Interview with a venture capitalist

i.t. matters
Tuesday, January 31, 2006 MANILA, PHILIPPINES

Philippine Silicon Valley

Interview with a venture capitalist

By DENNIS POSADAS
Consultant
UP Ayala Technology Business Incubator

Venture capital. To some, it evokes a mysterious form of financing that seems shrouded in mystery rather than something we take for granted. Unlike loan officers, venture capitalists are like a rare species.

Thus, on a sunny January morning, I decided to go into the concrete corporate jungle of Makati to meet a venture capitalist at his nest -- certainly not a nest of straw but a fancy plush office nest. The venture capitalist was Guilly Luchangco of ICCP Venture Partners.

Walking along the carpeted corridor leading to his office, I glance at the numerous deal and public offering announcements hanging like trophies along the walls. I see some familiar and unfamiliar names, but many with big amounts of money attached to them.

Then an assistant ushers me into his office. I saw a mestizo bespectacled Filipino-Chinese man in a dapper, grey suit. He shook my hand.

"Hi, I’m Guilly Luchangco."

EARLY YEARS

Asked how he got started, he recalled: "I went to La Salle for Engineering, B.S. Chemical Engineering (magna cum laude). I decided to work for Procter and Gamble in its factory. I was in research and development. Then I went to the United States to do my MBA at Harvard [Class of 1967]."

After getting his MBA from Harvard, Guilly felt his future was in the Philippines, and he packed his bags to go back home. His first job upon return was for a small group that owned a paper mill, a leather tannery and a tin recovery plant.

Guilly then moved to SGV where he spent 12 years at SGV in the management services division since he was not an accountant. For eight years, Guilly was the executive director of SGV Singapore. He subsequently joined Republic Glass Corp. as its president and vice-chairman for seven and a half years.

Then came the 1986 EDSA People Power revolution. "I saw some opportunities to get going on my own. So I started the ICCP Group. The group started with the Investment & Capital Corporation of the Philippines, an investment house." His partners initially included American Express Bank, AIG/Philamlife and Far East Bank. American Express, after a while, had to sell out its non-core businesses and their shares in ICCP went to the Development Bank of Singapore Far East Bank was eventually absorbed by BPI, which is now also a shareholder. Also, a number of prominent local businessmen are part of the venture.

PHILOSOPHIES

I decided to ask Guilly to demystify venture capital and what he thought of venture capital in this country. "I think venture capital is still relatively new and underdeveloped. A number of international venture capital offices had to close down here due to lack of government support, among others. "In countries like Singapore, Hong Kong, Taiwan, venture capital is strongly supported by the government. In Singapore, almost all the local venture capital firms have government equity in them and all of these governments gave strong incentives. That is one of the things that has not helped the local [venture capital] industry to grow."

Guilly said local entrepreneurs don’t understand the nature of the Silicon Valley model. "We run into so many of them [entrepreneurs] who think of what they believe the company will be [worth] in x number of years time, and that’s the value they want. They feel they are giving up too much if they don’t get that. Those future cash flows are not yet realized, and there is a big risk, and there are a lot of stumbling blocks along the way." He said many local entrepreneurs who approach venture capitalists forget that.

"Secondly, they don’t appreciate the valuable contributions that various groups need to put into it along the way to make it grow into what it should be," referring to venture capitalists like him. "They [the entrepreneurs] feel it’s a done deal."

"Because of this, there have been a number of deals we have declined to do here. In fact, people in the States are more reasonable. You can get a more decent deal. The way I look at it, [local entrepreneurs] shouldn’t be too worried (about diluting their ownership to venture capitalists] because with the venture capitalist, they create much more value, the guy who started the project still owns the majority, and therefore gains the most from it." I added that 100% of zero value is still zero. This referred to the futility of trying to hold on to ownership even if venture capitalists could offer to grow the value of the company, that it is better to have a smaller percentage of a big amount.

