Prajeeth Balasubramaniam, Chairperson of Lankan Angel Network and Co-founder and the Managing Partner of BOV Capital, which has offices in Singapore and Sri Lanka, tackles Sri Lanka’s challenges to accelerating its transition to a digital economy by addressing key challenges within its startup ecosystem, primarily the mismatch between investment opportunities and ROI.

Sri Lanka seems to be on the path to a slow recovery. What do you see as the most timely setback the Sri Lankan startup ecosystem landscape faces?  

There are several issues to address, particularly concerning the conduciveness of the startup environment in Sri Lanka. Let’s delve into a few key areas impacting both startups and investors. First and foremost, investors are wary of the mismatch between investment opportunities and potential returns. If startups fail to grow rapidly, investors face the risk of inadequate returns on their investments. Consequently, investors globally and locally scrutinize various factors such as ROI potential, associated risks, and growth prospects before committing funds.

Conversely, startups encounter challenges related to the conducive environment necessary for growth. Unlike countries like Singapore, where startups thrive due to abundant venture funding, Sri Lankan startups face constraints in accessing capital and scaling their operations. This discrepancy in startup support often hampers their growth trajectory.

Furthermore, there are distinct categories of startups to consider, namely service-based startups and product-based startups. While service startups focus on providing specialized services without developing proprietary products, product startups concentrate on creating innovative products for the market. Companies like Millennium IT and Virtusa exemplify the contrasting approaches, with the former renowned for its product, the fastest trading software, and the latter for its service offerings. However, despite the abundance of tech talent in Sri Lanka, the limited scale of operations poses a significant challenge for startups looking to expand globally. This scarcity in quantity hinders the full potential of the country’s tech talent, necessitating strategic adaptations to leverage available resources effectively.

One prevalent issue for investors is the phenomenon of double taxation, which significantly impacts the investment landscape. In traditional funding structures, profits generated by startups are subject to taxation at multiple levels, from the fund level to individual company exits. This taxation framework creates a substantial burden for investors, discouraging investment in high-risk assets like startups. 

Additionally, the lack of scalable opportunities within Sri Lanka prompts startups to seek international expansion, necessitating access to foreign currencies and regulatory compliance. However, stringent regulations, such as restrictions on currency exchange and share swaps, pose significant hurdles for startups operating in Sri Lanka. These impediments hinder the free flow of capital and deter potential investors from engaging with the Sri Lankan market.

Despite these challenges, secondary issues like ease of doing business, talent acquisition, and regulatory reforms also warrant attention. Streamlining visa processes, fostering supportive incubator ecosystems, and enhancing regulatory frameworks across industry verticals are essential steps to foster a conducive environment for startups. Moreover, forging free trade agreements with other nations can unlock new opportunities for startups to access international markets. Ultimately, addressing the core obstacles of funding accessibility and regulatory complexities is crucial for catalyzing the growth of the startup ecosystem in Sri Lanka. With proper mechanisms in place, startups can navigate these challenges more effectively, facilitating their expansion and contribution to the economy.

 

How can we accelerate our economic transformation by fostering the startup and digital ecosystems?

Sri Lanka aims to transition to a digital economy, which prompts us to ponder how to accelerate this transformation. Let me address this differently. Consider India’s digitalization efforts in 2015 with the advent of Aadhaar, which created a digital highway akin to the “Highway to Hambantota” concept in Sri Lanka. This initiative empowered small businesses and farmers by facilitating easier transactions. 

Subsequently, India implemented paperless transactions, spurring the growth of digital fintech, agri-tech, and health tech companies. While Sri Lanka’s population is significantly smaller, we can strive for the creation of $100 million companies, a noteworthy achievement for our investment landscape. The goal is not necessarily to replicate India’s success with unicorns but to cultivate a thriving ecosystem of substantial companies that contribute significantly to the economy.

We need to nurture several world-class tech companies in Sri Lanka, focusing on product development rather than services. Our talent pool is robust, as evidenced by the University of Moratuwa’s strong performance in Google’s Hash Code competition. Additionally, Sri Lanka’s potential in technology is underscored by its role in running eBay’s middleware. 

Despite these achievements, many are unaware of our technological capabilities. Similar to how CIMA graduates have excelled globally, we can elevate Sri Lanka’s reputation in technology by retaining and attracting talent. The government plays a pivotal role in this endeavour, particularly in facilitating brain gain rather than brain drain. 

Creating an environment conducive to digital nomads is essential, considering Sri Lanka’s allure as a picturesque destination. By prioritizing the needs of local startups and fostering an environment that attracts investment, we can lay the groundwork for sustainable growth in our technology sector. Ultimately, our success hinges on cultivating a thriving ecosystem that attracts both local and international talent, positioning Sri Lanka as a hub for innovation and entrepreneurship in the digital age.

Ease of doing business is paramount. Suppose a business nomad or digital nomad wishes to set up shop and requires reliable internet connectivity. While we may have sufficient connectivity at the airport, the situation across the country is lacking. For instance, even at beachfront locations, obtaining reliable internet access can be challenging. This is particularly crucial for digital nomads who may wish to work remotely from picturesque locations. Therefore, practical solutions to enhance internet connectivity are imperative.

