Start-ups that received funding from external sources (i.e., banks, angel investors etc.) have shown a higher growth rate than startups that were funded through personal savings, a new study shows.  According to a survey on start-ups conducted by the Sri Lanka Association of Software and Service Companies (SLASSCOM) Innovation and Entrepreneurship Forum to create a [...]

The Sunday Times Sri Lanka

75 % of Sri Lankan start – up entrepreneurs are aged between 20-35 years, SLASSCOM survey reveals


Start-ups that received funding from external sources (i.e., banks, angel investors etc.) have shown a higher growth rate than startups that were funded through personal savings, a new study shows.  According to a survey on start-ups conducted by the Sri Lanka Association of Software and Service Companies (SLASSCOM) Innovation and Entrepreneurship Forum to create a better understanding of the current start-up ecosystem in Sri Lanka, adequate access to debt capital however was listed as a major problem for aspiring entrepreneurs, particularly for startups catering to the food/drink and education sector.

This, it noted, may explain why the majority of aspiring entrepreneurs (62 per cent) look to either personal savings, or family and friends for funding. Although present day startups can usually kick-off with no involvement from external investors, it is evident that this may be the difference between simply starting a business and building a sustainable one. Attracting external investors requires entrepreneurs to go through a vetting process— formulating a sound business plan, one that will persuade the investor to take a worthy risk.

According to the report on the findings of the survey, with quantifiable data on ground level realities, SLASSCOM aims to fuel fact-based discussions on Sri Lankan entrepreneurship. Its overall goal is for the reports and forums to lead to a strategic, national and inclusive action plan to further nurture and grow the startup ecosystem.  The survey sample included 115 aspiring entrepreneurs, 110 existing entrepreneurs, 23 government/industry/corporate education bodies and others and 16 investors. Here are extracts from the report:
What is a Start-up?
Start-ups are new businesses that are innovative – they generate new products and ways of doing things. Technology ideas are now driving innovation as much as business and product ideas, the definition of a ‘tech company’ has become increasingly obscure as most businesses today are built around technology— creating a high growth, high impact business environment.  A start-up’s biggest value is the entrepreneurial mindset that eventually increases the chances of growing a business successfully. There is increasing interest from stakeholders of all kinds: venture capital investors, private wealthy individuals, event spaces and most importantly governments to get involved as the economic benefits of hosting successful tech companies is a big plus for the future welfare of any region.

What are Sri Lankan entrepreneurs like?
The survey found that 75 per cent of respondents were between the ages of 20 and 35. China indicates a similar age profile with 65 per cent of their entrepreneurs being from the same age band.  The survey found that 86 per cent of respondents had a Bachelor’s degree or higher, compared to 82.5 per cent in the United States. More than 65 per cent listed Computer Science or Engineering as their core area of expertise.  The research proved that 96 per cent of start-ups in Sri Lanka consisted of male founders, a trend ubiquitous globally.

What does a Sri Lankan Start-up look like?
According to the results of the survey, Sri Lanka’s current startup ecosystem appears to be in the expansion stage with 55 per cent of entrepreneurs generating early or growing revenues (with 65 per cent of them generating up to Rs.150 million in revenue).  The survey found that 38 per cent of respondents work in a team of 2-5 people while only 7 per cent of them were listed as working on their own. According to EY’s (Ernest & Young’s) Global job creation and entrepreneurship survey for 2015, 47 per cent of global entrepreneurs expect to increase their workforce within the first year of the business being founded.

58 per cent of respondents utilised personal savings to fund their business while 12 per cent of them relied on funding from family and friends. 28 per cent of funds were raised externally through angel investors and bank loans, etc. Access to credit is consistently rated by small and medium firms as one of the greatest barriers to doing business in Sri Lanka.

