Startup ecosystem: 4 cues PH can take from Singapore

“I have to admit, the government has lagged behind in its understanding and support for the [startup] sector. That’s definitely something we’d like to change going forward,” Philippine Trade Secretary Gregory Domingo said during his opening remarks at the two-day Slingshot Manila last week, an event of the 2015 Asia Pacific Economic Cooperation focused on startups.

That was perhaps the best way to open the event because further into it the Philippine government announced a partnership with accelerator IdeaSpace and the academe to build a national innovation center.

According to the government, the innovation center will have branches near a couple of universities to help develop an entrepreneurial mindset among young Filipinos and address their growing interest in starting businesses. The center will also tap into the universities’ wellspring of engineering and tech talent. Ultimately, the goal is to foster innovation and grow the country’s startup ecosystem.

The Philippines says it’s taking cues from neighboring country Singapore, which built Asia’s famous innovation district Block 71.

By building its own version of Block 71, the country is hoping that one day, local startups will reach higher valuations – maybe even produce a unicorn or two, speculates Domingo.

The question in a lot of people’s minds: will the Philippines’ ambitious plan take off? After all, growing the startup ecosystem will take more than just buildings, internet cables, and equipment. Soft infrastructure such as friendly business laws and a conducive investment climate are key elements.

IdeaSpace president and co-founder Earl Valencia told Tech in Asia that the center is not the be-all and end-all of what they have in mind for the startup sector. “It’s just the start. This is the point where we can all gather to work together and think about our policies.”

Indeed, the Philippines has a long way to go and there are many lessons to learn from Singapore. We asked some of the thought leaders in the tech scene what these lessons are and summarized their answers below.

1. Doing business must be easy

“The best way for the Philippine startup ecosystem to flourish is not through the so-called innovation center – that’s just developing real estate. It’s through the elimination of business formation friction,” says Eric Manlunas, co-founder and managing partner of Wavemaker Partners, a California-based venture capital firm. Wavemaker Partners also owns Wavemaker Labs, a technology incubator certified by the Singaporean government.

Manlunas points to the ease of setting up a startup in Singapore, considered one of the most efficient countries in the world in this respect. Procedures are free of red tape and corruption. And it takes only a few hours to incorporate.

“To spur business formation, entrepreneurs in the Philippines need to be able to form their entities within a day versus several months,” he adds.

Minette Navarrete, president of Philippine investment firm Kickstart Ventures, agrees. “Singapore’s ease of doing business is very good. You can register a company in three hours. It takes a lot longer here.”

Aside from regulatory issues, Paul Santos, another managing partner at Wavemaker Partners and co-founder of Wavemaker Labs, says the Philippines must also alleviate other causes of friction in business such as poor infrastructure and facilities. For instance, the Philippines has the slowest broadband speed in Asia. Singapore is blazing ahead with an average speed of 118.8 Mbps, but the Philippines is limping along at 3.6 Mbps. While Singapore’s fixed-line speeds have nearly doubled in the past year, the speed in the Philippines inched up a meager 6%.

“Internet [and] broadband is a great place to start. How easy is it to get? How fast and reliable is it? It’s hard enough to build a business without having to worry about these things,” says Santos.

2. Tax incentives should be in place to entice investors

Singapore is often cited as one of the leading countries that continue to reduce corporate income taxes while also introducing tax incentives to attract and retain global investment.

A newly incorporated company in Singapore enjoys no tax on its first S$100,000 (US$74,000) of profit for the first 3 years of operations. After the third year, the company pays 8.5%  tax on income of up to S$300,000 (US$222,000) and 17% for income larger than that.

There is no capital gains tax in Singapore, another plus for investors. Examples of capital gains include gains on the sale of fixed assets and gains on foreign exchange with capital transactions.

In contrast, the Philippines charges a corporate income tax rate of 30%. Tax incentives are offered by the government, “but these are geared towards companies with a high number of people like outsourcing firms. They are not meant for startups with small teams,” says Gabby Dizon, co-founder and CEO of mobile game studio Altitude Games, a company registered in Singapore but operating in the Philippines.

Manlunas suggests ways to entice investors to get involved in Philippine tech startups. For starters, he says the Philippine government may choose to follow Singapore and eliminate capital gains tax on any investments made in a startup.

He says it can also incentivize investors by allowing them to immediately write off their startup investments. “This would spur high net-worth individuals to invest since they’ll be able to deduct these investments against current taxable income.”

According to him, there’s also a way to encourage large corporations to set up venture arms and increase available capital in the startup ecosystem. It’s allowing them to expense their startup allocation against current taxable income over a certain period, say 5 years. “For example, if company X allocates US$50 million for their corporate venture arm, company X should be allowed to deduct this amount against their taxable income over 5 years.”

IdeaSpace’s Valencia says they are working with the Trade Department and the Board of Investments to include startups in the country’s investment plan. “This is so people can get a four-year tax holiday and maybe even a 15% tax rate, which is more competitive than Singapore.”

