exception of communications.

Wait, actually they do – indirectly – when you pay your Globe / Smart bill in an SM payments center.

That is absolutely phenomenal.

SM is the ultimate platform business in the Philippines. SM owns the Filipino consumer. Every single Filipino alive today and born from this day forward will contribute to SM’s bottom line at some point in their lives. Let me give you a few seconds to digest that.

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How would SM start? The intuitive bet is that they’ll start at e-commerce. They’ve announced this. Online banking and online real estate listings seem more like channels than business models from SM’s point of view. E-commerce is where they can leverage an unfair advantage nobody else has.

To understand why, let’s first take a detour to Seattle, USA, then to China.

If you look at the history of e-commerce in every major market, there was always a unique set of circumstances that catalyzed the industry’s hyper growth in the early years.

In the United States, e-commerce was subsidized by cheap capital. The capital markets gave Amazon an outsized valuation that allowed it to aggressively grow its customer base and its physical distribution infrastructure without much regard for profitability. That’s something that can only happen in the US.

In China, the popular opinion is that e-commerce growth was driven by internet penetration, the growing middle class, and nascent demand from secondary cities. However, a prominent VC once told me that the oversupply of cheap, counterfeit goods available abundantly on Taobao was the underrated driver of e-commerce – a historical anomaly that is unique to China.

In the Philippines, it’ll be SM that drives e-commerce growth. Not Lazada or Zalora. Not Ayala Land or Robinsons. Not even Globe or Smart.

The popular view is that the two biggest barriers to broad e-commerce adoption are logistics and payments.

Well, SM already has both.

As the experience of Macy’s has shown, it turns out that a network of stores make great warehouses and fulfillment centers. Nobody talks about click and collect in-store because it’s boring, but in France, there are already 3000 e-commerce pick-up points. Two thirds of Europeans do it.

Nobody else has the network of fulfillment centers SM has – a network of fully-stocked, accessible warehouses for e-commerce. These warehouses are called SM Malls, and they are 50-strong all over the country. Add a cloud-based inventory optimization layer, and we can rock and roll.

SM needs to overhaul its inventory management if it wants to do omnichannel e-commerce.

SM needs to overhaul its inventory management if it wants to do omnichannel e-commerce.

No other retailer has a BDO, a leading issuer of credit cards, debit cards, and online banking accounts that can subsidize the initial purchases of first-time e-commerce buyers. As far as I know, it’s only BDO that has automated online installments. Not even BPI or Citibank has this.

Nobody else has the power to arm twist the country’s biggest tenants to participate by allocating inventory to an online B2B2C marketplace, lest they suffer unfavorable lease terms.

Lazada and Zalora don’t have the ability to drive down customer acquisition costs the way SM can, by simply adding a “thesmstore.com.ph” to every single mall signage, shopping bag, elevator door, parking entrance, and store receipt.

Robinson’s has a far smaller retail footprint. Ayala’s new business teams are focused on health care, education, and infrastructure. San Miguel is focused on the big PPPs. Smart / Voyager’s local e-commerce operation will never have the omnichannel scale SM has. LBC is still figuring out its IT infrastructure, after its cancelled IPO.

SM can do all this to catalyze e-commerce growth – that is, if SM wants to. And that’s gonna depend on how big SM thinks e-commerce can be.

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So how big can e-commerce be for SM and what will it cost?

Let’s look at current benchmarks. The grapevine says Lazada Philippines is doing a run rate of Php 2 billion a year. That’s too small for Tessie, in my humble opinion. She sells more than Php 3 billion in movie tickets each year.

So let’s say Tessie will only start looking at this seriously when she believes SM can do Php 4 billion in annual e-commerce sales. 40% of SM’s P197 billion retail revenues is non-food, so P4 billion is 5%. That’s reasonable given that global non-food retailers see 8% to 20% of sales in e-commerce.

What will it take to achieve this?

A reasonable assumption is that an average order in non-food e-commerce is worth P1,000. A Php 4 billion business implies 4 million orders each year. Let’s assume that the average customer orders 2x a year, so that’s 2 million customers. There are 34 million internet users in the Philippines, and 4 million with credit cards. Lazada has also shown that the market is willing to buy via COD – 60-70% of orders in fact. So 2 million online customers isn’t smoking pot.

