Start-ups play a vital role in fostering innovation, creating job opportunities, and driving economic growth in the Philippines. However, one of the most significant challenges faced by aspiring entrepreneurs is securing adequate funding to transform their ideas into viable businesses.

The Start-up Ecosystem in the Philippines

In recent years, the start-up ecosystem in the Philippines has experienced remarkable growth. Along with a large youthful population and a growing middle class, the country’s vibrant entrepreneurial spirit has created a fertile environment for innovation. In the recent Venture Capital Report of Foxmont Capital Partners and BCG, funds raised by Philippine start-ups in 2022 exceeded US$1 billion for the second year in a row. Despite this potential, however, it is often difficult for startups to obtain the necessary equity and/or debt capital to sustain their ventures. Traditional financing options, such as bank loans, are frequently unavailable or have stringent requirements that many new businesses cannot meet. Therefore, alternative funding sources are essential for nurturing entrepreneurship in the country.

The Importance of Fundraising for New Businesses

Fundraising is crucial to the success of startups because it allows them to develop their products and/or services, scale their operations, and enter the market. Adequate funding enables entrepreneurs to invest in research and development, acquire the necessary infrastructure, and implement effective marketing strategies. In addition, it equips start-ups to overcome the initial obstacles and uncertainties inherent to the early phases of business development.

Start-ups generally burn cash during its early stages as costs exceed revenues. Therefore, the business is not sustainable and requires consistent support from external sources of funds that funnel the lifeblood of the start-up through funding rounds, often classified into stages such as seed, series A, series B, and mezzanine or bridge rounds. Start-ups need to raise capital before it run-out of “runway” which is the cash balance divided by the burn rate of the business. Beyond the runway means the company is out of money and is about to go bust.

Sources of Fund and Strategies for Fundraising

To address the funding requirement, it is essential to establish and promote effective fundraising strategies within the Philippine startup ecosystem. Here are some essential strategies that can be implemented:

Angel investors and institutional investors can provide start-ups with the necessary financial resources and expertise if their participation is encouraged. These investors provide not only capital, but also invaluable mentorship and networks that can accelerate the development of new businesses. Institutional investors normally refer to venture capital funds, and private equity funds but in certain times also extend to family offices. Because of the interconnectedness of institutional investors, either through personal close ties of respective principals or through fund-to-fund investments, having them in your cap table as early as possible provides you leverage to effectively and efficiently raise capital in the future.

It is important to differentiate between start-ups and small-medium enterprises. The former has a scalable and replicable business model, while the latter has none because of its small market size – take for example a sari-sari store which only operates within a subdivision, whose growth is barred by its market size. Start-ups can raise funds with angel investors and institutional investors because of its capacity for growth, while small-medium enterprises may most likely not. Typically the source of funds for small-medium enterprises are owner funds, friends and family, bank loans, and government support.

The Philippine government can play an important role in fostering the development of start-ups by providing financial incentives, grants, and tax exemptions that are specifically designed for start-ups. In 2019, the Philippines congress passed the Innovative Startup Act (RA 11337) to support startup companies and businesses in the Philippines.

Crowdfunding platforms enable start-ups to raise capital by establishing online connections with potential investors and supporters. By demonstrating their innovative ideas and value propositions, startups can attract a diverse group of financial contributors who believe in their mission. Just be mindful that usage of platforms for fund-raising is subject to origination fee which oftentimes is between one percent (1%) and two percent (2%) of raised amount.

Incubators and accelerators can provide start-ups with a nurturing environment, access to mentorship, and funding. These programs assist startups in refining their business models, establishing connections with industry professionals, and securing investment opportunities. Oftentimes incubators and accelerators would ask for five percent (5%) of the fund-raise size as equity compensation for their participation in your growth and capital raise efforts.

Ultimately, fundraising is crucial to the success of Philippine startups. By resolving the difficulties of procuring capital, we can unleash the maximum potential of innovative entrepreneurs and contribute to the economic development of the nation. It is essential for the government, the private sector, and investors to collaborate in order to establish a robust funding ecosystem that supports startups at all stages of development. By embracing innovative funding strategies and empowering entrepreneurs, we can establish a thriving start-up ecosystem in the Philippines that fuels economic growth, employment creation, and sustainable development.

LMD has been one of the organizations at the forefront of fund-raising in the Philippines, having fronted deals for start-ups in the mental health technology, fintech, and circular commerce. Want to learn more as to how LMD can help you in your fundraising efforts? Connect with us now and unleash the full potential of your business.