As the Philippines’ first unicorn stumbles, can ‘camels’ rise?

Revolution Precrafted is a different kind of unicorn — but then the start-up scene in the Philippines has always been a bit different from the rest of south-east Asia.

At a time when Singapore-based Grab Holdings and Indonesian rival Gojek were building digital empires spanning everything from ride-hailing to digital payments and more, Revolution and its founder, Robbie Antonio, were promising quick-to-build luxury homes.

Now, though, the company’s billion-dollar valuation is being called into question, angry customers are considering a lawsuit, and investors and venture capitalists are starting to rethink a new phase for the Philippines’ start-up ecosystem.

Founded in 2015 by Antonio, a socialite who partied with Donald Trump’s children, Revolution sold investors on its vision of bringing luxury modular homes to the mass market. Antonio, an art collector, enlisted more than 80 globally renowned designers such as Zaha Hadid and Daniel Libeskind to design homes that cost an average of $120,000 and can be delivered within 90 days.

But four years later Revolution, which wanted to be “the Ikea of homes”, has yet to demonstrate a feasible business model.

Frustrations and fury swirl inside a Facebook group formed by its customers, where queries vary from “How do I get a refund?” to “Who are joining the class action suit?”

Suppliers, too, have complained, saying the company lured them into dubious contracts worth 150m pesos ($3.1m), ABS-CBN reported in February.

Revolution’s lawyer told Nikkei Asia that the company had “reached amicable resolutions with a substantial number of its suppliers, contractors and clients after a series of constructive discussions in the past few months, including those who have filed a complaint before the National Bureau of Investigation in February”.

Regarding the few remaining claimants, the company said it “intends to fully comply with its obligations, subject to such obligations being legitimate, fair, and in adherence to the terms of the original contract that the counterparties signed with Revolution”. The company had said earlier that the “pandemic has activated force majeure stipulations in our contracts”.

Some argue that Revolution’s headwinds have grabbed headlines precisely because it is the only unicorn in the country. But the dearth of other highly valued start-ups underlines how the Philippines has largely missed out on creating its own unicorns.

The country is home to more than 400 start-ups, 50-plus angel investors, more than 40 venture capital firms and about 35 incubators, according to the Philippine Venture Capital Report 2020 by the local VC Foxmont Capital Partners.

But the combined value of venture capital deals in 2019 and 2020 stood at about $200m, the smallest among the six largest south-east Asian economies, according to Preqin, a UK financial data provider.

Having no successful unicorns puts the Philippines at a disadvantage in the quest for funding.

“The start-up scene in the Philippines is quite nascent, and the fierce competition between local homegrown start-ups and ‘superapps’ of the region creates an additional hurdle in proving its mettle,” said Marissa Salim, vice-president for fund manager data at Preqin.

She cited the competition between struggling local ride-hailing app Micab and Grab, both founded in 2012. The Singaporean company has already raised billions from a stable of high-powered investors such as SoftBank and is planning to hit the US stock market with a $40bn valuation. Micab’s fundraising, meanwhile, tops out in the millions.

It is something of a chicken-and-egg scenario. Without generous funding, start-ups struggle to grab market share. But without market share, many face a hard time attracting the attention of deep-pocketed investors.

It is a conundrum that the country has long struggled with, with some blaming the weak start-up ecosystem on a lack of cohesive government policy. Others point the finger at sprawling family-owned conglomerates and the Philippines’ restrictive foreign investment rules, leaving little room in the market for new challengers.

In fact, local start-ups’ inability to pull in large amounts of investment has been an issue for so long that some are questioning whether the Philippines should even aim to create its own unicorns.

Managers at the VC Gobi Partners, which teamed up with local VC Core Capital for a $10m Philippines-focused fund, suggested the country can instead breed “camels”, or start-ups that can survive crises such as a pandemic without a sky-high valuation. The term was coined by Alex Lazarow, director at global VC Cathay Capital, and is said to be gaining advocates in Silicon Valley.

“If they hit status, great. But even before hitting that, we want to make sure they can sustain themselves — that is the whole aspect of being a camel,” said Carlo Delantar, a partner at Core Capital.

Minette Navarrete, who heads the largest local VC Kickstart Ventures, said: “For Kickstart, breeding a unicorn is not the objective. At the end of the day, high market value is a result of a good company delivering products and services sustainably and keeping its customers happy.”

Kickstart manages the $180m fund pooled by the nation’s oldest conglomerate, Ayala, to invest in businesses complementary with Ayala’s diversified interests in banking, real estate, telecoms, healthcare, power, ecommerce and logistics.