If we assume customer acquisition cost ranges from P300 to P800 per customer, then that’s marketing spend of P600 million to P1.6 billion a year. If we assume that the fully loaded annual labor cost per head is P700,000 and an FTE of 500 people doing e-commerce, then that’s labor cost of P350 million.

The biggest barrier is rebuilding SM’s inventory management system to allow for real-time omni-channel retail. Some of the use cases are:

  • Order online but pick up in-store
  • Order online and get fulfillment from the nearest SM Store
  • Dynamically show products popular and available within a specified area
  • Allow third party merchants to use this platform as a marketplace.

This is a gargantuan task (it took Macy’s three years and counting…) so let’s say it’ll cost P400-P500 million pesos for an IT initiative of this scale (guesses on my end).

The total e-commerce investment (marketing, labor, IT), will thus be P1.35 to P2.45 billion. The combined 2015 capex budget of SM Investments (retail, banking) and SM Prime (property) is P82.8 billion. To dominate local e-commerce, SM just has to spend 3% of capex. A large scale e-commerce program is totally feasible.

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The problem is that SM’s corporate planning people will measure ROI wrongly. The assumption is that e-commerce is just another store format. They’ll do something like this: open a Microsoft excel file, estimate future sales from its online store (which, according to Similarweb, has shockingly less traffic than our niche online boutique AVA), tally up the costs, peg a discount rate, and get a net present value, IRR, and payback period.

But e-commerce isn’t a channel. It’s a business model. Treating it like a channel for ROI analysis neglects:

  • The impact of omnichannel (higher sales per square foot, higher inventory turnover, more optimized inventory, higher customer loyalty),
  • New revenue streams such as search and display ads on an SM-powered marketplace for tenants, and
  • The second-order effects of an e-commerce platform (higher payments volume on BDO, higher property prices on SM condos in areas covered by same-day delivery, the intangible value of creating a strategic deterrent against market entry by Alibaba, Rakuten, or Amazon).

Smart retailers like Walmart and Macy’s have learned to measure ROI not on online sales, but on total sales.

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This brings us back to Semmelweis and hand washing. In my humble opinion, the reason why it’s hard to make this intellectual leap for any local retailer is that the market is simply dominated by unsubstantiated dogma.

Take this misinformed Cushman & Wakefield report for instance that proclaims that Filipinos “still prefer the traditional bricks and mortar stores“.

Filipinos also love their mobile phones and social media. Online and offline aren’t mutually exclusive. They’re just different use cases. At AVA, 40% of our purchases are made outside of mall hours. To say that consumers “prefer” offline is missing the point – both are part of today’s shopping experience that customers expect. In a few years, there will be no such thing as “e-commerce”. It’ll just be “commerce”.

Another blind spot is the belief that e-commerce is just a website with a checkout page. And because it’s a website, it can be outsourced to a web development agency. Of course, that entirely misses the point because e-commerce requires an organization steep in product management, software engineering, digital marketing, data analytics, operations, customer service, and logistics – a very different skill set from a typical retailer’s.

As an illustration, if you search for “SM Store”, you well get these results.

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Any normal user will click on the first link.When you land on the homepage of thesmstore.com, you’ll think you can shop on this site. The nav tabs show “Men”, “Women”, “Kids” and so forth. But when you click on a category, all you’ll see are display ads for existing promos. If you want to actually shop online, you’ll have to do the extra work of either a.) finding the “Shop” button on the upper right (which as any UI person will attest, is less prominent than the upper left side), or b.) go back to search results and click on the second link.

Sorry to be blunt but if the person who designed this UI worked at Rocket Internet, Voyager, or Metrodeal, he’d be fired instantly.

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But that’s a minor point.

The more dangerous, deeply held dogma has something to do with how SM (and all local retailers) view their businesses.

In 1979, at the Royal Perth Hospital in Western Australia, pathologist Robin Warren peered into his microscope and saw bacteria in a person’s stomach.

Since the beginning of bacteriology, the dogma was that bacteria could not survive in the human stomach. It was too acidic and thus sterile.

