By John Januszczak, Fintech Advisor, Former CEO UBx, RCME Charter Member.
The startup ecosystem in the Philippines is experiencing a significant transformation, positioning itself as a burgeoning hub for venture capital (VC) and innovation in Southeast Asia. With a rapidly evolving landscape, the Philippines is attracting both local and foreign investors, offering a unique blend of opportunities that make it an attractive market for both startups and venture capital investments.
Current State of Startups and Venture Capital in the Philippines
The Philippine startup sector has seen remarkable growth, with the number of homegrown startups nearly doubling since 2019. While venture funding cooled worldwide between 2022 and 2023, venture capital deployed in the Philippines remained constant at about $1 billion per year over the same period. This surge in startups and ability to attract capital in a down market is indicative of a vibrant entrepreneurial spirit and a supportive ecosystem that includes government initiatives, incubators, and accelerators. The Gobi-Core Philippines Fund projects that startups in the country are expected to continue to raise at the same levels over the next three years, surpassing the total amount raised in the previous five years. This growth can be further fueled by regulatory reforms aimed at enhancing the competitiveness of the local startup ecosystem, making the Philippines an increasingly fertile ground for innovation.
In terms of funding, the Philippines has over 40 active VC firms, including homegrown Kickstart Ventures, Foxmont Capital Partners and Kaya Founders. Investments are primarily concentrated in sectors such as fintech, e-commerce, and media. However, there remains a notable gap in funding for agritech, cleantech, edtech, and healthtech, presenting opportunities for investors looking to diversify their portfolios. The preference for venture capital over traditional bank financing among startups highlights the need for more financial solutions that align with the unique challenges faced by early-stage companies. For example, venture debt in the Philippines is still in its nascent stages compared to more mature markets, but it is gradually gaining traction as part of the broader startup financing landscape.
Comparison with Other Southeast Asian Markets
When compared to its Southeast Asian neighbors, the Philippines is emerging as a competitive player in the startup ecosystem. Countries like Singapore, Indonesia and Vietnam have historically attracted more VC investments. For example, in 2019 Singapore startups raised well over ten times as much venture capital, and Indonesia nearly four times as much as Philippines. However, the Philippines is closing the gap. For instance, while Singapore continues to lead in terms of total VC funding, the Philippines is gaining momentum due to its large, young population and increasing digital adoption, which are critical drivers of startup growth.
The Philippine market’s appeal is further enhanced by its strategic location and growing interest from foreign investors. Many local startups are looking to expand into other Southeast Asian markets, which presents additional opportunities for foreign investors to participate in regional growth strategies.
Opportunities for Foreign Investment
Foreign investors are increasingly recognizing the potential of the Philippine startup scene. The government has implemented various initiatives to attract foreign capital, including tax incentives and a more transparent regulatory environment. Specifically, foreign ownership restrictions have been reduced, if not lifted entirely, in key sectors such as telecommunications, public transportation and retail. In addition, tax incentives include income tax holidays and reduction in corporate income tax rates, especially for small firms. Furthermore, economic zones have been set up with preferential tax rates in lieu of all national and local taxes. These reforms have made it easier for foreign entities to invest in local startups, fostering a more inclusive investment landscape.
Additionally, the rise of impact investing is creating opportunities for foreign investors interested in socially responsible ventures. Funds like Ignite Impact focus on startups that align with the United Nations Sustainable Development Goals, appealing to investors looking for both financial returns and positive social impact. Opportunities for investment in startups making a social impact and/or positive impacts to the environment abound.
The Philippines also boasts a highly skilled workforce, particularly in technology and engineering, which is essential for driving innovation. Creativity and resilience—characteristics of any successful startup— are characteristic of the local talent pool. The presence of numerous incubators and accelerators provides startups with the necessary support to scale their businesses, making them more attractive to foreign investors looking for viable investment opportunities.
Outlook for the Future
The future of startups and venture capital in the Philippines appears promising. As the local ecosystem matures, there is a growing expectation that more startups will successfully transition to later funding stages and “exits” where founders, investors, and employees realize financial returns on their investments and efforts. Capital markets in the Philippines and Southeast Asia are not as mature as in developed economies, somewhat mitigating the pursuit of initial public offerings (IPOs). The Philippine Stock Exchange has seen limited startup listings. While capital markets are maturing, startups can tap merger and acquisition opportunities as larger companies actively seek innovation and transformative intellectual property.
Furthermore, the ongoing digital transformation across various sectors is likely to fuel further growth in the startup ecosystem. As more consumers and businesses embrace digital solutions, startups that offer innovative products and services are well-positioned to thrive.
In conclusion, the Philippines is at a pivotal moment in its startup journey. With a supportive ecosystem, increasing foreign investment, and a strong talent pool, it is an opportune time for investors to consider the Philippines as a key market in Southeast Asia. The combination of local ambition and foreign interest could very well propel the country into the next phase of its startup evolution, making it a significant player in the global venture capital landscape.