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Start-ups transforming business landscape in the Philippines

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Analysis

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By Krista Angela M. Montealegre
National Correspondent

THE START-UP ecosystem is blossoming in the Philippines, and conglomerates may be just what they need for their lift-off.

A handful of traditional families dominate various sectors of the Philippine economy, but in this age of digital disruption, conglomerates may increasingly turn to start-ups to stay relevant.

“Globally, they understand this is important and if you ignore it then it can mess you up,” Katrina Rausa Chan, innovation hub director at start-up platform QBO Philippines, said in an interview, citing a study released in 2016 by Silicon Valley-based 500 Startups and the INSEAD business school that showed 68% of Global Fortune 500 companies are invested in start-ups.

“That’s the lesson we’ve seen,” Ms. Chan said. “But it shouldn’t just be fear that’s driving this. It should be seen as an opportunity.”

The Philippines can borrow a page from Indonesia, which is seeing conglomerates there get more and more involved with start-ups.

“What is interesting is they gave this sense of confidence to outside investors that even locals are investing. It seems there is enough demand,” Eka Himawan, the group chief financial officer of e-commerce site Orami, said in a recent forum.

Orami counts an Indonesian conglomerate among its investors.

This year saw the country’s old guard led by JG Summit Holdings, Inc. and Ayala Corp. engage the start-up community both at home and overseas as they look for ways to reinvent and shield themselves from disruption.

“We always take a look at opportunities that come our way and will selectively invest in businesses that will strengthen our current portfolio of businesses,” JG Summit Senior Vice-President Bach Johann M. Sebastian said in a text message.

In May, the Gokongwei-led firm participated in the fund raising of Singapore-based Sea Limited, an Internet platform company focused on markets in Southeast Asia — an investment that JG Summit President Lance Y. Gokongwei said will allow the entity to “learn new business models on e-commerce and gaming.”

The Ayala group considers itself a “big believer” in start-ups, having established investment platforms including Kickstart Ventures. Its subsidiary Globe Telecom, Inc. has a financial technology venture with Ant Financial Services Group, an affiliate of Chinese Internet giant Alibaba Group Holding Ltd.

Ayala is scouting for start-ups that have “some relation or significance to our businesses, and the idea has to have a strong business case and potential for disruption.”

“We recognize both their innovation potential and positive contribution to the economy,” Ayala Managing Director Paolo Maximo F. Borromeo said in a separate mobile phone message.

While successful start-ups have changed the landscape of businesses, countless others have failed, and this is the hard part for conglomerates, which are measured on quarterly performance and are hard-pressed to deliver value to shareholders.

“For conglomerates to put in a lot of money (in startups), it’s too risky,” BDO Capital and Investment Corp. President Eduardo V. Francisco said by phone.

Instead of directly investing in a startup, conglomerate principals could initially buy into them in their personal capacity so the company’s shareholders are protected and the firm — should it be listed — would not have to disclose the investment, Mr. Francisco said.

The conglomerate may step in formally once the startup has proven its business case with a solid track record.

“This is not the time anymore for conglomerates to just invest in something that they think will be profitable. The best option is to find synergies that can be integrated to the business model,” said Rens V. Cruz II, Regina Capital Development Corp. analyst.

There are questions whether old established businesses can transform and keep up with startups’ versatility. If they do, they may be key to nurturing billion-dollar unicorns in the Philippines.

“The more corporates engage with start-ups — if they figure out how to speak the same language and collaborate — there is an opportunity for value on both sides,” QBO’s Ms. Chan said.

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