"In some of the deals we’ve done in the Philippines [such as the Ambergris call center, the guys who made the real killing were the proponents who started it. We didn’t do one-tenth as well as the proponents did." He said entrepreneurs think, "Hey, these guys [venture capitalists] will get something for nothing, that they are getting too much," adding these entrepreneurs forget they would have never gotten the funding if they didn’t approach the VCs to get to the point where they would become big enough to be able to do an initial public offer or be bought out by a foreign group.

RETURNING TO SET UP VENTURES

Well, I thought, its great to have money, but who has the ideas worth investing in? So I asked him if most of the ideas came from returning Filipinos or home-grown ones.

"I’ve seen a mix of people coming home and home-grown start-ups, but mostly at this point home-grown. In fact some of those who have gone into start-ups have done it in the States rather than here. There are a number of successful people in the States who are entrepreneurs and who are Filipino."

Guilly said we should encourage more of them to come back. "But to do that they have to see the development, and this is where the incentives come in. A climate that’s friendly to entrepreneurship, this definitely means less government bureaucracy and much faster reaction time for people who’d like to do business in the Philippines."

STOCK MARKET

Noting that US companies like Intel, Microsoft, Cisco and Apple wouldn’t have made it without a small business friendly stock market like the NASDAQ, I asked him whether it was important to have a local stock market friendly for entrepreneurs, or if having them list in the regional bourses was adequate. He said that a good stock market should not only be good for entrepreneurs, but also for the country as well.

"Unfortunately, at the present time, the stock market isn’t that active. It’s not the boom years. But for example, our investment house took Ionics public here in the Philippines. That was a startup by Larry Qua. But we have also helped two companies list in Singapore. Ionics and Fastech of Bong Belen have listed in Singapore." He added that a company of the Concepcion family listed in the NASDAQ. "When you are listing abroad, you have to convince an investor in, say, Singapore that it’s okay to invest in a company in the Philippines."

DIVERSIFICATION OF INVESTMENTS

Guilly told me that they were not just purely invested in technology. For instance, they also have an investment in hypermarkets (Shopwise, together with the Tantoco family). "If you’re in the States, you can afford to say, "I will only be in this end of the tech market." I will only specialize in electronic hardware of a certain type. But certainly the market in the Philippines is not that large," he said, referring to a lack of deal flow that would allow them to simply concentrate on technology opportunities locally.

GOING INTERNATIONAL

Guilly told me they have gone international because the world is now borderless. "We also have a venture capital company in the States that directs investments into opportunities there. In fact, we have an office in Palo Alto [California]." He mentioned of frequent videoconferencing with investor companies and other venture capitalists in the US.

UPS AND DOWNS

I asked him if there was ever a point in his life that he felt like quitting and immigrate abroad. "I never had that thought. Maybe I have always been optimistic. When I decided to go off on my own [to start ICCP, a number of people expressed concern that, wow, what you are doing is a very brave thing. But I always thought I would succeed in it." He added that ICCP’s forays into hypermarkets and real estate were tests for them; "I don’t think I have wavered in [those tests]."

PROUD MOMENTS

"In venture capital, what makes me very proud is the fact that we have gained recognition as a venture capital group even in the States. And now, we are sort of talking on equal terms with a number of major, smaller sized VC players even in the States. We normally make an investment of $1-2.5 million dollars, that’s our investment size."

Guilly said their original concept was to always help entrepreneurs in the Philippines. "If we would not be able to do these $1- to $2-million dollar investments, most of the entrepreneurs would be swamped. Very few of them would qualify for our investments. So we’ve always tried to keep our investment size small enough so that we could [help] our Filipino entrepreneurs."

PRINCIPLES HE LIVES BY

Recalling that many senior executives would often have symbols to help them make decisions, I asked Guilly if he had any role models, quotations or tokens he would turn to if he was about to embark on a major turning point. "I don’t have any quotations but I do have an underlying principle Id like to live up to. I always like to do my best to ensure that the deal is fair for both sides. Do your best to make both sides happy. Otherwise don’t do it."

So, there you go. An honest-to-goodness venture capitalist tells his thoughts to us, right from his nest. I leave, oblivious to a crew who are about to do a photoshoot on him.

Come to think of it, don’t you wish there were more guys like him?

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