The year 2017 saw a clear slowdown in venture capital activity in the Philippines as the country reported fewer deals this year than last year. Only 10 VC deals were reported as at November-end, compared to 21 deals in the previous year, according to data compiled by DEALSTREETASIA.
The silver lining to the cloud? The country now boasts of over 300 startups, over 30 angel investors, and more than 20 VC firms, and a growing number of incubators/accelerators, according to a recent research done by professional services firm PwC Philippines.
This portal asked the leading players in the country’s investor community — Kickstart Ventures Inc president Minette Navarrete, Original Pitch VC partner Francis Simisim, innovation hub Launchgarage CEO Jay Fajardo, Gideon VC general partners Geoffrey Nuval and Edison Tsai — to share their views about deal flows in 2017 and challenges towards developing a robust startup pipeline in the country.
How do you view the venture capital space in the Philippines as it stands now?
Nuval (Gideon VC): The VC atmosphere in the Philippines is still in its infancy. It’s still very small and raw compared to other SEA countries, but definitely, we have a lot of untapped potential and talent. The deal sizes are small compared to other SEA countries. Case in point, it was only last October when we got our first Unicorn. There aren’t a lot of syndicated deals, most of the VC deals are 1:1. The progress is a bit slow.
Southeast Asia got $8 billion in funding from 2012 to 2017. Singapore leads followed by Indonesia, and Philippines is not even on the map. But it is in this vacuum we at Gideon see the opportunity because the talent, energy, and market are already present.
Simisim (Original Pitch): The tech VC space is still in its early stages. There’s only a handful of tech VCs around and funding is still scarce for startup founders. We expect this to improve as more and more solid startups are popping up and there’s significant interest from international investors to enter the market.
Fajardo (Launchgarage): It still far off from the regional standards, even by the standards of young startup ecosystems such as Vietnam and Thailand. There have been murmurs of small-scale funds (up to $10 million) that were going to happen this year or early next year, but apart from Kickstart Ventures’ activity and some investments by funds from Singapore and Japan, there aren’t any signs of serious institutional VCs actively deploying cash in our ecosystem.
Navarrete (Kickstart Ventures): I think the venture space in the Philippines is evolving. There have been venture investors for quite a number of years, but historically they’ve been actively investing in the more established businesses and industries ― so verticals like real estate, brick-and-mortar retail, food processing, and apparel manufacturing, and similar industries where the assets are tangible and the business models are well-established have received investment.
Do you think the local venture community is found wanting? If yes, what are the issues? And what can be done to address these issues?
Fajardo (Launchgarage): Yes, offhand in a way. I think there is a lack of local investors that are willing to play the role of LPs in a space that they know very little about, and second, international sources of VC funds are looking more in the direction of mature spaces such as Indonesia, Thailand, and Singapore. It’s important for the local startup community to drum up attention and educate local/foreign investors about the various opportunities in the startup space. Personally, I think that the fact that the Philippines does not have a local tech/startup journal covering the scene plays a big role in the lack of attention and knowledge.
Nuval (Gideon VC): One probable reason is that VCs in the Philippines tend to work in silos. Many international VCs based in Europe, Asia and USA have approached Gideon to work on deal flows together. But it’s very rare that local VCs start a conversation or collaborate on funding. We don’t have enough risk-takers in the startup scene. There is a scarcity of risk-taking founders and startups. We keep seeing the same startups in various VC events and pitch competitions. Even the incubators and accelerators are all fighting for the same pie. It’s very limited as of now. The local venture community can do a lot more in encouraging more aspiring technopreneurs or founders. In general, there needs to be more dialogue and collaboration between the various VCs in the Philippines.
Simisim (Original Pitch): Yes. There are several key issues ― exits, corporations, and experienced founders. Exits are still scarce in the local market, and we need more of those stories to encourage more investors to come and invest. There should be a way for corporations to support local startups by working more closely with them, leading to consolidation and M&A activities. With exits, we will have more experienced founders who have worked to help companies succeed. Scaling up is definitely an issue as it comes with experience.
Navarrete (Kickstart Ventures): I wouldn’t say that the local venture community is found wanting, but we would certainly love to see more investors become more active! This isn’t about “lack of capital” by the way: on the contrary, we believe that there is sufficient capital looking for good opportunities in the region. However, more investors will benefit the community as a whole ― and especially if this brings more diversity in the interests, investment focus, deal stages and cheque sizes, and subject matter expertise. It’s always good for startups to have a range of options; it sharpens discernment about what strategic value each individual investor brings.
Also, because of protectionist measures that were put in place in the last century, foreign investment has been constrained to those industries that were not protected by law. The last few years have shown us changes on both these fronts. The technology space has got quite a bit of attention, helped by consumer adoption of popular apps. And whilst a lot of the technology innovation has been visible in the digital/internet and mobile space, other verticals like agriculture and social impact have gained traction, too. This increased activity and the progress that startups have demonstrated mean that there are exciting opportunities for investors, both local and foreign, to find and fund tech innovation in the Philippines.
In a recent PwC survey among startups, a majority said they are planning to launch an IPO as a solution to their greatest challenge which is “capital requirements”. What can you say about this? Would a local startup exchange help?
Simisim (Original Pitch): Having a local startup exchange, for me, is a double-edged sword. On the one hand, it helps startups raise money easier while, on the other hand, the issue lies with the retail investors investing in a very risky vehicle but understanding the risks is plausible. Generally speaking, this will be a positive thing in the industry, allowing startups to flourish and raise funds easier for their projects and improve credibility being listed on the startup exchange.
Navarrete (Kickstart Ventures): Going public is a valid route to accessing capital, so it would be great to see more startups get to the point where they are able to meet the requirements for operating performance and good governance, as well as the ability to manage a larger set of investors.
Fajardo (Launchgarage): I have four points. First, the IPO has already gone out of fashion in the mature markets, which is why I don’t think this is a good idea. Private equity will always be the faster and more accommodating mode of raising cash. Second, the path to an IPO is exponentially more difficult because of the disclosure and compliance requirements imposed by the PSE (Philippine Stock Exchange). Third, the local market, according to my sources, is only prepared to absorb one tech IPO in a year. It’s not yet comfortable with the concept and we need one serious success story before we can expect it to be excited about local tech startups going public. This, of course, is discounting the traditional tech verticals such as the semiconductor industry. And fourth, more recently, the VC dynamic has been threatened by the emergence of the ICO (initial coin offering). It might still be early days but ICOs have already outpaced traditional venture capital.
Tsai (Gideon VC): We see that a lot of startups in the Philippines are not earning enough profits for them to be considered for IPOs/exits. We need more startups to prove that they can be successful in doing business and making money. The exit potential in the Philippines is only as good as the business performance of the startups.
The greatest challenge is about making a minimum viable product (MVP) that makes a real impact and that people will want to use precisely because of the reason.
Startups should focus on ensuring their users and profits continue to grow even after IPO. A tendency for some founders is to focus on IPO and ensuring maximum valuation of their startup. Every startup wants to go into IPO. That’s everyone’s endgame. The road to IPO is not to design the business model and product so that it can maximize the stock price during IPO. The startup should aim to solve a real problem in society. Create a product that can make a real difference.