Another essential aspect is the availability of startup spaces such as co-working spaces, accelerators, and incubators. While progress is being made in this regard, the establishment of such facilities remains slow. However, these spaces are crucial for fostering innovation and collaboration within the startup ecosystem.

Furthermore, once startups are nurtured and accelerated, the next step is scaling. However, accessing funding for scaling operations, especially from local sources, remains a challenge. Often, local companies cite a lack of clear ROI as a deterrent to investing in startups. Therefore, attracting venture capital and larger companies from outside the country is essential for providing startups with the support they need to scale successfully.

Regarding anti-corruption enforcement legislation, while it may signal positive change, it’s essential to address the root causes of corruption. Digitization, transparency, and governance are key to minimizing corrupt practices. Streamlining processes, reducing human intervention, and providing clear guidelines can help prevent corruption at various levels. Ultimately, creating a culture of transparency and accountability from the top down is crucial for combating corruption effectively.

What can we learn from the experiences of other developing countries? 

Let me illustrate with an example from Singapore. In 2016, we established operations there because setting up proved challenging in Sri Lanka at the time. Despite our efforts to establish a second fund here, the process was arduous. In contrast, setting up in Singapore was remarkably efficient. I was able to open a company and bank account within 24 and 48 hours, respectively. The transparency and governance were exemplary, facilitating swift progress. The only downside was the high cost of living in Singapore. Now, Dubai is emerging as an attractive option, drawing many Sri Lankans to set up operations there.

For instance, I have another startup in the drone industry. Facing obstacles to establishment here, they relocated to Dubai, where they’ve thrived, expanding their reach to Australia and beyond. Unfortunately, our country lost out on this opportunity. Entrepreneurs are incorporating Dubai, leveraging its favourable environment to tap into regional markets. These cases underscore crucial lessons we should heed.

Interestingly, countries like Qatar, Dubai, and Saudi Arabia are actively courting startups. Given our own country’s challenges, it’s compelling to consider these offers. To foster reverse migration, Sri Lanka must become more conducive to startups. We can take cues from Singapore, which transformed from scratch into a startup haven. While we have many assets, we’re not leveraging them effectively.

In contrast, countries like England offer incentives like tax breaks for startup investors, operating in a different league. We have a long way to go to reach that level. However, we can adopt similar strategies. For instance, sidecar funds and sovereign wealth investments can help minimize risks for investors, promoting collective investing. These approaches are crucial for nurturing a vibrant startup ecosystem.

How much has the Lanka Angel network invested?

The Lankan Angel Network has invested around Rs700 million. The average for startup funding to GDP is 0.5% globally and we’re barely scratching the surface, hovering around 0.001%. We’re investing around Rs30 million to Rs40 million annually, whereas ideally, we should be investing Rs100 million to Rs120 million annually. In an ideal scenario, we should be aiming for Rs400 million in funding annually.

The Lankan Angel Network is just one component of the investment network. Within the venture fund, there are various stages like seed funding, pre-seed early stage, seed, early and later stage funding. The Lankan Angel Network and its investors primarily focus on seed and pre-seed funding, with ticket sizes up to Rs50 million. Seed funding above Rs50 million comes from Venture Capital funding. The fund tickets for seed funding range from Rs100 million to Rs150 million for early-stage funding, and up to a million dollars. However, the challenge lies in the early-stage funding range of Rs150 million to Rs200 million, where there’s a lack of funding options.

While the ecosystem has evolved over the past decade, with significant progress, it’s still insufficient. For instance, out of the 800 startups within the ecosystem, only 600 are currently active. Ideally, we should have around 1,000 to 2,000 startups. One reason for not reaching this goal is the closure of startups due to the lack of funding and conducive conditions.

Growth has been very slow. It even turned negative during the COVID-19 pandemic, whereas most countries experienced positive growth due to digitization. COVID-19 was the ideal time for us to embrace digital solutions like last-mile delivery, digital health, and digital procurement. India, for example, saw a significant surge in digital health services during this period, with telemedicine and teleconsultation becoming widespread. Unfortunately, we didn’t capitalize on these opportunities despite having the necessary infrastructure and internet facilities.

We must take proactive steps moving forward, especially considering our resilience as a nation. However, if startups continue to leave due to a lack of investment opportunities, we risk losing talent and missing out on other potential options. Therefore, the government must play a role in fostering a thriving funding landscape. Even a modest investment of $50 million could serve as a catalyst, with banks and private sectors joining forces to create funds totalling up to $200 million. This collaboration is essential for driving growth and innovation in our startup ecosystem.

Additionally, alongside investing in digital infrastructure, such as widespread internet access, the government must also focus on nurturing startups and businesses to thrive within this ecosystem. Once the foundational infrastructure is in place, it’s vital to support startups in leveraging these resources to their fullest potential. This holistic approach will be key to unlocking the full potential of our startup ecosystem.