Why BBM is Winning

We’ve been bombarded with explanations of BBM’s dominance: historical revisionism, disinformation, paid trolls, a network of pro-Marcos accounts, hyper partisan Fox News-style YouTube channels, the GMA-brokered alliance with Sara Duterte, uneducated voters, the attempt to make Sandro the Current Thing and weaponised nostalgia on TikTok. 

None have explained these through the lens of aggregation theory and network effects. This is important because although any of the above are valid explanations, none would be possible without these two forces. BBM’s strategy rides on twin waves. 

If Leni loses, a deeper understanding of network effects and aggregation theory are foundational to a healthy opposition. 

The usual caveat applies: this is such a rabbit hole that this post merely serves as a humble overview. Regardless of the election outcome, I suspect we’ll be debating this for the next decade. And as always, I welcome your criticism and good faith counter-arguments. 

The Aggregation of Narrative

“In an aggregated world it is voters aka users who decide which issues get traction and which don’t. And, by extension, the most successful politicians in an aggregated world are not those who serve the party but rather those who tell voters what they most want to hear.”  -Ben Thompson,  The Voters Decide

Let’s start with aggregation theory, which readers of Ben Thompson will know well. Aggregators need 3 attributes to be successful: 

• A direct relationship with users

• Zero marginal costs for serving users

• Demand-driven multi-sided networks with decreasing acquisition costs

The core of the argument is that the BBM, through disciplined long term planning, iterations based on market feedback, and a bit of good timing, bootstrapped their way across the Super Aggregators (YouTube, TikTok, and Facebook) to become an aggregator that unleashed open source myths.  

BBM, TV, and YouTube are excellent examples of how aggregation theory played out: 

• In the post-EDSA 90s and 2000s, TV networks (mostly ABS-CBN, GMA, and TV5) delivered a bundle of content and advertising. The networks controlled production (news, noontime shows, telenovelas, celebrities) and distribution (towers, channels, regional offices). More crucially, TV networks reached viewers at a household level. Therefore, content appealed broadly to the entire family. 

• TV networks were gatekeepers to a Marcos revival because advertising year-round costs money and the political winds blew a different way during the FVR era. The winds got milder with Erap and GMA, but flipped with Noynoy. They flipped again with Duterte. Changing tides were not a reliable foundation for a revival strategy. 

• The 2010s saw YouTube (and of course Facebook, Twitter, TikTok, etc) build direct relationships with users by delivering content they cared about. Most crucially, the platforms reached users at a personal, rather than household, level: every Facebook and YouTube feed is unique to you. 

• The end result is that ABS-CBN and GMA’s content have been commoditized and modularized as another set of suppliers to YouTube, competing on an equal playing field with the guy in a Malabon internet cafe producing sabong videos. And yes, with the Marcoses too. The TV networks were no longer gatekeepers.  

This, in essence, is the basis of BBM’s entire strategy for the past 6 years. Freed from the shackles of having to please gatekeepers, political allies, or party leaders, BBM’s team was left with the first order priority of simply focusing on end users.

No need to worry about parties, policies, and platforms; just give voters what they want to hear.  

The easiest way to see this is to go to BBM’s YouTube channel and sort his videos by views. You’ll quickly observe that the top videos are basically: 

• Father and son watching TikTok videos and searching Google

• BBM learning to play Mobile Legends

• Fun and games with the whole family

And this strategy incurs zero marginal costs: once hooked with one vlog episode, it costs almost zero to get users deeper into the library because of the platforms’ recommendation engines. 

Multi-sided Network Effects 

At its core, network effects occur when the value of a service grows with increasing use. 

• YouTube creates a network effect across users, video producers, and advertisers. The more videos posted on YouTube, the more it can recommend videos users want to watch. Advertisers get to interrupt some of that watch time. The more users watch videos, the more videos producers post because they get a share of the ad revenue. More videos leads to more users, and so on. Crucially, any user can also be a video producer.  

• Recall that in an aggregated world, BBM has a direct relationship with his voters: he is no longer gated by TV, newspapers, or political parties. As a result, all he has to do is to give people what they want. And this is exactly what he and thousands of others have done. BBM’s constant YouTube presence - 12 years old already - just provides a spark to the cold start problem.   

• A 12-year old channel that’s producing at a high frequency means that BBM’s team has benefited from multiple feedback loops.  You’ll clearly see this yourself - most videos from the 2010 to 2014 era barely hit 10k views. But 7 of the top 10 most viewed videos were shipped in the past two years. 