3. There should be lots and lots of money!

The incentives for investors and venture capital firms is vital to the third and maybe even the most important puzzle piece in growing the startup ecosystem: funding.

“Startup funding is key,” says Manlunas. “Money is the thrust,” adds Santos.

In Singapore, the government went the extra mile by pumping money into startups through a number of programs.

There’s the i.JAM initiative, a grant scheme that doles out government money to startups through government-appointed private sector incubators. Startups receive a first tranche, after which they are required to bring a third-party investors on board to receive the full funding.

Another initiative is the Technology Incubation Scheme (TIS) of the National Research Foundation (NRF). The NRF co-invests alongside a partner venture capital firm, matching up to 85% of the VC’s investment, with a cap of $$500,000 per company. The investor has the option to buy back NRF’s stake in the startup in three years.

Then there’s the Early Stage Venture Fund, which is also run by the NRF. Under this program, NRF partners with VCs to invest in startups by matching them on a one-to-one basis. The scheme targets startups in the series A stage and above, and it plans to pump US$48 million into companies.

“I think the NRF’s TIS program did a lot to take the Singapore tech ecosystem to the next level. You basically want people to take a risk they wouldn’t normally take,” explains Santos.

Should the Philippine government invest in startups? There are polarized opinions on the matter, and the discussion revolves around how different the circumstances of the Philippines and Singapore are.

Of course, it helps that the Singaporean government is unencumbered by electoral politics, which means it can be far-sighted. It has a small population, with high average of disposable income, giving it more wiggle room for investment. On the other hand, the Philippines has 7,107 islands and a population 20 times the size of Singapore – at 100 million. Presidential elections are held every six years. Moreover, Philippine government funds have been prone to mismanagement and corruption. That’s why the state moved to privatize its investments in some sectors such as water and power.

Manlunas thinks “the best way for the government to help is by creating a conducive environment for entrepreneurs to succeed then getting out of the way.”

“As you can probably tell by now, I have very little faith in governments in general,” he quips.

Navarrete expressed a similar view, but with focus on the government’s appetite for risk. “Should the government invest? Some say ‘no, it shouldn’t’ because these are high-risk investments. When you look at Philippine government budgeting, these are line items with a 12-month lifetime. You’re looking at 10 years if you’re setting up a fund. It’s harder.”

However, for Santos, state investment can be an option. “Although I don’t know how many startups want to have the Philippine government as an investor,” he adds.

“There will be lots of money ‘lost’ as we attempt this but if you can get a few successes out then you can let the market take over. It’s kind of like taking the training wheels off once you’ve learned to bike because they will just slow you down.”

He continues, “my point here is simply that there has to be starting point. One way is to wait for the market to deliver a big hit […] The other is to find a way to get more capital into the tech ecosystem […] It might not be totally efficient but if you take Singapore as an example, it can be effective.”

If in case the Philippine government decides to get into funding, Manlunas says it should do it the way Singapore has done it, which is to select certain VC firms to co-invest with through matching grants. “The government should allocate money to these selected firms and have the experienced VCs conduct the selection process.”

4. Must attract good, diverse talent

Finally, the Philippines needs to have a pool of good and diverse talent to develop the ecosystem.

This is not to say the country has none at all. One of main things people say about the Philippines is that its people are good communicators. It has a good number of engineers and developers and labor is cheap, which is a clear advantage against Singapore.

But “talent is still raw,” says Santos, and there’s lack of “diversity in founders,” according to Navarrete.

“We need to attract foreign talent,” Santos concludes.

“Importing know-how is an integral ingredient to growing the local tech startup ecosystem,” notes Manlunas.

Navarrete says Singapore made real effort to open its economy up to foreign nationals.

Both foreigners and citizens can incorporate in Singapore. No residency visas are required. If an entrepreneur wants to live in Singapore, there are Entrepreneur Passes and Employment Passes available to make that possible.

On the other hand, there are restrictions on foreign residency and company ownership in the Philippines.

“There are certain laws we have that were created when there weren’t startups. We need to review whether they’re still appropriate or not. There are certain labor laws, Securities and Exchange Commission regulations, and immigration laws that apply uniquely to startups,” says Navarrete.

​“A good way to think about it is that talented entrepreneurs usually have options and it seems like other countries like Singapore and Malaysia are doing their best to attract them. I’m not an expert on Philippine regulations [or] procedures, but if the Philippines wants to be competitive, fewer restrictions are almost minimum requirements,” says Santos.

Manlunas, for his part, says: “easing foreign ownership limits won’t hurt but that’s more a mature company issue rather than a tech startup issue at this time. Liberalizing ‘professional visas’ will certainly help.”

Santos says the Philippines needs to build more companies that are creating value. “If we learn to do this, then we will be better off,” he says. – Rappler.com

Editor’s note: This article was first published on Tech in Asia.