Entrepreneurs, Entrepreneurship, Founders, Philippines, Startups, Uncategorized

The Honest Guide to Startup Fundraising in the Philippines , Part 1 of 2

“At some point, everything’s gonna go south on you. And you say to yourself, ‘This is it. This is how I end.’  Now you can either accept that or you can get to work. That’s all it is.

You just begin. You do the math. You solve one problem. Then you solve the next. And if you solve enough problems, you get to come home.” – The Martian


“Just close it down,” said my Dad, in no uncertain terms.

In the first quarter of 2015, my startup was dead in the water. We only had 3 months left of cash in the bank.

My father knew how to cut his losses. A serial entrepreneur, he’s tried many businesses over the years. And he wasn’t afraid to pull the plug when things weren’t going as planned.

Some context is in order. In the 2nd half of 2012, I raised a seed round of a few hundred thousand dollars. The objective was to grow a Gilt-style flash sales site. At that point, the startup was doing seven-digit revenues with profitable unit economics. It took about 6 months – fundraising in the Philippines is like our internet speed, slow AF – but it was easy to do. Valuation math is a breeze when you can divide percentages in your head.

But I made the mistake of listening to early advice to be lean, raise less now, and go for a bigger round in a year or two. I knew empirically that e-commerce – especially in infrastructure-void Philippines – needed immense scale. And scale required capital upfront.

That’s the first lesson of fundraising: never listen to advice that asks you to raise less than what you need. You know your business best, and investors have an incentive to doll out this advice – to cut your valuation, conserve their checkbook, etc.

Armed with our little funds, we adapted to the ruthless Darwinism of the free market: focusing on Metro Manila, building a brand, targeting the premium segment of the market that wasn’t price-sensitive (credit cards were 80% of our transactions, a rare outcome in this country), and hired 20 people. As a result, we grew gross revenue 6x in 2013.

Then the world changed. The flash sales model soon fizzled out as inventory ran dry. Though we had enough funds to cover overhead and customer acquisition, running lean meant we didn’t have enough to invest in inventory, R&D, logistics, and warehousing.

Merchandise revenue, which I forecasted to double in 2014, contracted by 10%. Normally, this wouldn’t be a disaster. But in e-commerce, growth is everything.

By the time 2015 hit, we had to move out of our office because we couldn’t afford the rent. I slashed my salary by 60% to make sure our employees made 100% of theirs. The COO I hired to help professionalize the business turned out to be a poor fit. Our CTO, who’s been with us from the start, had left. Morale sank.

I can’t say I wasn’t tempted to abandon the sinking ship. I had lots of other startup ideas. There’s been standing job invitations from a telco and a private equity firm, not to mention the constant inbound recruiting emails from Rocket Internet and Uber. I said no to all of them.

And as impossible as this situation sounds, it’s actually nothing out of the ordinary. 80% of startups fail within 3 years.

It was one of our customers that helped us out of the slump. It turns out that Kim Jones, before she became the huge brand ambassador she is today, was a customer. She loved our products, and one conversation led to another. In the middle of 2015, we launched her private label collection.

Remember that story about Airbnb’s founders selling cereal to make ends meet? Well, we did something similar too. It turns out our team was one of the few in town who actually had experience in building an end-to-end e-commerce platform from scratch. IT dev shops only knew the tech. Ad agencies only knew the marketing. We did everything. Our business experience allowed us to charge a premium. So a small side project for a brand turned into a multi-million deal that essentially saved the company. We were the cereal.

The rest of 2015 turned out to be a tumultuous year. There was acquisition talk with a prospective buyer, but we couldn’t agree on the price. A huge foreign e-commerce company offered a term sheet to lead a series-A, but freaked out when they faced massive foreign ownership restrictions in mass media and retail. The founder wanted to take his private jet and fly here to Manila, but was advised by his security team not to. Besides, that pretty young starlet he was dating kept him busy. Then, our original investor invested in the competition instead. Another local angel wanted to invest, but I no longer wanted to take capital if it was in small amounts.

All this was a distraction: each had no meaningful contribution to the goal of building a business.

As we entered 2016, there was only one move left to make: make the venture cash-flow positive. It was time to take our destiny into our own hands.

We launched another site, cut non-performing staff, and built an enterprise business doing digital strategy, e-commerce, and content, with local and international partners. By the end of 2016, our business turned cash flow positive after 2 consecutive years of steady growth. By 2017, we had more cash in the bank than when we started.

Meanwhile, it was a bloodbath in the local e-commerce market, as several local sites collapsed, among them well-funded international players. Only the biggest, most-capitalized foreign players, or well-run local sites remained.

