It’s easier to create a web or mobile app than ever before. Seed capital is also becoming easier to come by for local entrepreneurs and the combination is resulting in more startups and young founders than ever before. However, investment that goes into R & D locally isn’t sufficient to produce a steady stream of new inventions, hence only a few local startups are built around a core propriety technology that keeps competitors at bay.
The IT sector has seen some innovative B2B companies, established by founders with networks in Western markets that secured them venture capital and early customers. A fresh local entrepreneur without such networks is more likely to be enticed into the consumer internet space which perhaps doesn’t require much high-tech wizardry. Simple consumer apps are technologically not difficult to copy and indeed Sri Lanka already seems to have plenty of competition in some categories such as e-commerce and online classifieds. Given the small size of the local market, new aspirants piling into the same categories are unlikely to add much value. So where should aspiring local tech entrepreneurs set their sights?
In the Sri Lankan context, consumer internet startups can be categorized broadly into two categories. The first, are startups leveraging technology to serve an obvious and a relatively widely felt market need such as providing an easier way to book medical appointments (E-Channeling), airline tickets (Findmyfare.com) or purchase items online (Takas.lk). The second, are startups experimenting with a novel business model which can be scaled regionally or globally if successful (Trekurious). The business model and path to revenue creation is relatively straightforward for startups in the first category. Most of these business models have been tried and tested abroad in more developed markets and the intention of players in this category is to be the winner in their respective vertical. Since they are pursuing a widely felt market need, the opportunity is large enough to create a sizeable profitable enterprise if successful.
Unless they have been a very early mover into their vertical such as E-Channeling or Findmyfare.com all startups in this category are likely to have several competitors. The significant size of the opportunity means that these startups can raise venture capital at high valuations. At the same time, they are likely to be in a ‘land grabbing’ mode for some time to become the dominant company in their vertical and need constant cash infusions to keep going.
[pullquote]As the Sri Lankan venture capital market develops more depth and breadth, the current catch 22 that novel product ideas face when raising funding may disappear. Indeed, if current efforts to develop low-cost Internet connectivity in both urban and rural areas are successful, Sri Lanka will be uniquely placed to test the viability of consumer Internet startups, targeting regional and global expansion[/pullquote]
Any entrepreneur aspiring to start a business falling under this category needs to be able to raise significant capital. So this category may be shut out for fresh out of university undergrads without the necessary networks and experience to do so.
Bigger companies are actually better placed to implement many solutions that serve a wide market need and entrepreneurial youngsters may actually find better opportunities joining such initiatives. For example an established bank or a mobile operator stands a better chance to create a NFC card payment system or a peer-to-peer money transfer app.
Similarly a media or entertainment company may be better placed to create a local Spotify or Netflix. Larger, established companies have a tendency to be technology laggards and get disrupted by startups, but in Sri Lanka capital may prove to be the crucial barrier that arrests this trend.
The second category of startups experimenting with a novel business model are a rare species. Entrepreneurs pursuing such novel ideas are likely to face a catch 22 when raising capital. They would find it difficult to raise significant venture capital for a consumer internet startup due to the size of the local market.
The only way around this is to expand out of Sri Lanka to the region, which requires even more capital. This requires careful management of both investors and business strategy and may require entrepreneurs to look at Sri Lanka as an initial test market and plan for expansion abroad once the business model proves viable.
By establishing product – market fit for a novel product, entrepreneurs in this category are essentially creating a market that didn’t exist before and will be well placed to dominate it as the early mover. Hence depending on the novelty of the solution and the perceived scalability of the idea, a high valuation, even early on is a possibility.
As the Sri Lankan venture capital market develops more depth and breadth, the current catch 22 that novel product ideas face when raising funding may disappear. Indeed if current efforts to develop low cost internet connectivity in both urban and rural areas are successful, Sri Lanka will be uniquely placed to test the viability of consumer internet startups targeting regional and global expansion.