Miguel Encarnacion of Unifier Ventures Shares a Global View of a Local Market

As the 2019 Philippine Startup World Cup drew to a close, it became clear capital constraints are still the primary challenge for many startups.


We speak with Miguel Encarnacion, Managing Partner at Unifier Ventures, on the present and future investment landscape. After starting his career in corporate banking, Miguel managed a family office, eventually segueing into venture capital. His experience across different types of funds and companies gives him a holistic perspective of the startup ecosystem.


The conversation has been edited for length and clarity.


Tell us about Unifier Ventures.


Unifier is a cross-border, early-stage micro-VC. We’re a VC raising EUR25 million to invest in early stage tickets — between  EUR200-500,000 in Europe and between EUR 50-250,000 here in Asia. We want to come in, say, second or third round of funding, and help startups scale in these two regions.


Our view is cross-border in the sense that we help the European companies we invest in access Southeast Asian markets. For Asian startups, we help them access European capital. These two regions are complementary in what each brings to the table. Being cross border allows us to help in different ways.


Can you tell us how you came to this fund structure?


I started building the investment thesis for Unifier when I was still working for a family office here in Manila. One insight we had while looking at the market was that the most successful founders in the Philippines were either  US-educated Filipinos or Europeans. But why? I think it’s because those guys had a leg up in terms of understanding the venture cycle — in other words, fundraising. They had a huge advantage because they understood the different types of investors and how communication should differ across each type. And obviously they had more access to those investors. I migrated to Germany to serve as my base for investing in these European founders, before they even make the decision to expand.


On the other hand, we also want to help our Asian portfolio companies — the largest gap we see is access to funding. Our view is that European funds will begin to look at Asia in the coming years because it's the fastest growing digital market. And once they start raising their Asia-focused funds, Unifier is in a prime position to guide them to the right deals — co-investing or showing them our portfolio companies. I guess that's a medium-term view. We're investing in Europe to build a network of investors who will come to this region in the next few years. Hopefully that solves the Philippine funding gap, which is also reflected in the region.


Where do you think the gap is?


As an entrepreneur — even a really good one — if you don’t understand the investment cycle, there’s always a natural ceiling. You’ll raise your angel round or your seed round. But once you get to Series A and above, finding a fit is hard.


How can the Philippines address this capital issue?


Education: a broader macro view of the venture landscape globally. I always like to say that the job of educating corporates and  other growth stage investors, it shouldn’t fall on the lap of the startup. It shouldn't be the founder's role to educate them. That job falls on seed investors. A venture fund that focuses on early stage… these are the guys who need to be educating angel investors, corporates, on how to do deals properly. In a proper startup ecosystem, all the different types of investors play different roles.


Did your experience from banking, the family office, and now this fund give you an idea of what role each investor type should play?


I think it's good to see what goes on behind closed doors. Coming from banking, I understand the entire approval chain and how everything is structured. Having seen that, I also know which types of startups should be speaking with banks. Some kinds of business models naturally work much better with a bank because there's some other value they bring to the table.


Moving from banking to family offices... Family offices have a multi-asset class approach. I wasn’t just doing lending, but small cap private equity deals which allowed me to broaden my scope — not just in terms of industries but also the network I have. I met many PE funds that I think could become a good source of funding for growth stage tech startups, which is not necessarily the case in developed markets because there's a clear delineation between private equity and venture capital.


As I began to work on a multi-asset class strategy, I realized the role of venture. I like early stage because it's a very different mindset. I always say I went from the top 100 corporations (large enterprises) to top 1,000 (middle market), to top 10,000 (SMEs) and now with startups I get to look at that entire world of companies. As an early stage venture fund, you're coming in at the ground level and need to get your hands dirty. A lot of these founders still need help and they want you to help. That's very different working in a bank where they give you the money and they want you to know what you need to do with it. Very different approaches. But they're all helpful in their own ways, depending on what you're doing.


Can you share your view about which investor types go with which types of companies?


Let's start with banks. I think anybody with a tangible product — like these platforms with a direct to consumer model — work very well with banks. Because there’s something to discuss beyond equity. There’s something to hold on to. Some form of collateral, anything that can be securitized — that's what banks understand. Then once you established a track record and traction, you can look into PO financing, receivables financing, inventory financing. And if you find a bank that has a venture arm, you can get access to it at some point.


