Local start-ups see expansion prospects at home, neighboring countries

MOST LOCAL STARTUP businesses are confident to pursue expansion both inside the Philippines and in select Southeast Asian countries in the near future, a study showed.

In a pioneer survey conducted by Isla Lipana & Co., 95% of startups are planning to expand  to new territories in the next five years, with 56% aiming for other areas in the country. In terms of strategies for expansion in three to five years, 84% said they would improve their existing products or services while 79% said they would introduce new products or services.

Isla Lipana Chairman and Senior Partner Alexander B. Cabrera said the respondents’ confidence was due to the opportunities the Philippine market can offer, with many firms banking on the country’s potential as one of the fastest growing economies in the Southeast Asian region.

Likewise, 86% of the respondents believe that the business environment in the Philippines will improve in the next 12 months.

Meanwhile, 59% of start-ups said they are looking to expand in Indonesia, followed closely by Thailand with 57%, Malaysia with 55% and Vietnam with 52%.

The study also showed that 54% of the respondents believe they would have expanded geographically in five to 10 years.

DTI Undersecretary for Trade and Investments Promotion Nora K. Terrado said the start-ups could be looking into other Association of Southeast Asian Nations (ASEAN) members due to the ongoing process of regional integration, which would improve the ease of doing business, a concern that 59% of the respondents shared.

Likewise, 59% of the respondents also called for improved tax incentives for startups and 55% wanted more access to capital.

ASEAN INTEGRATION
“What the ASEAN integration is all about is to open up the barriers, so the benefit of overcoming those non-tariff barriers will not just only benefit the startups but other businesses as well. But I would say that a start-up that seeks to explore other markets within ASEAN will be able to take advantage of the ease of doing business by way of these tariff measures as well as non-tariff barriers. It makes it easier for them especially those who are looking outside,” Ms. Terrado added.

“Because that’s the nature of the ASEAN community — it’s a people to people. It’s an integrated economy where there’s a free movement of goods to some extent services so it’s [going to be] a bigger market. That’s the positive side of it, but yes, it allows other ASEAN member states to come to the Philippines. So, the competition is good in a way because it allows people to desire for bigger of higher level of maturity.”

Isla Lipana Managing Partner for Deals and Corporate Finance Mary Jade R. Divinagracia said it takes 20 years for start-ups to fully mature. In the Philippines, the start-up industry only started in 2012, with most start-ups built in 2016.

Due to the fairly young industry, 43% of the respondents are still in their pre-revenue phase and 37% reap P2 million for their annual revenues.

Ms. Divinagracia said it is hard to provide valuation and funding figures at present as most start-ups are still in their exploratory and product development stages.

“Another side of this is that a number of these investors are angel investors as well as private VCs (venture capitals) and some of them are very private that they do not disclose the valuation or the funding that they entered in a particular start-up so there’s that opaque access to information in terms of the findings and the absence of basis to estimate the value of the start-ups,” she added.

FUNDING
The study also showed that when it comes to funding, 63% of start-ups prefer to generate financial support through equity financing, followed by using their own capital at 26%. Only 4% prefer to use bridge loan and banks.

Some 47% of the respondents use less than $1 million to finance their start-ups, while the remaining start-ups go over $1 million up to $5 million. Respondents also said that they use the funding for product development, marketing initiatives, and hiring more talent.

“I think if you compare to US counterparts and those in more advance economies then you would say that one million [dollars] is really on the low side but the ecosystem is in its varying stages and what we have here is [still in its] very early stages and together with that are start-ups who are also still very young, still in the age of one to five years and therefore, the way that they think is also still in the short term rather than the long term and for them, the most immediate need that they have is proving or funding their product development and a million would be sufficient to do that in most cases.” Ms. Divinagracia said.

Isla Lipana’s study was officially launched in July this year, with the bulk of the work taking only 60 days. There were 106 survey respondents, 22 of which also went through face-to-face interviews.

According to Isla Lipana, 35% of the respondents came from the technology industry, indicating that most start-ups are leaning towards technological and digital innovations. Start-ups from the retail industry came in second with 15%, followed by financial services with 9%.

QBO Philippines President Rene S. Meilly said the study can hopefully put the Philippines in the global start-up map. In the 2017 Global Startup Ecosystem Ranking by Startup Genome, Silicon Valley emerged as the number one location for start-ups, followed by New York and London.

The results of Isla Lipana’s study will be formally introduced in the ASEAN Slingshot on Oct. 19 and 20. — Anna Gabriella A. Mogato