During the last five years, WSO2’s business has grown fivefold. Its charismatic founder is now talking about readying the company to go public in a few years
An extraordinary digital entrepreneurial explosion is happening in cities like Tallinn in Estonia, Tel Aviv in Israel and Singapore, which a mere decade ago weren’t considered as globally competitive cities to build tech businesses. Today digital startups providing an astonishing variety of services and products are bubbling up in these and several other cities. Although tech startups are everywhere – not all small countries and cities have been able to produce a concentration of globally competitive tech frms as have a few countries like Israel, Estonia and Singapore. Israel high tech workers represented 9.2% of the total workforce in 2019, according to the Israel Innovation Authority. The value of mergers and acquisitions, or exits, in 2019 totaled $9.9 billion, according to a report by consultancy firm PwC. Half of the total value of these exists, $4.5 billion, was in technology and software.
Estonia is considered the most ‘wired’ and advanced country in the world in terms of e-government. For instance, its citizens are able to cast their ballots in an election, online, from anywhere in the world since 2005.
Now we need to change gears to go from here to the next level, and we are significantly adjusting how the company works, how it sells and how it operates, to scale the business.
Singapore has become a magnet for the global tech giants, many of whom have headquartered Asian from the island. Once a fishing village, today 80 of the top 100 tech firms in the world have a presence in Singapore. Each of these countries has established their own niche in the tech sphere. Israel with tech focusing on security and defense, Estonia with e-government and Singapore by attracting multinational firms to establish innovation centers. There isn’t a surefire recipe to recreate Silicon Valley’s success, however these countries have picked a niche and aligned all their stakeholders to achieve that.
In the past, Sri Lanka has identified open-source software as a niche that may help set it apart. While the industry itself hasn’t fully embraced that, one company WSO2, has become a recognised leader in API management, enterprise integration and identity and access management. Its products are all open source.
If there ever were tech superstars in Sri Lanka, WS02’s Founder and CEO Sanjiva Weerawarana is one of them. The company is a pioneer in what is called middleware applications, software that connects other software components to create a seamless workflow for business operations. It now competes with the likes of Oracle, IBM and Microsoft.
From its inception 15 years ago with initial funding from Intel Capital, the investment arm of chip manufacturer Intel, WSO2 has evolved into a key player among the Silicon Valley behemoths.
In the last five years, the emergence of its API management, enterprise integration and identity and access management products has seen it onboard clients in healthcare, finance, retail, manufacturing, telecommunications and other industries worldwide. Many of WSO2’s clients are Fortune 500 companies and include American Express, Société Générale, Wells Fargo, Motorola, Telstra, Qantas, Schneider and NYU.
As it added clients, helping digitally transform their businesses, WSO2’s growth has accelerated. It now has offices in six countries. However, around 90% of its 700 strong team including Weerawarana are based in Sri Lanka.
WSO2 hit $50 million revenue last year and is now readying for its next growth phase. “Our goal is to set up the company to go from there to the five-billion-dollar track,” he says. “Now we need to change gears to go from here to the next level, and we are significantly adjusting how the company works, how it sells and how it operates, to scale the business.”
“To grow the business to a point where we can IPO in the US market by 2023 is our goal,” he says about WSO2, which is US headquartered despite its significant Sri Lankan presence.
The internet has democratised not only how easy it is to found a startup but where they can be located too. Starting a business is now cheaper than a couple of decades ago when tech businesses needed their own servers and scaling a product required months of planning and significant infrastructure investment upfront.
Today software is written, reviewed and tested on the cloud and when it’s ready, software can be deployed and, if it proves popular with users, scaled quickly by adding more processing and storage on the cloud. A prevailing model is of small innovative firms building products that run on top of platforms. This model is emerging in various sectors from e-commerce, banking and payments, telecom, electricity and in some places even government.
Since moving back to Sri Lanka in 2005, WSO2 founder Sanjiva Weerawarana, besides building a company, has been keen to help strongly position Sri Lanka so it can make the most of a software dominance that is driving the world.
Software is the future
For almost a decade, Sanjiva Weerawarana’s swagger was unconscionably inconsistent with his circumstances. WSO2 was then a minnow in IT middleware where IBM and Oracle are market leaders and hundreds of other firms jostle for a piece of the action. However, in the last five years, the firm has nearly doubled the size of its team to over 700 now. Its edge is twofold. Firstly, it feeds on the external disruption; the challenge posed to businesses by mobile, data, social networking and the cloud. Second, it’s founders’ attitude to building a world class open-source product company out of Sri Lanka.