What about family offices?


In Asia, family offices are not yet at the level of sophistication of family offices in the US or Europe — many still have a strategic investor mindset.  They don’t see a venture case, they see you as a target acquisition. So they’ll put money into your business if they see your offering has clear value add to one of their core businesses.


If you're a startup and see yourself growing really fast and big, it may not be the best approach to go with a family office right now because most see you as an acquisition. Once you’re acquired, it’s often command and control, which limits your ability to grow fast.


Are family offices starting to change in Asia?


They're starting to change — maybe from their failures. A lot of family offices here have done direct equity investments, bringing in this mentality of control... and some of them have already seen it doesn't work in this venture space because it's all about flexibility and autonomy. Startups need to be able to move fast. These family offices that have come in and acquired majority, got control, they saw, “Oops, that didn't really work out.” So yes, that mindset is changing now, but it's slower than I want it to be.


What about VCs?


Well, in the traditional venture case, you have technology that's industry changing — it has to be something that doesn't bring marginal value but orders of magnitude value. You need to be improving something by a factor of 10x or reducing costs by 90%. These are big impacts and those are the kinds of industry moving technologies that should allow you to think bigger.


In the Philippines, for a lot of the stuff I see, they’re still marginal improvements — digitizing a lot of these very manual industries and processes. That's not a bad thing, right? But I don't necessarily think those are venture cases. For that kind of situation, it might make more sense to find a strategic investor who understands the space and can make the right introductions for you. You don't even have to be acquired. You can turn it into a lifestyle startup where you hit a plateau, make  stable profits, and then start issuing dividends. But that's not something you want to do if there is potential of growing really fast.


If you're a startup in the Philippines, how should you look for and talk to investors?


It's a very small market here and that's a good thing. All you need to do is attend all the events over a three to six month period and you’ll know anyone doing anything in the space. It's easy to figure out who the active players are, but what startups need to do is reposition themselves — they can't come to the table and always take an inferior position. Investors can’t and shouldn’t dictate everything.


What I see here is startups going and pitching... but not even asking any questions of their investors. This is very different from what you see in Europe. There, startups come to the table and ask investors 20 questions first. When they think, “This is the type of investor I should be talking to” — then they'll pitch you.


What should startups ask investors?


Investor’s backgrounds in terms of industries or functional areas so you understand how they can help you. Also, what sort of deals investors have done: ticket sizes, volume, how often do they invest. And then the decision process —how long does it take from meeting to fund disbursement.


You need to know these things. Because as a startup, the worst thing is being strung along by an investor. You meet, you think, “That was a good meeting.” But behind the scenes, the decision process is six months... nine months... one year... and that's way beyond your runway. We have a hard time pushing investors here — Asian culture is more deferential. But if you're a startup, you have to think globally, put yourself out there, and ask uncomfortable questions. You have to because that's how you survive.


We’ve covered a lot. Any other advice for startups?


Global perspective is very important. Startups need to have a broader, macro view. You need to know your competition.  As an investor, you see good ideas addressing a good market, you know that everyone will want to do that. Everyone will put money in that, right? For things that are obviously good, there will be 10, 15 other guys trying to do what you’re doing. So how do you differentiate or do it better? A lot of Philippine companies, they have business models that have been done many, many times in the US and across Europe... you can see what those guys got right or where they went wrong.


So market insight is one. The other is access to capital. Unfortunately, we don't have enough capital in the Philippines. But there's so much money startups in the Philippines can get access to. There are acceleration programs in Singapore that take Philippines startups. They guide you, they mentor you.


And not just in Singapore. Right now, Europe is a very good place to be for startups because the European Union is making a big push in tech, SME, R&D. There's a lot of what I call “free money.” They come in the form of grants without expected equity. They give it because they just want to generate innovation in the region. I've seen some Philippine startups already work on accessing that — they apply for an acceleration program in Amsterdam and then go from grant to grant. With this sort of grant, as a startup, you're able to build your product cheaply because you're not giving equity out in the early days. There's free money out there. Take it.


Learn more about Unifier Ventures at unifier.vc