There was immense joy in finding a win in a no-win situation. You will never have an experience as meaningful and gratifying as facing the brink of the abyss and coming out alive, middle finger raised to the air.

And when word quietly got around that we were one of the few profitable ventures in town, we started getting inbound emails from random investors, including some who had rejected us before. Some clients offered to invest. I politely declined all of them.

This story is relevant because in a recent survey, 94% of PH startups see themselves raising funding in the next three years. Most will fail.

They’ll all go through the same journey we did, more or less. The excitement of a small group of friends wanting to conquer the world. The euphoria of winning a pitching competition and attracting media attention. Launching product. Getting your first few customers. And the brutal counterpunch of reality. Just another day in startup land.

The startup scene in the Philippines is like masturbation – lots of fantasizing, ego-stroking, and wish fulfillment, but not much real action going on.

Founders will read Techcrunch and Tech-in-Asia, join pitching competitions, attend conferences, and regale at the stories and startup advice of this month’s speaker – who by the way is either a government buffoon or is someone who has never built a business with his/her own capital before.

All this only increases the gap between wishful thinking and reality.

The stark reality is that if one looks at a map of Southeast Asia, you’ll see that the Philippines sits apart. It has the smallest venture capital market (in # of deals and value). It’s overlooked by the much bigger regional funds in favor of Singapore and Indonesia. There are very few really good angels, and a lot of predatory ones.

There’s been a number of initiatives over the years to change that, but none have really worked, thanks to the combination of a protectionist Constitution, our underdeveloped capital markets, and the complex regulatory environment (all topics worthy of exploration in a separate article). Just look at our foreign investment metrics as proof. Even Vietnam is eating our lunch.

Thus, scarcity drives the local startup game. And that’s the big point of this post if you’ve made it this far: because the game is stacked against founders, to raise startup funding in the Philippines, you have to make investors believe you don’t need the funding.

And the most empirical way to demonstrate this is to build a cash-flow positive venture. That’s all there is to it. Don’t repeat our mistake in delaying cash-flow positive status to after your 2nd or 3rd funding round.

Because of the smaller early stage funding market relative to Singapore or Indonesia, I would argue that new local Filipino founders should:

1. Have a bias for picking ideas that can be funded by customers, rather than investors

2. Draw a solid plan to get to cash-flow positive ideally in the first year. Maybe two years – max.

3. Have a low enough cost base that can be funded by 1-2 clients if you’re B2B, or 100 customers if you’re B2C. Forget about it if you’re advertising-dependent (Facebook & Google have won).

4. If you do need to raise funding, treat it as a last resort, and give yourself a hard deadline, say, 6 months.

5. Start with regional investors rather than local ones.

6. Incorporate in Singapore, Hong Kong, or Delaware. Create a local operating subsidiary only if necessary.

This certainly narrows the space for the kind of startups the Philippines can build. But it’s not impossible. An enterprise-focused SaaS product with a strong consulting arm can certainly be cash flow positive within a year. Or a direct-to-consumer online store with only 100 monthly customers but PHP 5,000 ATV and low overhead can certainly be profitable.

“That all sounds good, Oliver,” you might say, “but aren’t startups all about growth? What about those ideas that need massive growth and scale to be profitable?

Sure, I’m not discounting the possibility of success for such models. But the Philippines is not the place to start capital-intensive startups. You’ll need to be based in Singapore or Jakarta to access the capital needed to fund hyper growth, and simply have the Philippines as another portfolio country.

Which brings us now to an honest discussion about access to capital.

If you’re just starting out or if you’re cash-flow negative, you then need to figure out where you are in the local Startup Game.

The Game is defined by this 2×2 matrix. This matrix applies if you:

1. Want to do or are currently doing a startup

2. Have a reasonable amount of self-awareness

3. Have objective metrics on the viability of your product

Note that this matrix describes your starting point, not your end-state. It helps define your initial moves, not your destiny.

On the X-axis is your product. Does it have product-market fit, based on objective metrics – users, revenue, margins, retention, net promoter scores, etc?

Now, the Y-axis will likely sound controversial, but it’s the honest truth. On the Y-axis is a famous name: your family name, your school’s, or a previous company affiliation.

It doesn’t mean that raising is an impossibility, but your product will just have to be way better compared to someone in say, Singapore. When I was raising our first round, I got a lot of advice to mention my school or the fact that we won the Asia Pacific leg of the Harvard New Venture Competition – never mind that neither was a factor in our odds of success! But people are herd animals, and you would be wise to take advantage of this gap in human psychology.

