Eric Manlunas is the founder of one of Silicon Beach’s most unusual venture capital funds, Wavemaker Partners.
His Santa Monica-based firm, which focuses on early stage investment across a variety of industries, splits its operations between the United States and Southeast Asia. The company was an early backer of local successes like Cerritos-based compliance software provider Audit Board Inc. and Sherman Oaks-based accounting software provider Floqast.
In addition to Wavemaker’s core investments, Manlunas also oversees Wavemaker Labs, an early stage technology incubator that has produced products such as the “Flippy” fry cook robot used at Dodger Stadium and at Caliburger’s Pasadena location.
Wavemaker also anchors partner fund Wavemaker Three-Sixty Health, a health care venture fund based in Pasadena.
Manlunas’ firm has invested in more than 350 companies across its 17-year history and currently has $400 million in assets under management. The Business Journal had a virtual sit-down with Manlunas at his home office where he is sheltering in place and remotely managing Wavemaker’s operations.
What first got you interested in entrepreneurship and the startup world?
I was born and raised in the Philippines. I grew up in Manila. Growing up in a developing country, you see things that you don’t see in a developed market like the U.S. — the way that businesses and entrepreneurship can really improve lives and standards of living. I think even today about 96% of enterprises in the Philippines are what you would consider small businesses.
Was there anyone who particularly inspired you?
I might have gotten my entrepreneurial spirit from my grandmother. After World War II she started an apparel business. That was how she supported my mother.
Growing up I heard stories from her about how the business world works. I think those stories she told me shaped my views.
How did you get started in business?
I graduated (from college) in 1990. I moved to L.A. and got a job with Arthur Anderson’s retail consulting business. That was my first and only real corporate job. When I left in 1995, that’s when I decided to start my own business.
What were those early days like?
At that time, I had enough money for about 18-24 months. I told myself that if I couldn’t figure it out in 18-24 months, then I wasn’t going to figure it out.
About a year out, I built my first business. It was an online specialty-food selling company. That was when the internet 1.0 was beginning to commercialize. I sold that in July of 1999 and immediately started another business in the ISP (internet service provider) space.
What was that experience like?
To be honest with you, I didn’t know how to raise money from a VC, so we had to be scrappy. We were sustainable when the dot-com crash happened, so it sucked, but were able to survive. I sold that in December of 2002. Took some time off, did a victory lap. Decided to take my time and think of a third idea.
And what was that third idea?
I couldn’t think of a third idea. So, I ended up becoming an angel investor. I raised a small $8.3 million fund anchored by my own money. That was Frontera Group, the predecessor to Wavemaker. The next fund wasn’t until 2011.
The reason for the big gap was that I never considered myself an actual venture capitalist — just more someone with a pool of funds to make angel investments.
How did Wavemaker come about?
In the back of my mind I was getting the itch for doing that third startup and wanted to leave room for that. It was around 2011 when the itch finally disappeared, and I realized I was a bit too old to do another startup. That’s when I decided to more formalize and professionalize (Wavemaker). The vast majority of growth in Wavemaker really happened in the last eight years.
Wavemaker’s business is split between the U.S. and Asia. That’s pretty unique for an early stage VC. How did that happen?
The structure was a bit of a happy accident. I’ve always been interested in Southeast Asia because of my roots. But I didn’t want to (invest there) without the structure on the ground. VC is primarily a local business. You need to be within striking distance of your founders.
In 2011, I met my (business) partner, Paul Santos. We initially met because he was thinking about investing in our fund. He was also from the Philippines, and we had actually gone to the same prep school.
I asked him, instead of you being a (limited partner investor), I’d like you to be a partner. Frankly, the best career decision I’ve ever made, bar none, was bringing him on as a partner. He’s able to be there on the ground to head our Southeast Asia team.
What advantages did you see in that cross-border model?
The original idea was that there was going to be some cross-pollination between the two sides. That didn’t really happen. We realized that these are two very different markets. Actually, two emerging markets since Los Angeles is really an emerging market for venture capital compared to Silicon Valley.
So then how did you approach those two markets?
We ended up running them pretty much autonomously from each other. I remained as the common denominator as the founder and oldest guy — that’s why I fly back and forth. You do have instances of Southeast Asian companies wanting to come to market in the U.S. and vice-versa, though. That’s happened a few times.
We do that cross-border facilitation whenever the opportunity rises, but for the most part we run both practices autonomously. One family, two different practices.
How has this Covid-19 situation affected Wavemaker’s portfolio companies?
All of the portfolio companies have been impacted. About half a dozen companies have been impacted positively. They’ve turned the headwind into a tailwind.
One of our companies is up 13 times year over year in the same period. Some are up double, some are up 80%. What those companies are doing appealed to that shift in behavior with people being locked in at home.
What about the other half of the businesses?
Most (of the other) companies have implemented austerity measures. Survival has become the priority rather than growth. In startups, it’s normally about growth, growth, growth at all costs. That’s all gone out the window.
Unfortunately, the austerity has led to a lot of cuts. Some of the cuts have included layoffs. It’s all about living to fight another day.
What’s the outlook like for your portfolio?
Most (of our companies) will get through to the other side. It remains to be seen in what form or shape. The scrappier ones will be the ones that make it. It’s not the smartest or the strongest, but the most adaptable ones that will survive.
How do you think we’ll see this Covid downturn affect VC investing?
With early stage guys like myself, there’s no doubt that funding will slow down. I realize that a lot of people are saying they are open for business, but open for business is different from what it meant a few months ago. People will slow down in terms of investing because the calculus of investing has changed. They’ll be asking, “What do I do with my reserve capital? Use it to make new investments? Or follow on with existing companies?”
What else will be affected?
Fundraising is going to slow down, and new investment will follow. We are also doing that calculus. From our perspective, we are leaning toward being conservative — I realize that early stage conservative sounds like a bit of an oxymoron. We are going to continue to make new investments, but fewer of them. We have a few in the pipeline we are going forward with.
Has it changed the businesses that interest you?
It hasn’t affected the types of companies we are interested in, but it is affecting the runway. At this point, we aren’t entertaining any (who have raised operating runways of) less than 15-18 months. The bar has risen a lot more for a lot of investors as far as what to select. You basically have to assume that follow-on financing is not going to be as available as a few months ago.
Having led businesses through the dot-com bubble and the 2008 financial crisis, do you have advice for startup founders and business owners in the current downturn?
First and foremost, don’t panic. If you start panicking, you’re done. Once you realize you’re in a s---storm, you need to think, “How do I react? What’s my plan?”
You have to try and take all the sentiment and emotion out of it. You need to make sure your team’s morale and mindset are in the right place and you need to adapt quickly. If your business is right-sized for the cost structure, you can survive.
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