At first, large corporations were dismissive of the ‘free and open-source software movement’ as something nerds did to pass time. Half of WSO2’s team are engineers and many of them work on developing or adapting open-source software. Like all opensource software, including ones developed in semi-organised online collaborations, WSO2 software’s source code, file formats and data structures are ‘open’ and can be modified. Revenue is earned by providing consultancy and customising the software to work in specific environments.
In Sri Lanka, where jobs offering engineers an opportunity to work at the cutting edge are few and far between, WSO2 is an exception. Because it’s open source, WSO2 software also helps maximise the social value of its invention, because anybody can use it, improve it and deploy it elsewhere.
The great thing about software, Weerawarana points out, is that it creates a level playing field – meaning from Fortune 500 companies to college dropouts working from a ramshackle garage in Uganda, everyone has the same opportunity in creating a killer software product that could be used by billions of people around the world. “The opportunity software presents to a country like Sri Lanka is massive,” he says.
In his nearly eight years at IBM Research in the US, Weerawarana had come to understand that it takes only a small core team to build great software. “And I knew with the quality of Sri Lanka’s engineering graduates, that I can easily find the five, 20, or 40 people here,” he says recalling the period in the leadup to establishing WSO2.
“What was happening in Sri Lanka, for the most part, is those people don’t have the challenging opportunities here and often they leave the country seeking that somewhere else.”
Sri Lanka’s best engineers thrive overseas where opportunities are more plentiful. “These are smart people, and they work hard,” says Weerawarana. He points out that WSO2 difference from the outset is its focus on its people. However, they also pick the top undergraduates, attracting those with a strong technical foundation, good education, and high intellectual capacity.
If software is the future, no country can get around that without a deeply and highly skilled engineering talent pool. Global tech companies with Singaporean offices listed the highly skilled talent pool and innovation along with the modern IT infrastructure as the reasons that attracted them to invest in the city state.
Build hard core product
WSO2 helps businesses digitally transform with its software applications that connect disparate software systems to one another to create a seamless workflow for business operations. WSO2’s primary products are capable of acting as an interpreter between two software systems that don’t speak each other’s language.
Its products offer a comprehensive interpretation of each system taking into consideration the context. In middleware terms, interpreting quickly determines how fast services can be provided and how resource intensive that is, finally impacting the cost of running the application and the overall customer experience. Great applications also interpret more than one system and have what developers call ‘social skills’ or the ability to connect and interact with other applications seamlessly. WSO2’s three most successful products API Manager, Identity Server, and Enterprise Integrator perform this task. It also markets two other products that integrate several of its capabilities customized for the specific requirements of companies in the banking and healthcare industries.
Since WSO2’s founding 15 years ago, the technology landscape has changed. Most people use a smartphone and companies with digitized products or services are making it possible for their customers to access these over the internet. There are several types of software companies. The two main ones are companies that their customers hire to build specific software solutions. These companies build what their clients demand. The second type are product companies, like WOS2, which build software that solve a problem but without a specific client in mind.
Unlike software services, products take much longer to build. In WSO2’s case, it took the company years to ramp up revenue. As it’s privately held, only a few of its financial details are publicly available. However, in 2015, 10 years after founding, its Annual Recurring Revenue (ARR) was $11.2 million. Once products find traction however revenue rises faster. Five years later, revenue has grown fivefold according to Weerawarana, to $50 million (ARR) and the company is now profitable.
WSO2 lost money in the first 13 years of operations. Several rounds of investments funded product development and market share capture. “That’s a fairly common phenomenon for product companies, you have to invest to build the product, make it successful, get adoption, evolve the product over and over again, and get to a point where you have enough scale to support the business,” Weerawarana points out.
Tech entrepreneurship is now popular, even in Sri Lanka. Around it an eco-system of investors, accelerators and co-working spaces have emerged. Weerawarana suggests not enough of these startups are solving difficult problems with deep technology. “A lot of people start companies saying, ‘I will write a mobile app’. That’s not a problem to solve. That’s a service.”
“I encourage more startups taking on difficult problems, not just the cool fun problems. Those are important. I’m not criticising them. It’s a great thing to start a company, it creates jobs, they attract investment, and all that’s great. But if you want to build companies that can become unicorn valued ones, you need to solve hard problems. If you want to build a product company, you must say I have this problem. I’m going to write a piece of software to solve that problem.”