The PH Startup Game (1)

If you have a great product and a famous name, go ahead and raise. Do one round and get to cash-flow positive.

If you have a great product, without a famous name, I’d argue not to waste your time fundraising. Instead, you need to get cash-flow positive ASAP. Keep a good SEO strategy for your startup’s name and a healthy LinkedIn presence, and wait for the inbound investor requests to trickle in. You get investors to pitch you rather than the other way around.

If you don’t have a great product, but have a famous name, your next moves will depend on the nature of your famous name. If it’s your school or company, then you might be better off working for Rocket Internet or Uber for 1-2 years to learn the ropes. These guys love brand name degrees. Pick the role wisely. If you want to be an entrepreneur one day, working as a Product Manager at Grab is superior to a sales job at Google.

If it’s a famous family name that you have but not a great product, you can likely syndicate together 1-2 years worth of runway. Manila is full mediocre businesses from children of tycoons and suckers posing as investors.

If you neither have have a great product nor a famous name, you have three options:

1. Learn how to build a great product on your own

2. Get a famous name by joining an awesome founder

3. Or my recommended option – do both of the above. This is best accomplished by working directly under a startup founder or the local GM of a global tech company. For example, the direct reports of guys like Ron Hose, Ravi Agarwal, Jerome Uy, Paul Rivera, Nix Nolledo, Laurence Cua, Ken Lingan, or John Rubio will likely have great careers ahead.

That’s essentially the game. You need to recognize where you are to determine the right moves to make.

If you decide to take the fundraising route, stay tuned for Part 2 of this post, where I’ll talk about some of the tools you’ll need.



The End of Philippine Fashion. And What We Can Do To Save It.

This is the 2nd part of a 3-part series on our creative industries. Part 1 talked about the inadequacies of the prevalent strategies to grow our $1.5 billion in creative exports. This part talks about how technology can play a role in the competitiveness of our local designers, brands and retailers. It’s related to a broader conversation on the Philippine innovation economy.

"It was H&M, mum." Photo credits: independent.co.uk

“It was H&M, mum.” Photo credits: independent.co.uk

Local brands whisper “H&M is coming” in the same way as the Starks of Winterfell do: they know it will be unstoppable, it will last long, and many will perish.

And then, there’s the Japanese. We all know about Fast Retailing’s very public intention to create the biggest fashion company on the planet by 2020. Japan is our biggest trading partner, so you can count on the Philippines to be a major part of this strategy.

Finally, there’s the broader conversation on ASEAN 2015. The big step in creating a single market in Southeast Asia will inevitably lead to several new brands from around the region entering the local market. And our local champions are seriously outgunned. I couldn’t find data for fashion, but take banking: BDO is the biggest local bank, but is only #19 in Southeast Asia.

Does the increased competition mean the end of Philippine fashion? What will happen to designers, manufacturers, and retailers when the market is flooded with cheap products and more recognized brands? We’re seeing it happen in real time in Brazil. The competition won’t just come from offline players. Even China’s Alibaba is investing in department stores.

The three segments of the market will be affected in different ways:

Independent designers & small businesses will be hit the worst. Brands who rely on bazaars and consigning in department stores will find it harder to compete. The best designers will have a stable clientele for couture, but will find it difficult to scale with ready-to-wear. The rest will be more inclined to work with the bigger houses than start their own label. Contract manufacturers who rely on wholesale orders will see customers move to Vietnam and Indonesia, who are both employing even more aggressive textile export strategies. Cambodia is fast catching up. Just look at the ever dwindling traffic of foreign buyers in Manila FAME each year and the number of closures in the 2nd floor of Greenbelt 5.

The Sub-Billion Players (those with more P100 million in sales, but less than P1 billion) will find it harder to grow. Brands like Folded & Hung and Gingersnaps will slug it out over retail space. Mall operators will prefer leasing to anchor brands, or allocate the prime space to their own franchises (like SM’s Forever 21 and Uniqlo). Because the sub-billion brands don’t have the scale of the bigger players, they will have a harder time competing on price. They will source cheaper merchandise in China, further deteriorating product quality, which will turn off even more consumers. It’ll be a vicious spiral. There will be some consolidation in this space.