• The bigger library of BBM videos also means that YouTube has more videos to recommend to users (there are 2 main ways YouTube does this - in the ‘Up Next’ panel and the home screen). It’s no surprise that the vlog is on its 209th episode. That’s an average of one episode a week since the first episode aired four years ago! 

• TikTok’s different kind of network effect accelerates this: every single short video uploaded makes future videos more possible because of remixing, ripping, and mimicry.  

• On YouTube, there was a dearth of local Filipino content until the mid-2010s. As Android’s (where YouTube is preinstalled) growth accelerated in 2016-2020, so did people with YouTube channels. During this time, Filipino-produced videos had a disproportionately easier time getting ranked and recommended to a user. 

• It turns out, Filipinos are hungry to learn about history because it’s so boringly and pedantically taught in school (Not a coincidence that one of the top Groups on Facebook is about Filipino nostalgia). When developers in the 90s got frustrated with Microsoft, they turned to open source software. Filipinos today have turned to open source myth making.

• BBM doesn’t have to go 100% conspiratorial, nor does he have to pay every single pro-Marcos channel as most pundits will argue. YouTube’s and TikTok’s network effects will do it for him. Or more precisely, the mimetic desires of the masses will indulge in decades-rich Marcos narrative and spit that back out as creative expressions - rightly or wrongly, politely or crudely - of their alternative version of history or contested imaginations of this nation state’s future.

A Thought Exercise to Close 

Imagine that years before his presidential run, Marcos was rewriting history.

• His father was no longer rejected by the Filipino people during a time of violence and turmoil. The accolades from American educational institutions were real. 

• A comfortable childhood, an early professional career where he was constantly measured against his father, and his rise from a local position in Ilocos to the national spotlight in the Senate were well covered in the media. Videos of his life story circulate all over the Philippines.  

• He marries the daughter of a prominent clan. His mother is ready to see her son on the cusp of the presidency. 

You must be thinking of Bongbong, right? 

But this is Ferdinand Marcos, circa 1964. 

• Ferdinand publishes his biography, For Every Tear a Victory, and chronicles his tale as a wartime hero. Mariano Marcos’ death is ret-conned: executed by the Japanese rather than by his fellow Filipinos for collaborating with the enemy. The book is widely read in American political circles, and culminates in a biopic.   

• If Rizal wrote facts that masqueraded as fiction, Ferdinand wrote fiction that masqueraded as facts, and single handedly controlled his narrative. 

• In an era without YouTube, Facebook, or TikTok, Ferdinand built his myth with the closed sourced technologies of his time: American publishing, broadcast networks, and a growing movie industry. 

Sterling Seagrave, in The Marcos Dynasty, writes:

“Borrowing freely from others, the young Ferdinand Marcos created an entirely different identity for himself, a much happier one than his own, in which he was the hero, the boss, and the driving force. When he decided to go into politics, he went public with this fanciful legend, and used it to build a remarkable international career. In doing so, he was different from other charlatans only in the matter of degree. His success grew out of his resourcefulness, the gullibility of his audience, and the venality and opportunism of Washington” 

Replace the ‘opportunism of Washington’ with ‘the opportunities of the Internet’ and we’re basically talking about today, but with one difference: the myths are open-sourced: anyone can build on it.   

So how does Leni pull an upset against insurmountable odds? 

I believe the key lies in disrupting BBM’s network effects and using aggregation theory to the opposition’s advantage. I’ll cover that in a separate post. 

A Silicon Valley VC's Startup City in Asia

And its Cautionary Tale for Platform Power

It's March, 1945 in the Philippines, 6 months before the atomic bombings of Hiroshima and Nagasaki brought a conclusive end to World War II.

The destruction of the Battle of Manila was unimaginable. As the Japanese army tightened its grip on the capital to withstand artillery from American & Filipino forces, entire buildings and city blocks were razed to the ground. Among Allied cities, only Warsaw suffered more. When the fighting subsided, 100,000 civilian lives were lost.

Official Gazette PH @govph

Manila was the second most devastated Allied capital of World War II. Photos of a razed city: flic.kr/s/aHsk7KPdAb

Joseph McMicking survived the Battle of Manila. Serving in General Douglas MacArthur's Army as a Captain, the Stanford-educated, Philippines-born officer of Scottish and Spanish descent, was a man of the East and West.

De La Salle Alumni Association

Seeing the Manila streets where he grew up disintegrated to ashes must have been a horrific sight. But life had other plans for Joe, or rather - he had other plans for life.

Among The First VCs

In 1948, Joe and his brother founded McMicking & Co. in San Francisco.