What marks out product companies in a valuation point of view is the revenue multiple investors attach to their valuation. Services companies in technology could be valued at between one to five times revenue but for product companies’, investors start valuing them around five times revenue and going up to 20 times or more. In the tech industry, unicorns are companies that achieve a one-billion-dollar valuation. If WSO2 were valued today at 10 times revenue, it would be worth $500 million.
Go global
A study by two researchers attached to the private ICBT Campus in Sri Lanka surveying 264 engineers published in 2016 revealed that 49% of the participants were in the process of migration. Of that sample, 56% were graduates of the Moratuwa University and 31% from the Peradeniya University and the sample included software engineers.
Some migrate for graduate studies, only a few will return. “We have a huge brain drain of our top talent. Why do they leave? Many people also leave for a job, which is sad, because that means we are not able to give them a corresponding opportunity here.” At WSO2, in Sri Lanka, the teams are mostly Sri Lankan and Weerawarana challenges the rest of the industry. “We rely on foreign consultants, we don’t give our people a chance. We don’t trust our people to find a better solution. You’ve got to get out of that mindset if you want to compete,” he opines about why he thinks Sri Lankan companies are challenged with building more globally competitive products.
The logic that Sri Lanka’s market with its 20 million population and only six million connected to the internet is too small, is well understood. While the per capita income is high by South Asian standards, much of it is still concentrated in a couple of provinces where less than half the people live.
Weerawarana suggests the government can play a major role in helping Sri Lankan software product companies. “The government can change the model of building software. It can say that whenever they need some software, we’re going to go find a Sri Lankan company to invest into that and then also demand that the software be world class. To build products we need to create a market for them.”
Weerawarana can speak with authority about taking companies global. In 2005, he quit IBM Research in the US, having founded the web services platform there and developing new specifications for the way in which web-based applications interacted with each other.
I encourage more startups taking on difficult problems, not just the cool fun problems. Those are important. I’m not criticising them. It’s a great thing to start a company.
Outside of IBM’s predominantly proprietary business environs, Weerawarana was championing open-source application development and is credited with creating the Apache SOAP application: a lightweight protocol facilitating interoperability between a broad mixture of software programs and hardware platforms, a starting point for newer standards that are now widely used for providing web-based service. He also founded the Lanka Software Foundation (LSF) in 2003, a not-for profit to foster open-source software development out of Sri Lanka.
The culmination of events that took place in the lead up to the 2005 departure from IBM, is the inspiration for WSO2’s formation and has its roots back in 2001, when Weerawarana returned to Sri Lanka, still an employee of IBM, but working out of Sri Lanka. Convinced that IBM’s way of developing web services was wrong, he took up the issues with his then bosses by end 2002 and convinced them to start a project to re-develop the application that executed web services.
In September 2004, Weerawarana presented his final product to the IBM software group hierarchy. The project was however canned for being too threatening to one of IBM’s products, which offered a similar service. “That’s when I decided to quit IBM,” Weerawarana writes on his blog (http://sanjiva.weerawarana.org). WSO2, an acronym for web services oxygen, was set up as a technology company building web services middleware platforms. The vision of its founders, as pioneers in the open-source area, was instilled deeply since the inception, especially with some of its first engineers coming from the Lanka Software Foundation (LSF).
Think Israel, not India
Making Colombo the next Tel Aviv is an often-heard rhetoric in the local startup community. This idolization is not entirely without merit. “If we can build 10 companies, each of which can have a market cap of $100 million, they can be sold to someone. Then, they can generate billions of dollars coming into the acquired company. That’s what Israel does,” Weerawarana said as the key speaker for the Ray Wijewardene Memorial Lecture in 2017. With just an eight million population living in a geographic area that is one-third the size of Sri Lanka in a hostile neighborhood, the Middle Eastern country has become a technological superpower by focusing on niche and high-tech areas. In this context, the allure of the Israel model makes sense.
He added during an interview for this story their picking an area of expertise. “Many of Israel’s startups focus on security stuff. Israel is a world leader for technology related to security. Why is that? Because they live in an environment, maybe self-created, maybe due to the historical context, but very insecure. So, they are congruent. They have a massive IT infrastructure and digital system there.”
Sanjiva Weerawarana thinks Sri Lanka also has an opportunity to spark a tech startup renaissance and become an irresistible magnet to global tech giants to invest. However, tech industry stakeholders will need to lean in on a strategy that seeks to establish a niche, has a global outlook and focused on building more product software.