The Regulatory and Market Environment for Startups in the Philippines

Atty. Karen Jimeno, Director & Chief Legal Counsel, SofCap Partners Ltd.

Atty. Karen Jimeno, Director & Chief Legal Counsel, SofCap Partners Ltd.

The Philippines is the most oligopolistic country in the region and the willingness to invest of monopolies and oligopolies “is inhibited by their concentrated ownership structure”, laments a lawmaker pushing for investment reforms in the country (Department of Interior & Local Government, 2021).

Micro, Small, and Medium Enterprises (MSMEs) account for about 99 percent of total business establishments and employ at least 63 percent of the Philippines’ workforce (P&A Grant Thornton citing the Philippine Statistics Authority, 2020). Yet monopolies and oligopolies still dominate most sectors in the Philippines (agriculture, manufacturing, and major services such as electricity, water, wholesale & retail, drug stores, telecommunications, ports, transport) (Aldaba, 2008) and—compared to MSMEs—collectively generate higher revenues and gain more access to financing. 

Changing the Landscape: Policy & Regulatory Environment for Startups

The government has embarked on several efforts to change the business landscape of the Philippines which includes, among others, enhancing the country’s competitive environment, supporting MSMEs, and encouraging the growth of startups.  In the recently enacted “Innovative Startup Act of 2019” (Startup Act), it is a declared State policy “to foster inclusive growth through an innovative economy… and an innovative entrepreneurial culture in the Philippines.”  The Startup Act provides incentives for, and removes constraints to the establishment of startups and startup enablers. 

Incentives for startups include subsidies for costs of permits and other business registration requirements; expedited processing of government requirements; subsidies for the use of facilities, office space, equipment, or services provided by government, private enterprises, or institutions; use of repurposed government spaces and facilities as the startup’s registered business address; and Grants-in-Aid (GIA) for research, development, training, and expansion projects.  Host agencies (Department of Science and Technology, Department of Information and Communications Technology, and Department of Trade and Industry (DTI)) each have a Startup Grant Fund (SGF) to provide GIA for startups and startup enablers.  A Startup Venture Fund under the DTI was established to match investments by investors in Philippine-based startups.

Apart from financial incentives, the Startup Act provides development support such as linking startups with potential investors, mentors, collaborators, and customers through participation in local and international events (startups enjoy prioritized processing of travel documents, subsidies for fees and costs related to travel documents and baggage allowances, subsidies for airfares, and per diem allowances). 

Special visas were created by the Department of Foreign Affairs specifically for key roles in startups or startup enablers: “Startup Owner Visa” for prospective or current foreign owners; “Startup Employee Visa” for foreign employees; and “Startup Investor Visa” for prospective or current foreign investors. 

Additional incentives can be enjoyed by startups and startup enablers by locating in “Philippine Startup Ecozones.”  The creation of these zones was mandated by the Startup Act to extend the incentives and benefits of “The Special Economic Zones Act of 1995” (Republic Act No. 8748) to startups and startup enablers located in Special Economic Zones.  Benefits under this law include income tax holiday or 100 percent exemption from corporate income tax for a given number of years, tax and duty free importation of equipment, exemption from wharfage dues and export tax, zero rating of Value Added Taxes, and exemption from payment of local government imposts, fees, licenses or taxes. 

In terms of cultivating potential startups, the Startup Act mandates the Department of Education, the Commission on Higher Education, and the Technical Education and Skills Development Authority to develop and integrate entrepreneurial programs that foster an innovative environment, and to provide academic institutions funds or grants for research of their students and faculty.

Innovation is key to being categorized as a startup.  Any person or registered entity in the Philippines which aims to develop an “innovative product, process, or business model” falls within the definition of a “startup” (Startup Act, 2019). Depending on its size and the nature of its business, a startup may be entitled to additional benefits or support as an MSME. 

An MSME is any business activity or enterprise engaged in industry, agri-business and/or services that have assets (less land) of up to PHP100 million (around USD2 million), and less than 200 employees (Republic Act No. 9501 or the Magna Carta for MSMEs). 

The Magna Carta for MSMEs established a Venture Capital Fund and a Micro Finance Trust Fund to provide venture capital finance for MSMEs (especially in technology-oriented industries), and collateral-free loans for MSMEs emerging out of poverty, respectively.  The newly legislated Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act of 2021 reduced corporate income tax to 20 percent for MSMEs whose earnings do not exceed PHP5 million (USD100,000).   MSMEs also received additional support amid the COVID-19 pandemic, such as wage subsidies to employees of MSMEs (Small Business Wage Subsidy Program), a grace period for loans, and a grace period on commercial rent without incurring interest, penalties, fees, and other charges.  Beyond the COVID-19 pandemic, the DTI launched the “Livelihood Seeding Program – Negosyo sa Barangay” which allocated PHP203 million (USD4 million) to provide a package of livelihood kits and business advisory assistance and services to MSMEs affected by natural and human-induced calamities including health disasters.