The firm invested in Ampex Corporation, which made tape and video recorders from captured German technology. Ampex made history as one of the first IPOs from Silicon Valley (when the term didn't exist yet!), listing in 1958 after Hewlett Packard in 1957.

From Steve Blank's The Secret History of Silicon Valley:

Ampex business took off when [Fred] Terman introduced Ampex founder Alex Poniatoff to Joseph and Henry McMicking. The McMicking’s bought 50% of Ampex for $365,000 (some liken this to the first VC investment in the valley.) McMicking and Terman introduced Ampex to the National Security Agency, and Ampex sales boomed when their audio and video recorders became the standard for Electronic Intelligence and telemetry signal collection recorders.

What most people in Silicon Valley today don't know is that this early venture capitalist was simultaneously working on what we now call a side hustle.

Joseph McMicking is building a city from scratch.

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Makati: a 1950s Startup City

In 1931, Joe married a childhood friend - Mercedes Zobel de Ayala, a scion of the Filipino conglomerate Ayala y Cia.

Founded in 1834, Ayala by then had over 100+ years of experience bringing the Industrial Revolution to the Philippines. It started with distilleries and expanded over the decades to utilities, transportation, banking, and insurance.

After serving in the war, Joe returned to help his father-in-law revive the now struggling Ayala. Mercedes and her two brothers inherited 1650 hectares of swamp and farm land in the sleepy town south of Manila called Makati.

By 1948, Joe had the early versions of a master plan to transform an area roughly the size of midtown Manhattan into the new business and financial capital for the Philippines.

This was harder than it seemed. World War II ruined the economy. William Manchester, Gen. MacArthur's biographer, quantifies the destruction:

"Seventy percent of the utilities, 75 percent of the factories, 80 percent of the southern residential district, and 100 percent of the business district was razed."

Though the McMicking and Zobel de Ayala families used to live in the heart of Manila before the war, Joe found a better strategy in founding a new city from scratch, rather than rebuild Manila to its former early 20th century glory. And it worked.

City as a Product

The plan started with residential "villages" - essentially gated communities for the elite fleeing the ruins of Manila. As houses were built, commercial establishments sprouted. By the late 50s, Makati started resembling the typical American suburb.

Throughout the 60s, Ayala y Cia evolved into the Ayala Corporation. Ayala consolidated its holdings in real estate and banking, while entering the nascent food manufacturing, semiconductor, and telecommunication industries. As Makati's business elite expanded their businesses through the 60s, a financial district started taking shape along Ayala Avenue.

The Ayala Corporation keeping a tight rein on urban planning - by controlling the supply of commercial and residential land to keep prices rising, limiting air rights, controlling land use, granting land to religious orders to operate schools, even building a private security force.

Throughout the economic crises that rocked global currency, sugar, and oil markets in the 1970s, Makati continued to grow as the country's central business district, with its highly educated workers forming the backbone of the country's emerging middle class.

Joe wisely deployed a tightly centralized strategy to build Makati. The flywheel was simple. First, seed crowdchoice by selling the vision of a modern urban city. Inspired by Daniel Burnham's work, this urban development plan focused on seeding the city with wealthy business families who wanted to build homes on newly developed parcels of land, far from the destruction of Manila.

Second, get these families to invest in the commercial zones nearby. As big businesses flocked to Makati, entrepreneurs set up a thriving retail scene and nightlife to serve the growing city.

Third, growing property values unlocked even more capital from banks, which led to more businesses and even more residents.

Makati Skyline, by Mark Alvin Marbella. https://www.flickr.com/photos/markalvinmarbella/23637987311

Meanwhile, the decades-long economic boom funded a prosperous city government, where social services like public education, basic healthcare, and even burial benefits for senior citizens are provided for free to the city's ~500,000 residents. Measured by the size of its balance sheet, Makati is the richest city in the Philippines, with assets greater than the next 4 cities combined.

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Cracks Show

Fast forward to 2021, and the economy is once again devastated, this time not by invincible machines of war, but by invisible microbes.

The Philippines is the worst hit economy in Southeast Asia, with GDP shrinking by almost 10% in 2020. It's a major setback in alleviating poverty because emerging markets need to growth 7-8% just to keep up. 4.2 million are unemployed.

The good news is that Filipinos are rebuilding from the ground up. Business registrations logged by the Trade and Commerce Department hit ~430,000 in Q1, on top of the 900,000 registrations in 2020.

But unlike the 50s, it's highly likely that the recovery will be driven outside of Makati because the vast majority of entrepreneurs are priced out.

