No country for unicorns: why Philippine start-ups are struggling
- Last year, the Philippines got just a tenth of what its neighbour Indonesia received in start-up investment deals
- Analysts say inexperience and an aversion to entrepreneurship may be to blame – and a new law to assist tech start-ups may help
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While many surveys suggest the Philippines does at least have one unicorn – Revolution Precrafted, a property tech firm specialising in luxury prefabricated homes – it is largely seen as an anomaly.
The lacklustre performance can be partly attributed to the country’s inexperience in the sector. Many pitches for funding were copies of successful start-ups in Silicon Valley, according to Minette Navarrete, president of Kickstart Ventures, the largest venture-capital firm in the Philippines. Some showing promise tended to fall for bad deals early in the growth of the business.
Policymakers and local investors initially saw tech start-ups as small and medium-sized enterprises, subjecting them to traditional business expectations.
“I’ve met local investors who asked for dividends and return on equity at the first meeting,” said Paul Rivera, CEO of skill-matching job marketplace Kalibrr. The start-up has raised US$9 million so far, but foreign investors provided the bulk of the funding.
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Investors who understand the start-up community and are willing to provide capital remain few and far between in the Philippines.
A survey by public-private incubator QBO Philippines of the local start-up ecosystem revealed that there were fewer than 100 official VCs and angel investors in four key start-up hubs in the country, including Manila.
“Some founders may seek mentorship from entrepreneurs who may not have had experience in the start-up scene, and so they get traditional advice, which isn’t always applicable to a start-up seeking scale early on,” said Natasha Bautista, head of operations at QBO. “Scaling isn’t always about turning a profit in the first year, which is still hard to understand for some local investors.”
A lack of risk-taking is also apparent among start-up founders. Bautista, who has led start-up roadshows in 15 cities across the Philippines with QBO, said that while there was general interest from the public in setting up companies, following through had always been a challenge.
“For a lot of Filipinos, the goal is either to go abroad or to work for others’ businesses,” Bautista lamented. “I feel we’re not trained to have our own company.”
Indeed, the two biggest contributors to the country’s economy are remittances from overseas Filipino workers and the US$23 billion business process outsourcing industry that employs more than a million people.
Entrepreneurship is not always the first option for Filipinos, many of whom seek a more stable path.
“We need a real winner in the local start-up scene so that people may understand, from the government to the communities, what it takes to be a successful start-up,” Navarrete said.
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“Deals like that help give good publicity to Philippine start-ups. They give international investors insight into the activity happening here,” said Vincent Lau, founder of Maria Health, the first insurance aggregator in the Philippines.
Maria Health has similarly attracted sizeable investments from abroad, raising US$1 million so far, according to Crunchbase, a platform for finding business information.
Rivera echoes the sentiment, especially after encountering cases of foreign investors pulling out of deals as a result of the country’s political climate.
“The Philippines’ PR to the international community has not always been positive,” Rivera said. “We have had instances where investors backed out, maybe because of what our president had said, or fears of potential instability.”
But investors may be slowly warming to the Philippines. Since the start of the year, three venture-capital funds have been set up, two of which are led by the country’s biggest conglomerates in a bid to take part in the buzzing investment activity in the Philippines and the rest of the region. In May, Kickstart Ventures launched the Ayala Corporation Technology Innovation Venture Fund, which is worth US$150 million and named after the diversified conglomerate owning Globe Telecom.
A week later, listed conglomerate JG Summit Holdings, which has interests in retail, food and airlines, launched a US$50 million venture-capital fund.
While the two firms had investments in start-ups in the region before the funds’ establishment, their announcements signalled the formal participation of the country’s largest corporate players, a development long sought by the start-up community.
“It’s a signal that we have serious money,” Navarrete said. “The challenge now is to look for investible start-ups.”
Policy-wise, the ecosystem is also transforming, after the government enacted the Innovative Start-up Act into law in April, institutionalising support for tech start-ups. Its Implementing Rules and Regulations (IRR) are still being processed, but the fine print already calls for subsidies in business-permit applications, visa programmes for foreigners establishing start-ups in the country, and even investment funding.
One of its most potentially impactful provisions is the establishment of the Start-up Venture Fund, which seeks to match investments made by selected investors in local start-ups.
The law aims to solve the two most pressing problems local start-ups face in their first year of operations – funding hurdles and regulatory constraints – according to a 2017 industry study by accounting firm PwC.
While promising on paper, the start-up community is withholding its excitement as it awaits the IRR. For one thing, it may take a while before it gets fleshed out. Former senator Bam Aquino, the law’s main author, said the government was hoping to have the IRR’s first draft published by next month. That is already way past the initial deadline imposed by the law, which is 60 days after its publication.
Sources familiar with the situation said public consultation started only last month.
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“More pronounced support and mentorship by smart, institutional investors and angels will be far more impactful than any legislation passed by the government,” said Justin Hall, a partner of Singapore-based venture capitalist firm Golden Gate Ventures.
“That, combined with successful entrepreneurs that reinvest their time, energy and resources in the ecosystem, will drive more value than anything the government can hope to achieve.” ■
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