Every country these days brandishes itself as the next Silicon Valley, and Sri Lanka is no exception. The youthful glitz coupled with the promise of a monetary reward of epic proportions are some obvious factors for the burgeoning allure of startups. Whilst some scorn the fanfare surrounding the local startup movement, it has slowly evolved in to a more concrete, structured ecosystem consisting of competing investor networks, venture capital funds, and corporate incubators.
Today the Colombo’s startup calendar is littered with networking events, hackathons, and pitching events every month. Just over a decade ago, such events were non-existent. The investment opportunities for startups were dire, but times have changed.
“In 2010 if you asked the question from final year students of University of Moratuwa what were their plans after graduation, almost all students would say it is to join a big tech company like Dialog or Millennium IT,” says Heminda Jayaweera, an Innovation Fellow at the University of Moratuwa. “Today at least five students out of hundred would say they would like to fully commit to a startup. This is a significant change”. Currently more than 150 startups are found at the University of Moratuwa. Despite the nascent funding landscape, he admits that the launch of corporate incubators like John Keells X, Hemas Slingshot, and the number of angel investors are positive glimpses of better prospects for startups. “Companies are seriously considering investing and acquiring startups more than ever,” he says. Jayaweera, a former Dialog executive and an alumni of the campus, early this year launched the University’s first venture capital firm, Mora Ventures. The fund has set up a three-stage competition and the winners of each round are provided seed funding to elevate their startups to the next level. The fund is entirely sponsored by the University’s alumni. Its most recent grant was given by Bhasha, one of the early startups founded at the university that has enjoyed mainstream success. The fund has an audacious goal of creating the first Unicorn – a startup valued at $1 billion by the year 2027. “Philippines just had their Unicorn” he says. “There’s no reason we can’t do this”.
To achieve this dream, startups need to think beyond Sri Lanka, believes Jayaweera. There is an overwhelming tendency of startups to cater towards local market needs, he argues. Even at Mora Ventures out of 50 companies selected to the third stage, 45 have products and services focused on the Sri Lankan consumer. The small consumer market size of Sri Lanka often acts as a deterrent for startups to scale, and achieve significant growth in a short period. To prove his point, he takes the example of Sri Lanka’s e-commerce space. “The local e-commerce industry has not been a mainstream success like Flipkart or Snapdeal of India because the small consumer market we cater to,” says Jayaweera. “We need to instead think of focusing on niche areas with high-tech intensive solutions like Israel”.
The small market conundrum is a tricky problem for Sri Lankan startups. Bootstrapped and starving for cash, local startups on their own do not have the capacity nor the recognition to reach global markets. More importantly, without guidance and prior exposure, it is a difficult endeavour for startups to understand the needs of a foreign market on their own.
Startup X Foundry, one of the country’s first fully fledged incubators intends to bridge this gap. Incubators and their counterparts-accelerators provide mentoring assistance, networks, and work space in return for an equity stake of a startup. But unlike these, Startup X Foundry charges a fee of $200 per month for the services it provides for startups. Aloka Gunasekera who heads the operations at Startup X Foundry says at this initial stage of the company, a Y Combinator like model would not work, given the relatively low number of startups in the country.
The Startup X Foundry is co-founded by Mano Sekaram the Chief of 99X technologies, a software development firm which has a dormant client base in the Scandinavian region. This is expected to be a key leverage point for the startups incubated at Startup X Foundry to enter into markets outside Sri Lanka. “In terms of the product merit alone, a startup cannot go global” says Gunasekera. “If you go to Germany and say we are a Sri Lankan startup, the chances of getting a foot in the door is minute”. Companies like Startup X Foundry can provide the necessary endorsements and credibility for local startups to enter foreign markets. “We are going to position our extensive network in the Scandinavian region so the startups we incubate here has a direct gateway to work with those people.”
Even though only few Sri Lankan startups have achieved mainstream success to disrupt industries, the startup movement continues to generate momentum. Last year BOV capital, a seed stage investment firm backed by Google India Managing Director Rajan Anandan launched a $15.6 million fund focusing purely on investing Sri Lankan startups. Sri Lankan born Anandan is regarded India’s most prolific investor and has already invested in a flurry of local startups such as the e-commerce site, takas.lk and OMAK technologies, a restaurant management platform with significant presence in Southeast Asia.
“We got a lot of interest with regard to the fund, and I think it’s just amazing that Indian partners have come on board to help with the startup ecosystem of a neighboring country,” told Anandan to media.
Every month on average we get about 20 applications,” says Chalinda Abeykoon CEO of Crowdisland, a hybrid company of an equity crowd funding platform and startup accelerator programme. Startup valuations are often subject for debate. And firms like Crowdisland use their own proprietary financial models to evaluate and provide a credible assessment on the valuation of the startups to avoid investor confusion. Crowdisland is not a venture capital firm as it does not invest in startups, instead it takes a percentage of the raised money through its angel investor network. Now the company is looking towards the Sri Lankan diaspora in Australia, United States, and Canada as angel investors. “They are looking at investing around $50,000 which covers a full raise of one startup alone” says Abeykoon. “Another advantage is, by attracting diaspora we can build a channel to that particular global market, so that we can get access to it”.
Venture capital investment is still nascent in the startup eco system. As a result of the limited pool of investors, founders can be easily subdued to the dictates of investors due to their weak bargaining power. Another harbinger most startups face is fund raising for second and third rounds. Most startups find backing for its initial raise but for the next couple of rounds new investors should enter the venture capital market. “Those are some of the challenges we’ve had and we don’t have solutions for them,” says Abeykoon.