A once-in-a-generation challenge to save the Philippine startup ecosystem
By: James Lette
Tags: Philippines, Venture Capital, Startup, Angel Investors, Development Finance

The challenge facing the Philippines is unprecedented. A global health crisis wrought by the COVID-19 pandemic has become an economic calamity due to the extreme restrictions on social and economic activity which are the only proven ways for it to be combated.

With the IMF World Economic Outlook forecasting the country’s economic growth will crash to 0.6% in 2020, from 5.9% in 2019, the shock to the real economy and in turn society will be far reaching and long term.

As with all micro, small, and medium enterprises (MSMEs), technology startups have been hit hard by this crisis. In response there are currently 19 programs of government assistance available to MSMEs, in recognition that they are the backbone of the Philippines’ economy (comprising 99% of businesses and providing two-thirds of jobs).

However, due to their fundamental differences with most MSMEs, this support is not available to startups. Loan sizes are either inadequate, or loan criteria (such as required lengths of operation, positive cash flows, debt/equity limits, etc.) cannot be satisfied by most startups.

Much of the Philippine startup ecosystem is close to the point of bankruptcy or closure. A collapse in consumer demand, an inability to provide services during the Extended Community Quarantine (ECQ) period and soaring corporate late payment rates as cash flows tighten, have significantly affected startup revenues and compressed their runways.

A generation of Filipino startups could be wiped out without further specialized liquidity support.

Not a handout, an investment in the Philippines’ future.

Offering handouts to startups beyond that available to other MSMEs is not the right response.

This crisis has created a long list of needs in the Philippines. Studies suggest that about three out of five Filipinos have limited capacity to subsist without additional support if community quarantines are extended beyond one month.

With unparalleled demand, the government cannot provide direct support to all sectors. Scarce taxpayer funds need to be used where there is the greatest need to respond to human suffering and stabilize the economy.

Rather, mechanisms are required to serve as a powerful catalyst to unlock private sector support for startups, to ensure that they receive enough liquidity investment to remain viable and survive this crisis.

The Manila Angel Investors Network calls for the establishment of a Development Finance Institution-backed blended finance facility to issue bridging finance, alongside private sector funds, in the form of convertible loans, to technology startups impacted by COVID-19.

Such catalyst is bridge financing would incentivize individual and corporate investors holding on to their cash reserves to back Filipino early stage technology companies in a meaningful way.

For use solely for working capital purposes, it is intended to mitigate the immediate impact of the COVID-19 liquidity crunch, instead of stretching the impact over several years.

Its focus of support would be on funded startups-seed stage and onwards-to ensure it backs only startups that have a chance of commercial success beyond COVID-19. Unfunded businesses would not be supported, as these have a high chance of failure even in a stable economy.

Such a fund should also have the option to do invoice factoring, that is, provide startups with cash flow by purchasing their outstanding credit worthy invoices.

As a matched fund it avoids damaging or distorting the ecosystem, as it:

- does not prop up unsuccessful companies or investors,

- limits the risk of the government spending taxpayer money on poor businesses,

- is structured to give taxpayers upside, in effect a loan, and

- requires skin in the game from the private sector.

This action needs to be taken quickly, as any delay will prove fatal for startups, which may be down to as little as a few weeks of cash runway.

Why save Filipino startups?

Startups have a high chance of failure, even in a stable economy-so why not let them?

Simply put, the current crisis is not normal market risk, and its impact will decimate Filipino startups across the board. The Philippines will be losing good companies with the bad. As a result, it will:

- lose talent,

- lose a key driver of economic innovation which develops new products and helps power exponential growth, and

- lose all the hard work from a generation of investments made into the startup ecosystem.

Petr Sadlacek, a professor of economics at the University of Oxford researching startups for the European Commission, found that startups “are the ones that create the jobs.”

“Almost 100 percent of the new people hired in an economy come through startups and young firms,” he said. “The large firms are where most people work, but the startups are where jobs are created.”

Further, the impact of COVID-19 is not gender neutral. Women founders will be disproportionately impacted by the current crisis. Less than a quarter of startups in the Philippines are founded by women. In normal times, venture capital does not support female startup founders. Within the UK, for example, only 1p of every £1 of venture capital goes to women-led startups. This disparity will be felt for funding raised during this crisis period.

For this reason, MAIN calls for greater support for women owned or led startups during this crisis, and recommends that a higher level of leverage be provided by the proposed fund.

Most importantly, without action, the Philippines will be left behind, and startups domiciled in other ASEAN countries will capture our home market. Those startups that survive these times will be positioned to dominate the ASEAN markets. With the government of Singapore providing a 75% wage subsidy and deferred low interest bridging loans (up to SGD$5 million) providing cash flow support, their startups will preserve their capacity and capabilities, hitting the ground running once their ECQ is lifted.

We do not believe the future of the Philippines is served by standing by and doing nothing. Together with the private sector, we can unite for the survival and growth of Philippine startups that drive job creation and deliver compelling solutions to the country’s pressing needs.