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<p>This project consumed huge amount of work, research and dedication. Implementation would not have been possible had it not been for the support of numerous individuals and organizations. We would like to extend our sincerest gratitude to: • Ruwindhu Peiris Vice Chairman and Entrepreneurship Lead • Dharshan Cooray Executive Director (SLASSCOM) • Usaith Uwize Marketing and Brand Specialist (DMS Electronics) • Anas Akram Project Executive (SLASSCOM) • Ali Marikar Bawa Senior Research Analyst (Stax) • Randika Rodrigo Senior Data Analyst (Stax) Acknowledgements SLASSCOM has an aspiration of achieving $ 5 Billion in Export Revenue and creating 200,000 direct and indirect employment opportunities in the IT/BPM industry by 2022. We believe that the next phase of growth in our industry will be powered by companies that are yet to be born or are still at their early stages. Hence, it is absolutely imperative that we nurture and promote Entrepreneurship in Sri Lanka. ‘Startup Sri Lanka’ is an initiative by SLASSCOM to ignite Entrepreneurship and is an integral part of SLASSCOM’s plan to launch 1,000 start-ups, which is one of our core initiatives in order to achieve our aspiration for 2022. In Sri Lanka each year, ¼ million people enter the job market. Jobs need to be created, the government sector has almost reached its limit and the private sector has to now provide 8 out of 10 jobs. We believe fostering Entrepreneurship will not only create wealth but more importantly, create much needed Jobs. The Startup Survey was one of the first steps in that journey – this survey report will help investors, policy makers and entrepreneurs to debate, deliberate and facilitate building an ecosystem to foster the ‘1,000 Startup Program’ initiative launched by SLASSCOM. My sincere thanks goes to Startup Sri Lanka and the SLASSCOM Entrepreneurship Forum, headed by Ruwindhu Peiris, for their efforts in conducting the survey and publishing this report. Mano Sekaram Chairman SLASSCOM Chairman’s message 1.0 Country Overview 7 2.0 Business in Sri Lanka 7 3.0 What is a Start-up? 7 4.0 Start-up Survey 8 4.1 The Sample Distribution 8 4.2 Sri Lankan Entrepreneurs - what are they like? 9 4.3 What does a Sri Lankan Start-up look like? 10 4.4 What do they think about the current start-up ecosystem? 11 5.0 Barriers to Growth for Start-ups 12 5.1 Specialization 12 5.2 External Funding 12 5.3 Addressing Market Needs 12 5.4 Restricted Access to Online Payments 12 6.0 Path to growing Sri Lanka’s Start-up Ecosystem 13 6.1 Funding 13 6.2 Business Costs 13 6.3 Branding Sri Lanka as the Next Start-up Hub 13 6.4 Entrepreneurial Mindset 13 6.5 Regional Inclusivity 14 6.6 Strategic Input 14 7.0 What’s in Store for 2016? 14 7.1 Opening up Markets to Start-ups 14 7.2 Improving Skills of Entrepreneurs 14 7.3 Enhance access to Technology, Infrastructure and Funding 15 7.4 Improve and Simplify the Regulatory Environment 15 7.5 Enhance Cultural and Community Engagement 15 7.6 Other Initiatives 15 8.0 Conclusion 15 Table of Contents 6 Sri Lanka’s strategic geographical position at the southern tip of India places it at the nexus of the world, connecting the Far East and the Pacific with Europe and the Americas. The country’s economy has seen a steady growth and reached USD 74.94 billion in 2014—a growth rate of over 7.5%. According to the Central Bank of Sri Lanka, the country is making steady progress towards becoming one of the fastest growing economies in South Asia; whilst managing inflation (3.3%) and unemployment (4.3%). The growth momentum of the services sector continued with an expansion to 7.1% (of GDP) during the first half of 2015 compared to 4.2% in the first half of the previous year. Overshadowed by the long-running war and the success of India’s information technology (IT) industry, Sri Lanka was previously left unrecognized by most as a center for delivering IT, business process outsourcing (BPO) and other knowledge services. If Sri Lanka looks forward to sustaining and perhaps increasing its level of economic growth, start-ups could provide an opening into a highly competitive and largely impenetrable job market, reducing unemployment by hiring handfuls of young, qualified individuals across a range of industries. Moreover, technological advancement and increased competition between small businesses, require start-ups to develop their products more quickly, efficiently, and cheaply, while combating macro-economic issues such as rising rates of inflation. Sri Lanka’s current standing as a middle-income emerging market, along with the prevalent business optimism and recent policy changes to revitalize foreign investment inflows, is helping to position it as a regional economic hub. The business climate within the island is becoming increasingly favorable to foreign investors and regional players. It is the only country in the world to have Free Trade Agreements with both India and Pakistan; the government plans to set up 45 high Economic Development Zones and 11 Industrial and Technical Zones to attract investors; and Sri Lanka moved up six spots in the World Bank’s overall ‘Ease of Doing Business’ ranking this year. But is the country a favorable place for entrepreneurs and start-ups? SLASSCOM set out to assess the entrepreneurship landscape in Sri Lanka. Having started by surveying local entrepreneurs to understand realities on the ground, and entrepreneurs’ biggest pain points. SLASSCOM already held a forum towards the end of 2015 