A country’s startup ecosystem may be a gauge of how it is keeping pace with rapid technological overhauls, adopting those ubiquitous digital tools helping to improve accessibility and productivity in farming to manufacturing, services delivery, conservation and consumption, indelibly altering spheres like healthcare, education and even financial services, and forever changing how people live and work. Innovation is about making the best use of technology as much as developing new technologies. However, innovation is a much broader concept.
Contemporary innovation entails introducing new elements or enhancing existing products, processes, services, or technologies. Fundamentally, innovation involves fostering new concepts, techniques, offerings, or remedies that yield significant positive outcomes and value. It is about generating fresh ideas and translating them into tangible results that bolster efficiency and efficacy or fulfil unmet requirements. Innovation extends beyond technological strides to encompass inventive problem-solving approaches, procedural enhancements, organizational culture shifts, or bold business models. It is about leadership and culture.
The examples of MAS and Brandix, MillenniumIT, Virtusa, and WSO2 are legendary embodiments of innovation, and there is more: we have many large conglomerates that have established themselves overseas and many small businesses that have gone global in the last few years or found growth amid an economic crisis. Sri Lanka has many inspiring examples of innovative people and companies.
However, as a nation, the innovation puzzle remains unsolved. Consider our state-owned enterprises and bloated public sector workforce that have required more debt for sustenance (and now tax increases) for decades. The problems are myriad and complex, and why focusing on the limited startup space may help address fundamental issues that can elevate the entire economy. A 2021 ASEAN report calling for a policy framework among member countries for regional startup development and collaboration across borders identified these fundamentals.
Fostering a vibrant startup ecosystem demands a multifaceted approach, blending strategic policies with collaborative efforts. Core to this endeavour is ensuring stability and transparency in governmental regulations, instilling confidence among entrepreneurs to plan and invest effectively. Moreover, maintaining a supportive regulatory environment that encourages innovation while safeguarding consumer interests is crucial for sustained growth.
In tandem, attracting and retaining talent must remain a priority. Simplified work visas, collaborative initiatives between academia and startups, and pathways for skilled professionals—domestically and internationally—foster a diverse talent pool essential for fueling innovation and ecosystem expansion. Investing in entrepreneurship education programmes, integrating them into school curricula, and offering training for aspiring founders cultivate a culture of innovation from an early age, unlocking societal potential for economic and social progress.
Access to capital remains pivotal. Encouraging investment from angel investors, venture capital firms, and government-backed funds provides the financial impetus for growth and innovation. A robust startup ecosystem will also have up-to-date physical and digital infrastructure and secure intellectual property protections.
Government support as a customer can significantly benefit startups and enhance public sector governance. For example, procuring goods and services from startups can validate innovative solutions. These solutions have the potential to foster transparency, reduce corruption, and minimize costly human interventions. Additionally, such partnerships can create valuable revenue streams for both parties and improve public benefits.
What is the state of Sri Lanka’s startup ecosystem, having considered the above? How does Startup Sri Lanka stack up against the rest of the world? We turn to Startup Genome for insights.
Startup Genome advises on innovation policy and researches startup ecosystems globally, collaborating with over 160 economic and innovation ministries and public and private agencies in over 55 countries. Among their initiatives, the Global Startup Ecosystem Report offers insights into global startup ecosystems and hubs, trends, and challenges.
There are several positives.
The startup ecosystem in Sri Lanka has seen steady growth over the past decade, currently hosting 748 startups. Initiatives like Startup SL aims to increase this number to 1,000 and employ 10,000 people by 2025, with several programmes driving this effort. The construction of five tech parks began in February 2022 to attract foreign investment and establish Sri Lanka as an innovation hub.
Microsoft for Startups Founders Hub launched in October 2022, while AccelerateHER, a collaboration between Hatch and the U.S. Department of State, supports female founders. Other notable private sector initiatives like Lankan Angel Network, Good Life X and John Keells X offer valuable resources for startups to thrive.