Joe built a city with the technology of this time - centralized urban planning, conglomerate economics, control of land, and a young capital market. While this worked in the post-World War II era, centralized development started showing cracks in the 2000s, namely in housing, free and open markets, and education.

Problem 1:Affordable Housing. Makati has ~500,000 residents but a daytime population of 1 million, driven by people who work there but live outside the city. In Makati, NIMBYism has root access via incredibly tight deeds of restrictions that prevent land owners from building higher density housing.

From the 60s to the 80s, currency depreciation and government expropriation of private businesses raised an entire generation reliant on real property to build wealth. Makati’s residents will protect those gains at all costs. This dynamic is clearly seen in the distribution of property prices all throughout Metro Manila, with Makati as the red zone in the center:

Send a drone 100 meters up, and you'll clearly see the housing inequality: skyscrapers surrounding by a sea of urban slums.

Photo from PavelSinitcyn | Getty Images

But it's not because of lack of land. Pan to the left and get a wider shot of that same photo above, and this is what you'll see.

Source: Wikipedia

That huge strip of green in the lower left are the private gated communities of Dasmariñas Village and Forbes Park. There is more land allocated to these private enclaves where low-density housing dominate, versus the entire commercial district of the city. But because of a captive city government, building cheaper higher density housing near the central business district is close to impossible.

If these enclaves seeded the city in the past, they are now ceilings to its future.

Problem 2: Free and open markets. This isn't unique to Makati in itself, as the Philippines as a whole ranks in the bottom half in the World Bank's Ease-of-Doing-Business survey, which ranks countries on indicators such as starting a business, registering property, accessing credit, trade across borders and so on. But this massive market is kept relatively closed by an entrenched oligarchy - mostly headquarted in Makati - that seeks to keep its hold of the local economy by minimizing foreign competition.

As a result, though the Philippines has a larger population than Thailand, Malaysia, or Vietnam, it has significantly lower levels of foreign investment:

Problem 3: Education. Despite its proximity to big business, Makati never really gave birth to a globally recognized science and research university. This is like Boston without MIT, New York without Columbia, and the Bay Area without Stanford. Some schools tried. For example, the high school I went to tried to expand its campus to support university courses in the 80s and 90s, but was immediately blocked by local NIMBYsm.

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What Happened? A Tale of Two Platforms

The overarching problem is centralization. Joe was limited to the tools of his time to jumpstart an economy. Like the technology platforms of today, Makati the city was eventually captured by a ruling elite, accruing power that rivals even the state.

The same dilemmas for sharing power, rights, and economic privileges that Apple, Google, and Facebook face have played out slowly over decades in McMicking's startup city, precisely because it is so hard to distinguish where a product ends and platform begins.

The Means of Creation newsletter describes this dilemma well, using Apple and iOS to illustrate:

Apple is a product company. They famously obsess over details, and want every element of the user experience to be perfect. They require total control, because it allows them to use their taste to make choices that are frustrating at first for users (like removing the headphone jack) but then turn out later to be prescient and perhaps even courageous. There’s no question, they make the best products, and they extract a steep price for them.

But iOS is a platform. And the habits you acquire by being a good product company do not always help to run a platform effectively. Too much control, taste, and value extraction can break a platform. These three principles served iOS well in the early days when the platform was nascent and needed to be hand-nurtured. But now that the iPhone is ubiquitous, the App Store has become part of the basic infrastructure of the internet. And many of its policies around in-app purchases and tightly controlled App Store curation are not well-suited—and in fact harm—the broader ecosystem.

Ayala is a product company. But Makati is a platform. And if Apple has a hard time making this distinction, so too can the people behind a vast conglomerate with decades-old interests in banking, real estate, utilities, energy, healthcare, and telecommunications. Though the C-suite leaders of Ayala are incredibly well-liked for their humility, simple lifestyle, and commitment to nation building; a slow-moving class of middle managers resistant to change has sprouted like weeds. The head of international sales was once quoted, without a hint of irony, something that would titillate a rightwing Republican's wildest dreams (emphasis mine):

The fact that there is nobody in the Philippines who regulates urban planning has been great for Ayala Land, because we are probably the only company there that has the scale financially to take on large plots of land.... By developing big tracts of land, we become the government; we control and manage everything. We are the mayors and the governors of the communities that we develop and we do not relinquish this responsibility to the government.... But because we develop all the roads, water and sewer systems, and provide infrastructure for power, we manage security, we do garbage collection, we paint every pedestrian crossing and change every light bulb in the streets – the effect of that is how property prices have moved.

