Outlook 2023

REUTERS

By Brontë H. Lacsamana, Reporter

STARTUPS may have to consider rightsizing and conserving cash in order to attract investors, who are expected to be more cautious in 2023 amid increasingly gloomy economic predictions.

Venture capitalists, meanwhile, are expected to remain very conservative with their investments, focusing primarily on proven companies with resilient business models and those able to show profitability, according to a report by global professional services firm KPMG.

With Bangko Sentral ng Pilipinas (BSP) raising interest rates to contain inflation, a decrease in startup valuation is on the horizon, putting pressure on startups and small- and medium-sized enterprises (SMEs).

“It’s been really hard and I can’t downplay the outlook. Yes, things have been picking up on the macro level in terms of demand, but the question is, until when will this pent-up demand last?” said Ruben Carlo O. Asuncion, chief economist at UnionBank of the Philippines.

The anticipated global economic downturn has several layers, he added: uneven pandemic recovery; rising supply chain costs due to the ongoing Russia-Ukraine war; and surging inflation.

Anthony Ison, country manager of logistics management system Zhenhub, said that as cost pressure increases and supply chain disruptions become the norm, startups should look to technology solutions to maximize stretched resources.

“It may sound counterintuitive, but shifting their attention to improving processes and implementing technology can actually enable them to become more efficient and prepare them for the future,” he said.

The startup ecosystem in Metro Manila alone is valued at $2 billion, according to the Department of Trade and Industry (DTI).

“In 2015, only 100 Philippine startups were reported to be active, with just $40 million in investment. Today, individual startups can raise $30 million in one round alone. The ecosystem has grown to more than 1,000 active startups nationwide,” Trade Undersecretary Rafaelita M. Aldaba said at a Nov. 15 conference during Philippine Startup Week.

The DTI has recorded more than 35 incubators and accelerators, more than 50 investors, more than 200 coworking spaces, and more than 40 venture capitalists nationwide.

BRIGHT SPOTS
E-commerce continues to show promise, evidenced by online payments firm PayMongo and automation tech firm StoreHub securing Series B funding before investments waned toward the end of the year.

Web3 startups in decentralized finance and cryptocurrencies — despite being rocked by the collapse of crypto exchange FTX — have staunch defenders and champions who point out the superiority of the user experience of crypto remittances.

“We have to make a distinction between the state of the markets and of bitcoin. Markets fluctuate all the time and we still see a lot of Web3 apps being built,” said Philippine Digital Asset Exchange (PDAX) founder and chief executive officer Nichel O. Gaba. Archipelago Labs, a startup accelerator launched by PDAX in November, will invest in Web3 startups beginning with Playdex, a building infrastructure for Web3 gaming.

Healthtech is also expected to grow as the coronavirus disease 2019 (COVID-19) pandemic exposed gaps in healthcare delivery. Empath, a social enterprise that provides online mental health services, received a P500,000 grant from the Insular Foundation and participated in a 14-week accelerator program funded by the European Union and the government.

“Both government and private institutions provided a plethora of initiatives to further help small businesses, social enterprises, and rising Filipino startups,” said Stephanie Angelica S. Naval, founder of Empath.

Despite the gloomy outlook, Ms. Naval is optimistic about funding opportunities in 2023, citing Microsoft, Uber, Pinterest, Mailchimp, WhatsApp, and Slack as examples of successful startups that managed to raise funds in uncertain times. 

BETTER SUPPORT
Banks are better prepared to support the SME and startup sector today as compared to the Asian financial crisis in 1997 and the global financial crisis in 2008.

“One big lesson is that we now have to utilize technology in reaching out to SMEs in terms of financing and in terms of improving our credit ratings or credit appraisal processes, to give chances to many more people,” said UnionBank’s Mr. Asuncion in a Zoom interview.

Financing options have also expanded with entities like fintech lending firm First Circle, a DTI partner, which offers non-collateralized lending products to counteract the BSP’s rates.

“While there are certainly near-term challenges — inflating costs, labor shortages, etc. — we remain extremely bullish on the outlook for the Philippines,” said Chris Burgess, First Circle chief investment officer, via e-mail.

During Philippine Startup Week, Science and Technology Secretary Renato U. Solidum, Jr., said that the government granted startups about P182.5 million for research and development this year alone.

“Our framework is to support these startups from idea to product to market to expansion,” he said.

Private sector initiatives have also arisen to cultivate the startup ecosystem: Smart Communications, Inc., PLDT, First Pacific, and Meralco, among others, established IdeaSpace Foundation, Inc., in 2012, which holds its own annual startup incubation programs. Globe Telecom, Inc. has its own venture capital firm, Kickstart Ventures, backed by Ayala Corp. and SingTel.

Ms. Naval’s mental health startup Empath was funded under Women-Helping-Women: Innovating Social Enterprises, which supports women-led or gender-focused enterprises that need technology access and early-stage funding.

“We have been prioritizing building a strong product, monitoring our financial health closely, and being mindful of strategic cash flow,” Ms. Naval said, adding that there is a “clear plan on how we can withstand the foreseeable difficulties that lie ahead.”