Bad deals stifle Philippine startups. But things are looking up

In 2019, Geoff Mabasa, joined The Final Pitch – the Philippine equivalent of American reality show Shark Tank – with an idea: He wanted to place targeted ads in ride-hailing vehicles through facial recognition tech. Two judges offered the first-time founder a seed investment of 10 million pesos (around US$200,000) in exchange for 25% equity each in his business, which was then called Gypsy.

Inexperience bred naivete: Mabasa signed the documents, thinking he was getting a good deal for his startup, which had been renamed as Transitflix. But a few months later, the deal was dissolved, and with it, Mabasa’s company.

The story of Transitflix has become something of a case study for Filipino founders. “I was like the poster boy for startup founders that accepted a really ridiculous deal structure,” Mabasa tells Tech in Asia. “It looked like I was desperate for the investment.”

His experience sparked debates across the Philippine startup scene: Are local early investors taking too much equity from Filipino startups?

Any experienced startup player knows that equity is the most expensive form of financing, and taking away too much of a founder’s equity too soon will make it difficult for them to raise more capital in the future. But deals like Mabasa’s come as no surprise in the Philippines.

The local startup scene is relatively young. While global tech investors – among them Chinese and American players – have been betting on the Philippines in the last few years, its investment scene isn’t as mature as its neighbors in Southeast Asia. It was only in recent years when most of the country’s traditional corporations woke up to the tech opportunity.

“You hear about [investors] who want 51% for a pittance. I’ve never been in a meeting where that’s happened, but you hear [that kind of story] from startups all the time,” James Lette, executive director of Manila Angel Investors Network (MAIN), tells Tech in Asia.

With the Covid-19 pandemic speeding up tech adoption, more people are building startups to ride the wave. Naturally, industry insiders like Lette are anticipating a surplus of first-time founders and tech investors who don’t know how to properly structure a deal.

Investors like Lette worry that badly structured early deals could curtail the growth of companies even before they get started.

A buyer’s market

Lette has been an angel investor in the Philippines since 2018. He screens over 500 startups a year for MAIN, his social impact investment organization. In Lette’s experience, he’s come across angel investors seeking a majority stake in their investments a handful of times. They tend to be those who “made their money 20 years ago,” usually because they want control over their investments and would sometimes go to great lengths to get that.

There are even occasions when people who own 51% of a startup’s equity would call themselves as its founder. But after screening such claims, it becomes clear that they’re actually early investors who were posing as founders to justify the huge equity share, Lette says.

Joan Yao, vice president of venture capital firm Kickstart Ventures, has witnessed the same thing: an investor who owns half of a company but doesn’t know how to code or build products, or anything about startups. “It’s like dead weight on the cap table,” she says.

While startups can walk away from unfavorable deals, they also have to reckon with the lack of funding options. The Philippines is a “buyer’s market,” according to Jason Gaisano, co-founder of local VC firm Core Capital. The investors that partake in the startup game tend to play as angels, and angels don’t have to worry as much as VCs about offering a fair deal, he says.

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