So how do these problems get solved? In general, I think we have two directions:

• Solve these problems inside Makati

• Solve these problems outside of Makati

One can certainly imagine DeFi solutions for the first, such as equity tokens that can fractionalize ownership and governance of Makati's gated communities to enable higher density housing, or a Diem-like currency instrument redeemable across its businesses. But let's give Ayala's managers a chance to figure this out themselves.

Instead, I think the 2020s will see a critical mass of Filipinos opting for the 2nd strategy because a new generation of entrepreneurs will realize the limits of conglomerate-led central planning and thus experiment with more decentralized solutions.

This is a soft exit, with users voting with their feet to move domestically, rather than join the 10 million+ Filipinos working overseas.

We now see clear trends of this happening. On the 'supply-side', a nexus of cloud, crypto, and communications technologies have now made this exit possible. On the 'demand-side', the timing is right, for the following reasons:

1. Filipinos are solving pandemic problems with decentralized solutions. The state's pandemic response has made "national vs local" a more salient mental model in the minds of Filipinos. Vaccine procurement and distribution has been led by local city mayors. Over 6,700 "community pantries" - food banks with donated essentials staffed by volunteers - have sprouted in a few weeks, after a single food bank went viral and was replicated by countless others.

2. Economic catastrophe has sparked a Cambrian explosion of new businesses. As mentioned earlier, Filipinos are rebuilding from the ground up. Business registrations logged by the Trade and Commerce Department hit ~430,000 in Q1, on top of the 900,000 registrations in 2020. These are impressive numbers in such a short period of time for a population of 110 million.

3. Capital is hungry to be deployed. Central bank data shows that total deposits increased 9% year-on-year to PHP ~15 trillion ($312 billion), but total loans stayed flat at PHP ~10 trillion ($205 billion), leaving more than $100 billion in domestic capital waiting to be allocated. As overseas Filipinos come home to retire, they bring their wealth to their hometowns. It's now not surprising to drive to remote farmlands but see clusters of housing and small shops bootstrapped by remittance dollars.

4. "Next Wave Cities" are driving growth. Limited usable land and expensive prices are giving rise to over 20 next wave cities, who will now compete with Makati to attract new residents and businesses.

5. Greater awareness of geopolitics. As a wave of illegal Chinese migration to the Philippines in 2018-2019 happened, many locals got priced out of the property markets. And as islands are reclaimed by the PLA in the South China Sea, more and more Filipinos are realizing that they need to build new cities on their own, or else China will.

How will these new cities be bootstrapped?

At this point, we're nearing the realm of the speculative. But if the trends above hold through the 2020s, I foresee 3 rough models, all rooted in existing legislation and urban developments.

From a scale of large to smaller communities:

1. Cloud towns: the Philippines already has a regulatory framework for special economic zones that grant incentives to exporters. Traditionally, these have been large companies. But with community bargaining + equity-like tokens, it's not impossible to imagine collectives formed among the 2 million people working as freelancers. Members can start by collectively bargaining for legal protection, then evolve to acquire and develop property together, and fund public goods such as schools. (This isn't entirely new - the Philippines already has a party list system, where by sectors such as laborers and overseas workers are represented in Congress). With crypocurrencies, these towns will bypass national restrictions that prevent foreign education providers to serve local students.

2. Cloud villages: This is a smaller version of towns, often just composed of a few blocks. One example is "Sinigang Valley" in the Poblacion area of Makati. Here, a small group of startups decide to co-locate their offices and open residential units for their employees. More startups mean more demand for local retail businesses and for legal, accounting, and health services, which in turn attracts more startups. Cloud villages also help solve a perennial problem faced by many businesses: a stable internet connection. By banding together, startups can better demand better services from telco providers.

3. Cloud islands: this is digital nomadism taken to the island frontier. The Philippines has more than 7,000+ islands, and less than half have permanent human settlements. As satellite internet becomes a reality, expect more remote outposts of knowledge workers plugged into the global economy, but working in paradise. Projects such as TAO have been long treasured secrets.

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The Island Chain

At the end of the day, it's still incredibly inspiring to learn how Joseph McMicking built both a city and a tech company in two different hemispheres. But now we have the tools to scale his dream and share prosperity more widely by building more Makati's.

Decentralization is deeply rooted in Filipino culture and history. This is the post-colonial end state that brings the archipelago full circle with its historical roots. After all, before the Spanish conquests in the 1500s, there was no such thing as a Philippine nation state, just a collection of islands entrepôts sustained by rich trading networks with China, Java, Sumatra, and Borneo, and as far out as India and the Middle East. Maybe this isn't the beginning of a new history, but simply a return to it.

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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.

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.