Ranking of obstacles for growth of a Start-up

  •  Affordable work space
  •  Convenient means of making and receiving payments online (such as PayPal)
  •  Access to debt capital from banks
  •  More reliable and cheaper access to Internet bandwidth
  •  Sri Lanka brand recognition and global marketing to help attract foreign clients
  •  Access to experienced mentors to gain advice
  •  Regulatory environment and ease of doing business
  •  Access to technically proficient talent

Ranking of enablers for Start-ups to succeed

  • Availability of capital
  •  A supportive regulatory environment and ease of conducting business
  •  Risk tolerance and celebration of failures
  •  A pro-entrepreneurship culture and support from family to pursue startup dreams
  •  A collaborative business culture
  •  Guidance from experiences entrepreneurs
  •  Visible successes and role models ‘ that encourage new startups
  • Technical skills

Barriers to growth for Start-ups Specialisation
Research showed most startups in Sri Lanka undertake rapid diversification in order to mitigate the risk of failure. A group of 27 companies with revenues up to Rs.150 million was assessed to understand if the number of sectors they served bore a relation to the revenue they generated. Companies generating revenue within the range of Rs.12 million to Rs.150 million served two sectors, while companies that served three or more sectors generated Rs.0 – 12 million in revenue.

The strategy of early diversification has its positives—creating a larger product mix, increasing the odds of a great idea and building up an entrepreneur’s skill-set. However, it can be seen that start-ups that focus on growing one product have the ability to generate greater revenue, possibly due to the fact that these players can focus their resources on developing a higher quality product. Diversification may be better suited for a later stage—following the execution of a successful primary product when companies have more resources to develop a more sophisticated offering, as well as investigate new markets.

Path to growing Sri Lanka’s  Start-up ecosystem Funding
With over 50 per cent of aspiring and existing entrepreneurs opting to utilise personal savings to start their business, it is evident that external funding and the lack of support from the banking system are clear barriers to Sri Lanka’s start-up ecosystem.  The current slump in global capital markets and Sri Lanka’s risk averse nature of investors has led them to look for more stable avenues for investment. A mutual fund catering exclusively to start-ups can be considered an alternative to the conventional investment paths for venture capitalist and angel investors— diversifying risk as well as portfolio, while having potential to bring in exponential returns.

Encouraging enterprises and individuals to make angel investment in the IT/BPM industry by extending triple tax deductions for angel investments of up to Rs.25 million rupees with matching investment from the state; funds will be required to be managed via a chosen development bank.  The current restrictions imposed on foreign investors should be relaxed— private foreign investments are risk free to the country and whilst providing funding for start-ups, they bring with it the advantages of advanced technology, management best practices and assured markets.

Business costs
The survey showed that over 50 per cent of existing and aspiring entrepreneurs find the lack of affordable workspace to be an issue. Furthermore, the cost of electricity which remains one of the highest among countries of similar standing is a key concern if Sri Lanka is to compete as a tech start-up hub.  Fostering incubators and co-working spaces that provide low cost space and subsidised electricity is proposed to tackle heavy costs of operation during the company’s infancy. Public/private partnerships to identify suitable areas to be converted to ‘incubator zones’ offering affordable rental and electricity rates as per a pre-defined scheme.

Regional inclusivity
Since 87 per cent of the IT/BPM workforce are from areas outside Colombo, this has created an environment of increased urbanisation and living costs. Analysis of the geographic spread of the survey respondents revealed majority of the investment community and aspiring/existing entrepreneurs were from Colombo.  It is important to ensure inclusive growth in order to achieve national prosperity— initiatives such as the entrepreneurship workshop held in Jaffna to create awareness of start-up potential of regions outside Colombo. Tax incentives for existing IT/BPM companies to set up operations outside Colombo will ensure a balanced development of the ecosystem and infrastructure throughout the country.

Strategic input
Access to experts that have an objective view of the business —similar to that of an investor — can be paramount to streamlining a company’s goals and providing it with a long term plan to fruition. Specialist input towards a realistic valuation may aid the funding process by providing lenders with a more credible foundation to invest, while consultation on strategy and in-depth market research will allow the company to follow a focused path to growth.

Possible government subsidies will help start-ups gain access to professional help to better understand markets, identify pathways to organic growth and discover untapped areas of opportunity. Furthermore, steps should be taken to organise similar initiatives to SLASSCOMS Xeleration, Sri Lanka’s first accelerator programme with regional access which provides start-ups with immersion into the international forum and mentoring from entrepreneurs and domain experts whilst providing exposure to valuable networks to help capitalise on regional growth opportunities.

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