Startups and the business impact of COVID-19

With the longer ECQ, economists have lowered the 2020 growth forecast for the Philippines to 0.2%, which is significantly lower than the government’s initial target growth rate of 6.5% to 7.5%. The lower household consumption, decline in cash remittances, ban on public transport, and business closures because of the pandemic are among the reasons for the economic slowdown. In March, the National Economic and Development Authority (NEDA) estimated that the potential job losses in the Philippines will reach 1.8m. COVID-19’s impact on the Philippine economy, however, may be managed depending on the government’s response and actions.

^{Source: Bangko Sentral ng Pilipinas, THE ASEAN+3 Macroeconomic Research Office} 

One of the initiatives under Republic Act. No. 11469, also known as The Bayanihan to Heal as One Act, is the PHP1.0bn Enterprise Rehabilitation Financing (ERF) facility under the Pondo sa Pagbabago at Pag-asenso initiative of the Department of Trade and Industry’s (DTI) Small Business Corp. (SB Corp.). Through this facility, micro enterprises with an asset size of up to PHP3m may borrow up to PHP200,000, while small enterprises with an asset size ranging from over PHP3m to PHP10m may borrow up to PHP500,000. Loans provided by the ERF will carry an interest rate of 0.5% per month or 6.0% per annum. Proceeds from the loan should be used for loan amortizations, inventory replacements, and working capital requirements. The approved borrowers will also be given a grace period based on SB Corp.’s evaluation.

While the government has provided assistance, and is planning to introduce more programs to help the MSMEs recover from the impact of COVID-19, additional help is needed because the country has over a million MSMEs nationwide. Technology startups, for instance, need dedicated programs and funding facilities because majority will not meet the banks’ standard loan requirements.

With almost everyone at home during the ECQ period, technological tools, solutions, applications and infrastructure became important to support the people’s educational, employment, and household needs.

While only 48% feel threatened by COVID-19, the founders identified financial impact and effects on operations, potential global recession, and difficulties with funding as the top three major concerns with respect to the pandemic. To help manage the potential negative impact, most of the founders say that they’ve reduced their level of operations and started offering new products and/or services to adapt to the consumers’ needs during the ECQ. During this period, we have seen the entry of new players such as on-demand delivery service providers, market startups offering vegetables and meat, and more.

With majority having a short cash runway, 64% of the founders say that they need up to PHP5m in additional funding to help normalize their operations. According to them, proceeds will be used mainly for working capital requirements, technology improvements, and salaries of potentially new employees.

While no final government grants or subsidies have been announced, 64% of the founders say that they plan to secure these in the next three to six months. Other major plans to secure additional funding include equity financing, and bank financing.

With what’s happening globally, equity financing is a challenge because several investors are taking a wait-and-see approach as a result of the COVID-19 outbreak. In fact, the M&A deal value in Asia Pacific (excluding Japan) in the first quarter of 2020 was US$103.2bn, 32% lower than the deal value in the same period last year, and is the lowest quarterly deal value since the first quarter of 2013. One of the major deals that has been affected by the pandemic is SoftBank’s US$3bn planned tender offer for WeWork. The potential deal, which was agreed in October 2019, was cancelled in March 2020. SoftBank cited failure to meet the pre-conditions as well as the COVID-19 outbreak as some of the reasons for cancelling the deal.

Given the possibly lower valuations, bank financing may be among the best options for our startups to secure additional funding. What’s concerning, however, is banks in the Philippines still ask for traditional banking requirements such as hard securities. With the startups’ asset-light setup, 54% of the founders say that they can offer shares in the startup as collateral for financing. Hopefully, banking requirements will change to help support the Philippines’ growing startup ecosystem.

As investors take a wait-and-see approach, and companies expect lower valuations, 71% of the founders say that the government can help startups by providing loans with a longer grace period and relaxed credit terms. A founder shares: “I hope the government will provide a strong and deliberate financial assistance to all startups in the same way it has implemented its strong enforcement of the ECQ.” With only 19% saying that they have a cash runway of over 12 months, having available credit lines with the government will help bridge the funding gap.

Incentives for both startups and investors are also among the helpful programs that the founders identified. In other countries, tax exemptions are as high as 50% of the startup’s chargeable income. Providing incentives to investors such as tax holidays and other schemes may also help encourage them to provide both debt and equity financing to startups. Modern public-private partnerships (PPP) may also be explored by having the government inject equity into startups. In the United Kingdom for instance, the government is willing to give away equity to startups as bridge funding. Such financing program is part of the UK’s bailout plan for venture capital-backed startups who are experiencing difficulties because of the pandemic. 

To get back in business, and maintain sustainable ventures after the ECQ, the founders identify access to customers, talent, and free consultants as the assistance that they need – aside from financing. Because all businesses, regardless of size, were hit by the pandemic, startups will need a wider customer base to ensure enough revenue sources.

A founder says: “The negative effects of the pandemic may persist to up to a year after the lifting of the ECQ. It is therefore important to develop support systems as well as funding options and collaborations with big firms to support the SMEs since SMEs account for more than 66% of employment in the Philippines.” At a time like this, more partnerships, whether commercial or financing, are needed to rise and heal as a nation.