After much research, Warren and a colleague, Barry Marshall, discovered the bacterium H.pylori,  debunking decades of dogma. H.pylori was found to cause ulcers. In 2004, Warren and Marshall won the Nobel Prize.

What’s strange is this: Warren wasn’t the first pathologist to see H.pylori in the stomach. Before Warren, samples had to be taken from stomach cadavers where information was already lost.  In the 1970s, the invention of the flexible endoscope allowed doctors to extract live tissue from the stomach. Tens of thousands of stomach biopsies were being made yet no doctor or scientist identified H.pylori.  They had seen it, but it remained invisible. When everyone reviewed their previous biopsies, they clearly saw H.pylori right there staring them straight at the face. One scientist said, “Failing to discover H. pylori was my biggest mistake“.

In the book “How to Fly a Horse“:

“When Robin Warren accepted his Nobel Prize, he quoted Sherlock Holmes: “There is nothing more deceptive than an obvious fact. H.pylori hid in plain sight for more than century because of a problem called “inattentional blindness”. Douglas Addams defined this as “Something that we can’t see or don’t see or our brain doesn’t let us see, because we think that it’s somebody else’s problem. The brain just edits it out; it’s like a blind spot. If you look at it directly you won’t see it unless you know precisely what it is. It relies on preople’s natural predisposition not to see anything they don’t want to, weren’t expecting, or can’t explain.”

The scientists saw what they wanted to see – because of the “obvious facts”.

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The obvious fact that is causing inattentional blindness is how you look at SM’s business. SM is in retail, property, and banking, right? That’s an obvious fact. In every investor relations material, SM sees its business this way. Everyone sees SM this way.

But consider this future possibility.  Let’s start with your BDO credit card. It knew you bought a pair of shoes on Zalora and will thus retarget you with a better offer on the SM Store e-commerce site. When you check-out, you can either have it delivered to your Net Plaza office (geo-tagged, of course – because SM owns Net Plaza – no need to fill out the delivery form), or pick it up at Aura. If you choose the latter, it gives you 50% off a cinema ticket, or a P500 grocery voucher. Oh, by the way, when you order your groceries from the SMCart app (modeled after Instacart, naturally), you get free same day delivery if you live in an SMDC condo. But you still live with your parents, so you search for available units at SMDC’s online marketplace, which also features a mortgage comparison tool powered by BDO. When you do buy your SM condo, it includes a tool to track your power and water consumption. All of this saving and spending can be tracked on your BDO online account, which by the way you can also access on your phone. The app is so smart that it can recommend which items you can save on – and lead you directly where in an SM store you can get the savings.

That’s when you realize that SM is neither in the retail, banking, or property business. It’s in the customer knowledge business.

SM is a big data company masquerading as a conglomerate. And if it can incorporate a software and digital layer on its physical infrastructure, it will be a race ahead of the pack.

The product isn’t a pair of shoes, or a shopping mall, or a credit card. It’s a stack of digital information that can connect separate businesses to generate an unprecedented amount of knowledge about its customers, and power a company that is more responsive to their needs and wants. And imagine if SM’s eco-system of suppliers can tap into this knowledge and customer access via open APIs and marketplaces.

Robin Warren knew that the dogma pre-dated the technology of his time (flexible endoscopes), and this created an opportunity to question the current state of affairs.

For SM, the dogma is the belief that it is merely in the retail business. Its flexible endoscope is the emerging boom in e-commerce, data science, and cloud computing, as well as our new understanding of network effects, winner-take-all dynamics, and platform businesses. This is the underlying philosophy that will guide SM’s digital future.

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I of course realize that all of this are easier said than done and there will be a lot of work ahead for local retailers. The historical predisposition of Filipino companies is to aggressively protect its turf and resist big bets. When the company decided to completely overhaul SM Makati, cannibalize itself, and banish its retail operations to the upper floors in favor of Uniqlo, H&M, and Crate & Barrel, it showed that it can evolve with the times.

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The stories on Semmelweis and Warren came from Kevin Ashton’s book, “How to Fly a Horse“. I enjoyed reading it.

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