The Billion Peso Club (P1 billion+ in sales) will handle the onslaught, but they know the era of easy growth (by simply opening new stores and slapping celebrities on billboards) is over. For them, the smart bet is to pursue an international presence as fast as possible by bringing their brands abroad or by positioning themselves as local partners for foreign brands. Golden ABC (the parent company of Penshoppe) is implementing an Inditex-like strategy: open overseas stores and build a portfolio of brands. Bench is bringing in foreign brands (Aldo, Pedro, etc) while extending its iconic brand to new categories (skin care, salons, etc). This strategy, of course, makes sense given the small size of the local market and resources controlled by these companies.

Online retail will empower all these players. My humble thesis is that e-commerce holds the key to exporting Philippine design. An online strategy can help our local brands 1) remain competitive locally and 2) pursue breakout opportunities internationally

Vania Romoff launched an online-only collection on AVA.PH

Vania Romoff launched an online-only collection on AVA.PH

How do we think about this new normal for Philippine fashion?

1. Think Stories, not Stores. The primary unit of analysis in retail used to be the physical store. Today, it’s the customer story. How do we create a seamless brand experience for consumers regardless of the touchpoint – whether it’s in the mall, on laptops, or on mobile phones?  For example, Warby Parker started as an online eyewear brand. Last year, it opened its first set of brick-and-mortar showrooms where customers can try out different frames and order on an iPad.

With the ability of the internet to distribute content all over the world, local brands can tap an international market. At AVA, we’ve gotten a few customers from the United States, Germany, Belgium, Australia, Singapore, Malaysia and Japan. And we haven’t even done any marketing in those countries.

Unfortunately, there’s so much misguided thinking in the Philippines. At a recent public forum, the head of one of the biggest malls in the country said that “online is the biggest threat to our business“. This is alarmist and exaggerated drivel. It’s misguided because it creates a false distinction between online and offline. Alarmist because the shopping mall will obviously not go away (US e-commerce is still less than 10% of total retail, but a large majority use online to guide purchase decisions).

It ignores how new retail technology can be integrated in the store. It’s no longer “online vs offline”, but a choice on how to communicate the brand story in both worlds.  For instance, brands like Marc Jacobs (who is using social media as a form of in-store currency) and American Eagle (who is piloting iBeacon technology) are showing innovative new ways of embedding retail tech in their traditional offerings.

It’s not just about opening an “online store”, but integrating tech into sensible parts of the retail value chain. Walmart’s latest experiment? Using ad tech to cut waste in its media budget.

Tweetie de Leon and AVA partnered to launch a Kickstarter campaign to save the dying inabel fabric.

Tweetie de Leon and AVA partnered to launch a Kickstarter campaign to save the dying inabel fabric.

2. Build Omni-Channel Capability. Omni-channel retail is an infrastructure decision. And thus requires completely new thinking on organization design, marketing, logistics and inventory management. Another fashion brand was hesitant to launch its own online store because management didn’t want to “divert part of the marketing budget from print and outdoor“. And that’s the problem: an e-commerce strategy isn’t a marketing mix decision, but a business unit-level decision that requires its own set of resources.

When I met the chairman of another retailer, his first question was, “can going online be profitable in the first year?”.  (Dear Mr Chairman: Please do not ask Jeff Bezos this question). Yes, if you’re thinking of “going online” as simply putting up a website. It would obviously not be if you view it as an infrastructure decision.

The good news is that the technology is getting cheaper. I can build a shopping app that costs way less than a billboard on EDSA or a print campaign in Preview. Getting educated about e-commerce is free (it’s called Google). The payments and delivery network have been built and getting better each year. And with companies like Rocket Internet and Naspers operating in the country, talent is more widely available.

Brands without a clear e-commerce strategy aren’t being cautious, they’re being lazy.

3. Leverage on Platforms. Think of a platform as a business that empowers other businesses. The iPhone, for instance, is a platform. Apple provides the centralized eco-system, while independent app developers around the world provide the content. Global marketplaces like Etsy and retailers like AHAlife have allowed independent producers from around the world to access consumers far beyond their home country. Etsy for instance did $1.35 billion of gross sales last year. On Amazon, up to 1/3 of products are sold by third party merchants who host their products on Amazon’s distribution centers. Crowdfunding platforms like Kickstarter allow designers to generate pre-orders even before their products hit the market.

With these platforms, Filipino producers can immediately access a global market on day one. The bazaar in Rockwell only gives you a spike during Christmas? No problem. A presence in Etsy helps expand your footprint. What to customize the look of your store, but don’t have the budget? There’s Shopify for that.