The Lanka Government Network connects over 860 state institutions, with the Lanka Government Cloud hosting 150 government agencies. The National Data and Identity Interoperability Platform links government information systems, and the Digital Libraries Project, launched by the ICTA in 2022, aims to establish 26 model digital libraries. The National Fuel Pass tracks fuel quotas digitally, while the Courts Automation Project seeks to improve efficiency through an ICT-based court management system.
The International Water Management Institute and the Department of Agrarian Development Sri Lanka launched the GeoGoviya monitoring and feedback system to enhance coordination in the agriculture sector. The Bill and Melinda Gates Foundation offered assistance in developing Farmer Data Management Systems and a Digital Strategy. Government initiatives announced in early 2023 aim to enhance food security, including the National Food Security Act.
The University of Moratuwa has an open learning platform providing free training in full-stack development, while the National Future Talent Initiative guides youth toward careers in IT and business.
Despite these encouraging developments and trends, Sri Lanka grapples with solving the innovation puzzle according to data compiled by Startup Genome.
Startup Genome data for 2020-2022 highlights the value disparity of the Sri Lankan startup ecosystem, which stood at $244 million, notably lower than the global average of $34.6 billion and the $11 billion in the state of Tamil Nadu, India, which had two unicorns while Sri Lanka lacked any.
Early-stage funding amounted to $11 million, starkly contrasting with the global average of $970 million, with Tamil Nadu securing $381 million. Medium seed round funding averaged $90,000, significantly lower than the $821,000 global average ($470,000 for Tamil Nadu), and total venture capital funding reached $128 million, far below the $6.6 billion global average ($2.6 billion for Tamil Nadu).
Total exits in the same period totalled $75 million, notably lower than the $11.3 billion world average and Tamil Nadu’s $16.8 billion. The average software engineer salary in Sri Lanka for 2022 was $6,000, compared to $8,000 in Tamil Nadu and the global average of $46,000.
In Cairo, the startup ecosystem was 8.3 billion, with total VC funding reaching $1.7 billion, while in Argentina, these figures stood at $319 million and $77 million, respectively. Nairobi emerged as a hotspot in Africa, boasting a $7 billion ecosystem and $2 billion in venture capital funding, with software engineer salaries averaging $13,000.
As Prajeeth Balasubramaniam, Co-founder and Chairperson of the Lankan Angel Network, points out elsewhere in this issue of Echelon, Sri Lanka’s startup ecosystem faces significant challenges that hinder its further growth and development.
One of the primary setbacks is the mismatch between investment opportunities and potential returns, which makes investors wary of committing funds. Additionally, startups need help accessing capital and scaling their operations due to limited local startup support systems.
Moreover, issues like the need for more scalable opportunities, frequent currency crises, double taxation and stringent regulations further impede the investment landscape and hinder startups’ expansion plans.
Despite these challenges, addressing core obstacles such as funding accessibility and regulatory complexities is crucial for catalyzing the growth of the startup ecosystem in Sri Lanka. Collaboration between the government, banks, and private sector, alongside investments in digital infrastructure and support for startups, is essential for fostering innovation and driving economic transformation in Sri Lanka, Balasubramaniam points out.
Sri Lanka’s broader problem with innovation lies in the need to foster a comprehensive innovation ecosystem beyond digital innovation, encompassing both product and process innovation to drive economic growth by focusing on sectors like exports and sustainability.
According to Anushka Wijesinha, an economist, this entails acknowledging the diverse players involved, including government, private sector, research institutions, and digital technology hubs, and implementing strategies to fortify every facet of the ecosystem while ensuring inclusivity and equitable access for all stakeholders.
Overcoming obstacles related to the relationship between the state and the private sector and clarifying their distinct roles are crucial for realizing Sri Lanka’s economic potential. Therefore, establishing clarity, consensus, and focus on innovation initiatives is essential for unleashing innovation as a means of economic transformation in Sri Lanka, Wijesinha says. That is what it will take to solve Sri Lanka’s innovation puzzle.