Other local investment houses are also making a foray into venture capital and tech investments. Food, airline and property group JG Summit has set up a $50m fund, while Aboitiz Group, which has businesses in power and banking, and real estate developer Megaworld are both charging into tech.

The rise of funds backed by the country’s family-owned conglomerates can also make start-ups more viable by linking new tech-powered services with more traditional businesses.

Ideaspace Foundation, which is supported by leading telecom PLDT and its sister companies, is also moving from an incubator into a major funder.

“We are more equity-focused now,” said Ideaspace president Rene “Butch” Meily. “If start-ups are more mature, they are more of interest to us.”

But conglomerates-turned-investors are no panacea.

One start-up founder previously told Nikkei Asia that conglomerates’ preoccupation with margins can be stifling. Some want a quick return on investment, this person said.

One thing that could give the Philippines’ start-up scene a shot in the arm is the same thing that has battered the broader economy: the coronavirus pandemic.

The 2020 Philippine Venture Capital Report noted several local start-ups that were able to survive or even get a boost during the pandemic, including payroll services provider Sprout Solutions and grocery delivery app MetroMart, which is preparing for its first major fundraising later this year.

Kumu, a TikTok-like live streaming app whose user base surged amid the prolonged lockdown, completed a $5m Series A round last year from local and foreign VCs.

The pandemic also fuelled a surge in registrations for online businesses as people embraced ecommerce, and it boosted the appeal of fintech, which in recent years has been a magnet for investors who see potential in the country’s unbanked, who comprise about 70 per cent of the population.

Fintech company Mynt, backed by Ayala and Jack Ma’s Ant Group, raised $175m from existing and new investors last year, valuing the company at nearly $1bn. Mynt, known for its GCash e-wallet, plans another round this year and aims to double the value of transactions to 2tn pesos this year.

While Revolution’s troubles continue to cast a shadow over the Philippines’ start-up sector, investors say the sector as a whole is turning a corner.

“The pandemic has weeded out this whole, I would say, mindset of just playing the valuation game,” said Jason Gaisano, co-founder of Core Capital and a fourth-generation entrepreneur from a prominent retail group in the central Philippines.

Kickstart’s Navarrete said there is now a greater focus on fundamentals during due diligence. “We start to hear many more investors rationally asking: ‘Are your margins positive? Can we see unit economics?’ I think those questions come up more.”

And while VCs have previously favoured start-ups that want to quickly expand globally, companies that focus on solving local problems and markets are now gaining appeal in the pandemic era, investors said.

As Shopee and Lazada wage an ecommerce war in south-east Asia, for example, Kickstart recently invested in Edamama, an online retailer focused on mother and baby products in the Philippines.

Believers in the Philippines’ potential say the local market is big enough to nurture potential billion-dollar companies.

The country is home to about 110m people, second only to Indonesia in the region. It has a median age of 26 and was among the fastest-growing economies before the pandemic hammered its economy last year with a record 9.6 per cent contraction.

Rising smartphone penetration and improving internet connectivity with the entry of China Telecom-backed Dito Telecommunity are supporting the digital shift.

The government, too, is slowly doing its share. After passing a law that allows one-person corporations, President Rodrigo Duterte has asked Congress to speed up measures to liberalise restricted sectors, including retail, which could ease investments in ecommerce.

Last year, the government released its rules for implementing the landmark Philippine Innovation Act, which earmarks 1bn pesos in funding for start-ups, though deployment has been hampered due to the pandemic. Meanwhile, the Philippine Stock Exchange recently relaxed listing rules to help tech start-ups, opening up a new venue for fundraising.

But investors say risk-taking and entrepreneurial spirit still need to be fired up in a country where many opt to play it safe in service industries such as call centres and other outsourcing jobs — or working abroad, like the 10m Filipino overseas workers, who remit about $30bn a year.

“We just need more success stories to turbocharge the whole industry,” said Meily of Ideaspace.

The last major successful exit was of Silicon Valley entrepreneur Ron Hose when he sold the mobile payment platform Coins.ph to Gojek for about $72m in 2019.

Meily said he was not giving up on the hunt for a Philippine unicorn. “I am still looking for an authentic Philippine unicorn,” he said. “We haven’t had our Grab. We haven’t had our Airbnb, but I am confident that we will find them. That’s our goal.”

There is also a lesson to be learnt from Revolution. “Performance before publicity. It’s better to have performance first and publicity later,” Meily said.

A version of this article was first published by Nikkei Asia on May 14 2021. ©2021 Nikkei Inc. All rights reserved.

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