4. Slow Down Fast Fashion. Fashion’s deep, dark secret is that sweatshop labor all over the world subsidizes the thirst for fast fashion in the developed world. Sites like Maiyet, Uncommon Goods, and Everlane are all signals of consumers’ desire for a different way of thinking about fashion. The tragedy in Bangladesh helped cast a wider spotlight on this sorry state of affairs. People are now looking beyond the rack and seeing how their purchases are collectively affecting a global supply chain. Brands are looking for authenticity to break through the cynicism. This is good news for our creative industries. We can’t compete with China on price, but we can certainly compete on design and an authentic brand story that explores our rich cultural heritage, our traditional textiles and materials, and our local craftsmanship.

In my next post, I’ll share what we’re doing at AVA to help create a bridge between our local products and the global market.


To Find Happiness, Forget About Passion

This post first appeared in the Harvard Business Review blog on January 13, 2012. You can find the original post – along with the interesting conversations in the comments section – here

Several years ago, a friend decided she wanted to follow her passion. She loved the liberal arts and academe. She was a talented graphic designer, a great writer, and was the president of a student club. But the prospect of working a nine-to-five job was never interesting. I can’t blame her. After all, ours is a millennial generation proselytized to pursue our dreams. So she spent seven years getting a PhD, writing an award-winning dissertation in the process. It was a wonderful ride while it lasted, and she was among the happiest people I knew.

Then the recession hit. The value of university endowments crashed. Teaching and research positions were cut. She moved back in with her family, stopped paying off her student loans, and waited two years before getting a minor teaching role in a small research center. Throughout this time, she suffered the anguish of an uncertain future, became socially withdrawn, and felt a sense of betrayal.

It’s a poster tale for our times. Was following her passion worth it?

Like myself, today’s twentysomethings were raised to find our dreams and follow them. But it’s a different world. And as the jobless generation grows up, we realize the grand betrayal of the false idols of passion. This philosophy no longer works for us, or at most, feels incomplete. So what do we do? I propose a different frame of reference: Forget about finding your passion. Instead, focus on finding big problems.

Putting problems at the center of our decision-making changes everything. It’s not about the self anymore. It’s about what you can do and how you can be a valuable contributor. People working on the biggest problems are compensated in the biggest ways. I don’t mean this in a strict financial sense, but in a deeply human sense. For one, it shifts your attention from you to others and the wider world. You stop dwelling. You become less self-absorbed. Ironically, we become happier if we worry less about what makes us happy.

The good thing is that there are a lot of big problems to go by: climate change, sustainability, poverty, education, health care, technology, and urbanization in emerging markets. What big problem serves as your compass? If you’re a young leader and you haven’t articulated this yet, here are some things you can do.

Develop situational awareness. There’s too much focus on knowing the self. Balance this with knowing the world. Stay in touch. Be sensitive to the problems faced by the unfortunate and marginalized. Get out of the office and volunteer. If you’re in school, get out of the classroom. It’s been a long time coming, but business schools are finally instituting changes that put the real world at the center of their programs.

Look into problems that affect you in a very personal way. We’re more likely to be motivated by problems we can relate to on a personal level. In Passion & Purpose, Umaimah Mendhro recounts her story fleeing a war-torn Pakistan with her family and how the experience of dodging bullets to escape helped her summon the wherewithal to found thedreamfly.org, an initiative that helps create connections across communities in conflict.

Connect with people working on big problems. In a world where problems are by their very nature interdisciplinary, just getting to know people who are passionate about one problem leads to discussions on how other problems can be solved. When Jaime Augusto Zobel de Ayala helped reinvent Manila Water to better provide for the Philippines’ capital, he had to deal not only with the typical issues a public utility had to face, but also with problems related to climate change, technology, and community development.

Take time off and travel. Forget about traveling as a tourist. Instead, structure a trip that takes you off the beaten path. Go to an unconventional place. Backpack and get lost. The broader and richer experience pays dividends down the line. Steve Jobs described his time living in India as one of the most enriching and mind-opening phases of his life, and this undoubtedly helped him develop the intuition to solve the big problem of making lives simpler through technology.

We don’t find happiness by looking within. We go outside and immerse in the world. We are called to a higher purpose by the inescapable circumstances that are laid out on our path. It’s our daily struggles that define us and bring out the best in us, and this lays down the foundation to continuously find fulfillment in what we do even when times get tough.

Happiness comes from the intersection of what you love, what you’re good at, and what the world needs. We’ve been told time and again to keep finding the first. Our schools helped developed the second. It’s time we put more thought on the third.

Key Takeaways

Forget about finding your passion. Instead, focus on finding big problems. Tweet

Happiness comes from the intersection of what you love, what you’re good at, and what the world needs. Tweet.