What’s holding back the Philippines’ startup ecosystem?

Panelists share their take on why the Philippines isn’t yet performing as well as its regional counterparts.

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What’s holding back the Philippines’ startup ecosystem?

The Philippines is the second largest country in Southeast Asia by population, behind Indonesia, yet its startup scene has yet to produce strong local players of the scale of Go-Jek, Bukalapak, Tokopedia, or Traveloka.

In many ways, the two countries have similar problems. Both are archipelago countries fragmented into thousands of islands. Both struggle with inequality and and a fare share of their people still live under the poverty line with little or no access to healthcare and financial services.

In contrast to Indonesia, English is an official language in the Philippines and people learn to speak English at a young age–presumably an advantage in the highly interconnected and global world of tech. The Philippines has a well established the call center industry, and its population is known as tech-savvy and very active online, especially in gaming. Yet these characteristics haven’t yet translated into an edge when it comes to growing companies to a certain scale.

The Indonesian tech ecosystem is remarkably more dynamic than that of the Philippines. In terms of deal volume, Indonesian startups have secured at least 46 investments in 2018 amounting to USD 4.07 billion overall. In contrast, the active startups in the Philippines only raised a combined value of USD 304 million in the same year, according to E27.

However, in Indonesia, it’s the unicorn funding rounds that can go into the billions that account for a large share of the total sum. Why does the Philippine’s tech scene appear to lack these outliers companies, despite having a healthy base of active startups?

A panel discussion at Singapore’s Innovfest Unbound conference last week, “Accelerating to greater Heights: The Philippines Story,” dove into this topic.

The panelists included Rafaelita Aldaba, undersecretary of the Philippines’ Department of Trade and Industry, Katrina Rausa Chan, director of QBO Philippines, Joan Yao, vice president of Kickstart Ventures, and Ron Hose, CEO of fintech startup Coins.ph. It was moderated by Joji Philip, founder and editor of Dealstreet Asia.

Lack of access to capital 

One of the biggest issues holding the Philippines back is the lack of access to capital.

“We have a very young ecosystem and we still need to do a lot in order for us to move on to the next phase. [One of the things] we need to do is to [provide] a lot of funding, which at the moment is still at a very low level,” Aldaba said.

The lack of access to capital prevents the startups from growing and expanding, which is echoed by Chan. When asked why haven’t the Philippines produced more unicorns, Chan said, “when you talk about unicorns, it is all about the traction [and] valuation and that can be a very expensive endeavor. Local companies or Filipino companies are still working towards being able to raise enough money to be able to grow.”

On this matter, the Filipino government’s strategy is to create a more connected community. This is because a thriving startup ecosystem requires close collaboration between both the private and public sectors.

“We are currently building our innovation and entrepreneurship ecosystem to link together the different stakeholders, especially the startups along with other large and small and medium enterprises with the government and the industry. We’d also like corporates to be able to link up with the startups,” the undersecretary added.

Conservative mindset

The second reason highlighted at the panel was the presence of cultural biases against entrepreneurship and high levels of risk aversion.

“[The] Philippines produces a lot of tech talents [who go] into the startup space, but in terms of actually converting these tech experts into founders, we still have a long way to go,” Chan observed.

Culturally speaking, the population see entrepreneurship as highly risky. One has to be able to withstand certain social pressure to start his or her own company and very often, the most difficult part is convincing your parents that it is okay to pursue this path. As such, the number of tech startups in the Philippines does not commensurate with the fact that it has a tech savvy and tech enabled population.

The solution to this core problem, Chan said, is for the government to push for at least one success story. Successful examples have the ability to change the national psyche and create emotional support for budding entrepreneurs to pull through the various structural challenges like lack of access to capital.

The Philippines is pumping in resources to ensure this happens. It employs dozens of government programs to encourage entrepreneurship such as the P3 Program, Kapatid Mentor Me Program, and those provided by QBO Innovation Hub.

The moderator, Joji Philip pinpointed fintech as a sector that the government focuses heavily on. Some of the efforts include the establishing of a regulatory sandbox called “Test & Learn”, pioneering of a central regulatory framework for electronic payments, National Retail Payment System (NRPS), as well as liberalization of customer background check requirements.

Hose attributed the government’s effort to the presence of a real need for fintech. “Filipinos need financial services and it is a real pain that these [fintech] companies are solving,” he added. A large number of Filipino adults do not have access to formal financial institutions and SMEs are often not able to borrow credit from banks.

Beyond fintech 

The Philippines is a fertile ground for fintech companies but it is also an equally exciting space for emerging verticals like advertising and artificial intelligence.

“The last space where we are seeing some interesting things happening is new media content advertising, whether is it live-streaming or gaming,” Yao shared.

The Philippines has 3 million gamers and on average, they spend ten hours a day online, the longest in the world. More startups are expected to venture into this space to sell to online Filipinos.

From the government’s perspective, artificial intelligence is an area of huge opportunity. It’s aim is to build the country to become an artificial intelligence “center of excellence”. While the roadmap is still being drafted, the undersecretary revealed that the focus will be on building a pool of data scientists from schools. The top four universities in the Philippines are beginning to offer graduate degrees in artificial intelligence, while courses are also being incorporated at the undergraduate level.

“We know the opportunity is there so we are working with a company based in Silicon Valley and tech hubs are also being established to serve as training centers for data science,” Aldaba said.

KrASIA is Innovfest Unbound’s media partner.