Startups and the business impact of COVID-19

May 2020

Introduction

The COVID-19 virus, which has infected over 4.1m people in 185 countries as of 10 May, is continuously hurting the global economy. While some countries have gradually lifted their restrictions, most countries including Singapore, the United States, the United Kingdom, and the Philippines are still on lockdown as they control the outbreak.

While it is difficult to predict how long the pandemic will impact the global economy, the ongoing lockdowns have resulted in job losses, supply chain problems, travel restrictions, and business disruptions across the world.

In the Philippines, the Enhanced Community Quarantine (ECQ) in Luzon was declared on 16 March, and was originally set to end on 12 April. The ECQ was then extended to 30 April, and on 24 April, the Philippine President further extended it to 15 May.

 

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.

 

The Bayanihan to Heal as One Act

Impact of the COVID-19 outbreak on the Philippine startups

To understand the impact of the COVID-19 outbreak on the tech startups in the Philippines, PwC Philippines, together with the Department of Trade and Industry, QBO, and IdeaSpace,  surveyed 90 founders from 12 to 26 April.

Almost half of the founders are greatly concerned about the impact of COVID-19 on their operations, while 23% view it as an isolated concern. Interestingly, 21% of the founders say that the outbreak resulted in an increasing demand for their services and products.

48% of the respondents
Actions implemented during ECQ
startup covid 01

Startups from the logistics, education technology, enterprise services, financial technology, and healthcare sectors have been positively impacted by the outbreak because their products and services are critical to making the arrangements during the ECQ work. During the ECQ period, only employees to providers of essential products and services are permitted to pass through control points. These companies are the following:

  • Manufacturing plants of food products, essential products medicine and medical supplies
  • Retail establishments (groceries, public markets, and drug stores)
  • Logistics services
  • Hospitals and medical clinics
  • Food preparation/processing companies
  • Delivery services for food, water, medicine and other basic necessities
  • Banks and capital markets
  • Power, energy, water, IT, telecommunications, waste disposal services
  • Export and business process outsourcing companies.

Companies in Luzon also adopted work-from-home and skeletal workforce arrangements to comply with social distancing measures.

49% say they started offering new product
21% say COVID-19 is positively impacting their business
COVID-19 concerns

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.

 

"This situation will create a new breed of startups, and will probably change how we do business in the long run. Startups need to adapt to the new needs and behaviors of people. They should not expect that things will go back to as they were before COVID-19."

Ellard Capiral, CEO, AdMov

Expectations on productivity

As a country with challenges in internet speed, it is not surprising that 38% of the founders identify productivity loss due to lack of remote work capabilities as one of the potential results of the work-from-home arrangement during the ECQ. In March 2020, the Department of Information and Communications Technology (DICT) said that people will experience slow internet because the government’s ultra-high speed information highway project has not been completed. Such project, which the government started with Facebook in 2017, is expected to be completed within the year, and is expected to result in lower internet service costs and faster speed. With the current situation, Filipinos are at home, and are watching and downloading videos at the same time. According to the DICT, the existing infrastructure cannot support and provide faster internet with the current usage. 


Getting back in business

With technology serving as the backbone of our startups’ businesses, 84% of the founders say that they expect to have normalized operations within six months from the lifting of the ECQ.

Despite having the capabilities to relaunch their operations faster than traditional businesses, 62% say that they only have a cash runway of up to six months, and 69% say that they can only sustain their startups by up to six months if the ECQ is extended. Such finding is alarming given that some startups could fold in a few months if they fail to secure funding or new revenues. At a time like this, a founder highlights:

“It is important to have a business continuity plan for crises like this. Additionally, it is also important to have a source of recurring revenues to ensure stability.”

 

expected time to normalize
Less than 20% of the startups have enough cash and capacity to sustain the business for more than 12 months. They will need the government’s help in keeping their businesses.

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.

financial services
Startups would need additional funding to have normalized operations
Additional funding
Available securities as collateral

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.

 

“Startups are naturally wired to weather this crisis. They are digitally-enabled and can pivot when needed. Given the right support, startups will not just survive the crisis, but will thrive thereafter.”

Mary Jade Roxas-Divinagracia, Deals and Corporate Finance Managing Partner, PwC Philippines

Plans to obtain in the next three to six months as a result of COVID-19


Helping the startups

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. 

Helping the startups

How the Philippine government can help startups

71% Provide loans with a longer grace period and relaxed credit requirements
66% Tax incentives
60% Provide incentives to startup investors to help accelerate the fundraising activities
53% Provide equity financing to startups
42% Provide wage subsidies
8% Others

Access to customers and talent are the top considerations of startups to have sustainable businesses

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.

 

“COVID-19 rebooted and changed the entire economy to something unfamiliar to most. It is a unique opportunity for the startups to start at the same time and compete with the established corporations in re-inventing businesses under a new set of reality.”

Leo De Velez, Chairperson, Frontlearners
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Contact us

Alexander B. Cabrera

Alexander B. Cabrera

Chairman and Senior Partner, PwC Philippines

Tel: +63 (2) 8459 2002

Mary Jade T.  Roxas-Divinagracia, CFA®,CVA

Mary Jade T. Roxas-Divinagracia, CFA®,CVA

Deals and Corporate Finance Managing Partner, PwC Philippines

Tel: +63 (2) 8459 2060

Karen Patricia Rogacion

Karen Patricia Rogacion

Deals and Corporate Finance Senior Manager, PwC Philippines

Tel: +63 (2) 8459 3089

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