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A Revolution prefabricated home on display in Paris: The Philippine company and its founder, Robbie Antonio, made headlines with its promise to deliver quick-to-assemble luxury homes. (Source photo by courtesy of Revolution Precrafted)
Business Spotlight

As the Philippines' first unicorn stumbles, can 'camels' rise?

Revolution Precrafted becomes a cautionary tale for valuation-focused startups

CLIFF VENZON, Nikkei staff writer | Philippines

MANILA -- Revolution Precrafted is a different kind of unicorn -- but then the startup scene in the Philippines has always been a bit different from the rest of Southeast 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' startup ecosystem.

Founded in 2015 by Antonio, a socialite who partied with Donald Trump's kids, Revolution sold investors on its vision of bringing luxury modular homes to the mass market. Antonio, an art collector, enlisted over 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?"

Revolution Precrafted, which wanted to be "the Ikea of homes," has yet to demonstrate a feasible business model. (Photo courtesy of Revolution Precrafted)

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

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

Regarding the few remaining claimants, the company "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 startups underlines how the Philippines has largely missed out on creating its own unicorns.

The country is home to over 400 startups, 50-plus angel investors, more than 40 venture capital firms and around 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 around $200 million, the smallest among the six largest Southeast Asian economies, according to Preqin, a U.K. financial data provider.

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

"The startup scene in the Philippines is quite nascent, and the fierce competition between local homegrown startups 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 like Masayoshi Son's SoftBank Group and is planning to hit the U.S. stock market with a $40 billion valuation. Micab's fundraising, meanwhile, tops out in the millions.

It is something of a chicken-and-egg scenario: Without generous funding, startups 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 startup ecosystem on a lack of cohesive government policy. Others point a 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 startups' 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 $10 million Philippines-focused fund, suggested the country can instead breed "camels," or startups that can survive crises like a pandemic sans 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 unicorn 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 $180 million fund pooled by the nation's oldest conglomerate, Ayala, to invest in businesses complementary with Ayala's diversified interests in banking, real estate, telecoms, health care, power, e-commerce and logistics.

Other local investment houses are also making a foray into venture capital and tech investments. Food, airline and property group JG Summit Holdings has set up a $50 million 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 startups more viable by linking new tech-powered services with more traditional businesses.

Fundraising for the Philippine ride-hailing app Micab tops out in the millions. (Photo by Cliff Venzon)

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," Ideaspace President Rene "Butch" Meily said. "If startups are more mature, they are more of interest to us."

But conglomerates-turned-investors are no panacea.

One startup founder previously told Nikkei Asia that conglomerates' preoccupation with margins can be stifling. Some want a quick return on investment, the founder said.

One thing that could give the Philippines' startup 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 startups 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 livestreaming app whose user base surged amid the prolonged lockdown, completed a $5 million Series A round last year from local and foreign VCs.

The pandemic also fueled a surge in registrations for online businesses as people embraced e-commerce, 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 around 70% of the population.

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

While Revolution's troubles continue to cast a shadow over the Philippines' startup 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 favored startups 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 e-commerce war in Southeast 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 around 110 million 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% contraction.

Philippine fintech player Mynt, known for its GCash mobile wallet, is valued at nearly $1 billion. The online retailer Edamama focuses on products for mothers and babies. (Source photos by Yuki Kohara and AP) 

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 liberalize restricted sectors, including retail, which could ease investments in e-commerce.

Last year, the government released its rules for implementing the landmark Philippine Innovation Act, which earmarks 1 billion pesos in funding for startups, though deployment has been hampered due to the pandemic. Meanwhile, the Philippine Stock Exchange recently relaxed listing rules to help tech startups, 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 centers and other outsourcing jobs -- or working abroad, like the 10 million Filipino overseas workers, who remit around $30 billion 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 to Gojek for around $72 million in 2019.

Meily said he is 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 learned from Revolution. "Performance before publicity. It's better to have performance first and publicity later," Meily said.

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