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November 23, 2020
6 min read
The Philippine startup ecosystem is on the rise, ranking 53rd across the globe in 2020 and advancing by 17 positions from its rank in 2017. It is home to 400+ startups, 50+ angel investors, 40+ venture capitalists, and 35+ incubators and accelerators and has seen an estimated 47 known deals in 2019.
The Philippines also continues to experience an increasing level of startup activity across its regions. Metro Manila, the country’s National Capital Region located in the Luzon island group, recently joined Startup Blink’s 100 cities club to rank 88th among 1,000 cities across the globe andhas advanced by an astonishing 830 positions from its rank in 2017. Meanwhile, Cebu City and Cagayan de Oro located in Visayas and Mindanao, respectively, also made noteworthy developments in 2020 rankings.
Between 2018 and the first half of 2020, total investments into startups in the Philippines amounted to about $547M. Of these, venture capital investments totaled approximately $200M with significant average year-on-year growth. The funding values of the first half of 2020 alone, which include private equity investments in startup companies, surpassed 2019 year-round values at $184M and $38M, respectively, registering about a 384% increase so far. The industry has also been seeing increasing maturity with the smallest funding rounds, from accelerators and incubators to early-stage funding, contributing more and more to the Philippine total. Whereas in 2018, these rounds in aggregate make up only 12% of funds raised, it has gone up to 86% of total funds raised in 2019, and to 26% of the total in the first half of 2020. The venture capital industry in the Philippines remains relatively small but is remarkably poised for growth across the board.
STARTUPS ARE AT THE FOREFRONT OF PHILIPPINE DIGITIZATION
The rise of the digital economy posits the continuous growth of many startup sectors in the country. The number of internet users stands at 65 million people as of 2019, representing a 67% internet penetration rate, and is forecasted to reach 92% by 2031 due to sustained efforts to improve mobile experience and digital connectivity by the government and major players in the private sector. Improvements in infrastructure, along with a young, tech-savvy population driving the demand for digital products and services, have encouraged the rapid emergence of tech startups across the board.
The Philippines is evidently moving towards digitization efforts across different industries, with a significant majority of startup fundraising in the past three years targeted towards either the expansion of information technology and Software-As-A-Service offering offline to online solutions, or the entry into untapped geographic regions in sectors such as digital banking, web-based traffic management, and e-commerce. Another evident trend is a shift away from established business centers like Makati and Taguig into promising areas such as Pasig, Mandaluyong, and Quezon City. In fact, the leading city in terms of deal value in the past three years is Mandaluyong City, accounting for approximately 62% of total funds raised in the Philippines. Additionally, investment activity has also been progressively moving outside of Metro Manila, with cities like Davao being a prime choice for bases outside of NCR. These trends suggest an unmistakable growth course for digital inclusivity spearheaded by startups.
STARTUP FOUNDERS AND INVESTORS EXPECT A PROMISING FUTURE IN THE LANDSCAPE – 2020 PHILIPPINE STARTUP SURVEY
The Philippines enjoys a talented English-speaking workforce, a young population with a median age of 25.7 years old, and an economy that is globalizing at an increasing rate. The growth of local founders is accelerated by many advantages for today’s entrepreneurs, including access to more mentors, the entry of new funds and investors, and the rising number of successes. Today, capital is not only flowing into businesses with the purpose of regional expansion – it’s pouring into original ideas and energetic founders. The country is experiencing a shift from an ecosystem that has traditionally been dominated by subsidiaries of foreign startups, to seeing an emergence of home-grown startups solving inherently Filipino problems through new and imaginative solutions.
THE PHILIPPINES STILL WAITS ON LOCAL HEROES
The developments of the country’s ecosystem can be attributed to the increasing number of participants and level of involvement from key stakeholders, the growing existence of innovation infrastructures and platforms, as well as the collaborative culture of a young industry.
But despite exciting prospects for the future, taking the landscape to the next level presents its own set of challenges. The lack of external funding has been slowing the growth of the industry in comparison to Southeast Asian neighbors, with a funding void making it difficult for businesses to quickly scale. A majority of support systems such as government legislation, incubators, and sandboxes have been focused on early stage efforts, and initiatives to boost startups in the growth stage towards becoming unicorns have remained scarce. Consequently, the absence of local unicorns and more success stories have kept promising startups under the radar from offshore sources of capital.
The country’s technical talent pool also needs to match that of neighboring regions like Singapore. More traditional career aspirations have likewise dwarfed entrepreneurship potential in the country, with graduates tending towards corporate jobs with stable paychecks. Lastly, brain drain remains prevalent in the workforce, and surveys among Generation Z and millennial (15 to 34 year-old) Filipinos reveal that a significant number (53%) have desires of working abroad in the next 3 years.
THE FIRST HALF OF 2020 SURPASSES 2019 IN TERMS OF VENTURE CAPITAL DEAL ACTIVITY
The first half of 2020 recorded USD 51.8 million in venture capital funding in the Philippines at the early stage level, surpassing 2019’s recorded amount of USD 37.9 million, but still far behind 2018’s recorded amount of USD 110.2 million. Activity for 1H2020 was driven by capital raised at the seed round which totaled USD 24.0 million and is heavily attributable to the Tonik Financial deal which raised USD 21.0 million. Deal flow remained slower with 14 completed deals in 1H2020 as compared to the 24 deals recorded in 1H 2019.
M&A refers to corporate mergers and acquisitions transactions involving Startup companies and were included to provide a more comprehensive overview of startup deal activity, Private Equity refers to funds raised from private equity funds or funds raised at a much later stage, and Venture Encompasses earlier fundraising such as venture capital, venture debt, and accelerator funding.
IN THE PAST THREE YEARS, TOP 6 DEALS ACCOUNT FOR 80% OF TOTAL FUNDS RAISED
The Philippine startup ecosystem still remains in its nascent stages with 6 deals in the past three years accounting for nearly 80% of total startup funds raised. This is expected to become less concentrated as the ecosystem matures and becomes witness to successful landmark exits. Gojek’s investment into Coins.ph in January 2019, for example, is a noteworthy transaction setting a precedent which is believed to pave the way for more landmark exits to come. Funds raised saw a spike in Q4 2018 and Q2 2020 because of private equity capital raised by Voyager Innovations in the amounts of USD 175.0 million and USD 120.0 million, respectively.
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