Market Environment & Prospects for Startups in the Philippines

There was already a burgeoning startup ecosystem in the Philippines prior to the enactment of the Startup Act.  In 2017, there were 300+ startups, 20+ incubators/accelerators, 30+ co-working spaces, 20+ venture capitalists, and 30+ angel investors (Philippine Startup Survey, 2017).  During this time, the Philippines’ startup ecosystem ranked 70th in the world out of 100 countries (rated based on the activity level of the ecosystem such as number of startups, coworking spaces, accelerators, and meetups) (Startup Ecosystem Rankings, 2019).  By 2020, the startup ecosystem had increased to 400+ startups, 35+ incubators/accelerators, 120+ co-working spaces, 40+ venture capitalists, and 50+ angel investors (Philippine Startup Survey, 2020).  While the increase does not seem drastic, the rise of the Philippines to rank 52nd in the world indicates a substantial improvement in its startup ecosystem relative to other countries (Global Startup Ecosystem Index, 2021).   Manila (the Philippines’ capital city) ranked 87th among 1,000 cities in the world in 2021, advancing by 819positions from its rank in 2017 (Global Startup Ecosystem Index, 2021) and 36th in Startup Genome’s Top 100 Emerging Ecosystems (GSER Global Startup Ecosystem Report, 2020). Metro Manila’s startup ecosystem is valued (based on startups funded and exited from 2017to the first half of 2019) at USD1.6 billion (GSER Global Startup Ecosystem Report, 2020). 

Even before government support was embodied in the Startup Act, the private sector has consistently played a key role in supporting the Philippines’ startup environment.  Funding or investments in startups typically come from family offices, and angel investors/high net-worth individuals (representing over 70 percent of total funding). Private equity (PE) firms, Venture Capital (VC) firms, and corporate/strategic investors each provide an average of around 12 percent of investments in startups (Philippine Startup Survey, 2020).  These financing sources helped overcome formidable barriers to entry such as the Philippines’ underdeveloped financial markets and the lack of access by small/new enterprises to bank financing. 

PE and VC firms have been significant in boosting startup deals.  From 2018 to the first half of 2020, private equity funding accounted for 63 percent (or USD347 million) of total startup deal value in the Philippines (Philippine Venture Capital Report, 2020). Although deal count is low at five deals, median deal size (around USD80 million) greatly exceeded other forms of funding.  The low deal count reflects the minimum check size that is usually required for PE firms to fund startup deals.   In terms of deal count, early-stage VC firms, incubators, and corporate VC arms were the most active, accounting for 49 percent, 18 percent, and 8 percent, respectively, of the 107 deals completed over the same period (Philippine Venture Capital Report, 2020).

Since the incentives and programs from the Startup Act are recent and have not been fully implemented, we have yet to see the full effects of government support in furthering the growth of the Philippines startup ecosystem.  Meanwhile, the prospects for startups in the Philippines seem promising. 

The number of fintech startups is growing at an average rate of 16 percent per annum and comprises 26 percent of total Philippine startups (Philippine Venture Capital Report, 2020 citing the DTI).  Prior to the COVID-19 pandemic, fintech already attracted almost 80 percent of startup investments in the Philippines due to the growth in financial inclusion and digitized financial services (Philippine Venture Capital Report, 2020). Last July 2021, fintech startup NextPay (launched in 2020 during the pandemic) raised USD1.6 million in a new round of seed funding.  The amalgamation of VC funds and local and international investors (which includes Singapore-based Golden Gate Ventures, and US-based VC firms Goodwater Capital and Tribe Capital) that participated in the funding for NextPay denotes the wide scope of potential funding sources for Philippine startups.  Also notable is the interest from large Philippine conglomerates (also linked to some historical business oligopolies) that invested through their VC/investment vehicles, such as the SM Group/Sy family’s Gentree Fund and Ayala Group’s Kickstart Ventures. 

Rather than viewing startups as competition, there’s a growing interest among Philippine conglomerates to invest in startups.  A few months ago, Philippine media company GMA Network launched GMA Ventures to invest in technology startups.  GMA Network joins other local conglomerates that have launched venture capital units: the Ayala Group with its USD150 million VC arm Active Fund, JG Summit with its USD50 million JG Digital Equity Ventures, and the Sy Family’s USD40 million Gentree Fund.

Within the next few years, a lucrative future for Philippine startups is expected in fintech, medical and healthcare, education technology, and e-commerce.  These are sectors where startup ecosystems like Manila can flourish, which scored favorably in market reach and talent in Startup Genome’s rating for Top 100 Emerging Ecosystems (GSER Global Startup Ecosystem Report, 2020).  The Philippines’ young population is also a favorable demographic trend that can supply the talent pool and dynamic environment required to fuel startup ecosystems. 

Weekly Brief

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