Venture Capital in Asia? Think Philippines

It's hardly the new China, but Manila's Ayala-led science park—in a country culturally close to the U.S.—could appeal to U.S.investors

by Bruce Einhorn

If you're an investor thinking of putting some money into research and development in Asia, you're probably going to look at China and India, maybe Vietnam. It's unlikely you're considering the Philippines. The country is known for its call centers, and the semiconductors which make up 70% of its exports, thanks to factories like Intel's (INTC) semiconductor packaging plant. But the Philippines isn't exactly a hotbed of innovative startups and entrepreneurs.

Dennis Posadas is trying to change that. A 40-year-old electrical engineer and alumnus of the University of the Philippines, Posadas spent 14 years working in the semiconductor industry— for Analog Devices (ADI) and Intel. In 2005 he left his job as a technology business analyst for Intel and joined the Ayala Foundation, the philanthropic arm of Ayala Corp. (AYYLF), one of the largest conglomerates in the Philippines.

Ayala Land, one of the group's companies, has started building a $120 million science park on the Metro Manila campus of the University of the Philippines, with the first buildings due to be finished by the end of the year. Posadas is offering his expertise to help nurture the development of entrepreneurial companies there. Ayala and the university now operate one high-tech business incubator for local startup companies, and have plans to open more.

Calling All VCs

It won't be easy. When it comes to raising startup funding, the deck is stacked against Filipino entrepreneurs. "Here in the Philippines—and in a lot of Third World countries—the infrastructure is really [more] suited for big business," he says.

It's not hard for large companies to get bank loans, but try finding investors interested in putting up capital in exchange for equity. "If you were to hold a convention of loan officers, you would probably need a big hotel to host all of those people," says Posadas. "But if I were to call a meeting of all the VCs [venture capitalists] in the Philippines, I would only need a small conference room to get all of them in."

And the few VCs there are in the Philippines aren't investing big sums of money. William M. Valtos Jr. is president of ICCP Venture Partners in Manila, one of the most active VC funds in the country. He estimates that last year venture capital firms invested about $20 million in Philippine companies. "It's pretty small," says Valtos, whose firm typically invests about $3 million per transaction.

Struggling for Acceptance

That's peanuts compared to China. An influx of funding saw a brisk increase last year—VCs bet $920.7 million on Chinese information technology companies alone, up 34% from 2005, according to a Feb. 13 study from Dow Jones (DJ) VentureOne and Ernst & Young (see BusinessWeek.com, 2/15/07, "VC Players Look East, To China").

U.S. venture capital funds, for example, are helping boost the growth of China's chip design industry, funding new fabless companies such as Beijing-based Vimicro (VIMC), a leading designer of semiconductors for PC cameras. The industry is also growing in India, where Taiwan Semiconductor Manufacturing (TSM) recently opened an office in order to be closer to the country's new chip designers.

But in the Philippines is struggling to win acceptance, says Victor B. Gruet, chief executive officer of three-year-old chip design startup Symphony Consulting. His goal, he says, was to model the company on some of the successful Taiwanese companies that design integrated circuits (ICs) and become accepted as a partner.

Former U.S. Colony

"I thought it would be easy to join the Taiwan IC design supply chain," he says.