highlighting key issues surrounding the growth of Sri Lanka’s start-up ecosystem, and with these reports we hope to disseminate our findings further, and begin a broader conversation on this topic. Start-ups are new businesses that are innovative—they generate new products and ways of doing things. Technology ideas are now driving innovation as much as business and product ideas, the definition of a ‘tech company’ has become increasingly obscure as most businesses today are built around technology— creating a high growth, high impact business environment. A start-ups biggest value is the entrepreneurial mindset that eventually increases the chances of growing a business successfully. There is increasing interest from stakeholders of all kinds: venture capital investors, private wealthy individuals, event spaces and most importantly governments to get involved as the economic benefits of hosting successful tech companies is a big plus for the future welfare of any region. Countries such as Israel are cultivating a thriving, accessible and creative start-up environment comparable to that of the Silicon Valley. With its capital having a population similar to Colombo— it currently hosts one of the highest concentration of start-ups with 62 accelerators, 40 co-working spaces, 60 “tech-community” spaces, and almost 70 investors all within in a country of just 8.4 million people. Its entrepreneurs have created a near perfect ‘innovation ecosystem’ Whereby thousands of high-tech companies and start-ups, leading multinationals, accelerators, and dozens of networking events- coexist within an environment of raw urbanism and avant garde culture. Israel’s start-ups relies heavily upon investors and its government, which directly directly supports the company at every stage through 1:1 investments and initiatives such as the Tel Aviv-Yafo dedicated to elevating the cities global position as a start-up hub. 1.0 Country Overview 2.0 Business in Sri Lanka 3.0 What is a Start-up? 7 The survey was launched by the SLASSCOM Innovation and Entrepreneurship Forum to create a better understanding of the current start-up ecosystem in Sri Lanka. With quantifiable data on ground-level realities, we aim to fuel fact-based discussions on Sri Lankan entrepreneurship. Our overall goal is for these reports and forums to lead to a strategic, national, and inclusive action plan to further nurture and grow the start- up ecosystem. 4.0 Start-up Survey 4.1 Survey Sample 8 Our survey found that 75% of respondents were between the ages 20 and 35. China indicates a similar age profile with 65% of their entrepreneurs being from the same age band. 86% of respondents had a Bachelor’s degree or higher - compared to 82.5% in the US. More than 65% listed Computer Science or Engineering as their core area of expertise. 4.2 Sri Lankan Entrepreneurs what are they like? They are young They are educated 9 They are predominantly male Our research proved that 96% of start-ups in Sri Lanka consisted of male founders, a trend ubiquitous globally. Sri Lanka’s current start-up ecosystem appears to be in the expansion stage with 55% of entrepreneurs generating early or growing revenues (with 65% of them generating up to LKR150M in revenue). 58% of respondents utilized personal savings to fund their business, while 12% of them relied on funding from family and friends. 28% of funds were raised externally through angel investors and bank loans etc. Access to credit is consistently rated by small and medium firms as one of the greatest barriers to doing business in Sri Lanka. 38% of respondents work in a team of 2-5 people while only 7% of them were listed as working on their own. According to EY’s Global job creation and entrepreneurship survey for 2015, 47% of global entrepreneurs expect to increase their workforce within the first year of the business being founded. 4.3 What does a Sri Lankan Start-up look like? They are expanding They are internally funded They have a growing workforce 10 Respondents, were asked to rate a multitude of factors pertaining to the current situation of start-ups: Affordable Work Space Access to debt capital from banks More reliable and cheaper access to internet bandwidth Sri Lanka brand recognition and global marketing to help attract foreign clients Access to experienced mentors to gain advice Regulatory environment and ease of doing business Access to technically proficient talent A convenient means of making and receiving payments online (Such as PayPal) Technical skills Visible successes and role models that encourage new start-ups Guidance from experienced entrepreneurs A collaborative business culture A pro-entrepreneurship culture and support from family to pursuit start-up dreams Risk tolerance and celebration of failures A supportive regulatory environment and ease of conducting business Availability of Capital 4.4 What do they think about the current start-up ecosystem? Ranking of obstacles for growth of a startup Ranking of enablers for Startups to succeed 11 Our research showed most start-ups in Sri Lanka undertake rapid diversification in order to mitigate the risk of failure. A group of 27 companies with revenues up to LKR150M was assessed to understand if the number of sectors they served bore a relation to the revenue they generated. We found that companies generating revenue within the range of LKR12M– 150M served ≤2 sectors, while companies that served 3 or more sectors generated LKR 0–12M in revenue. The strategy of early diversification has its positives—creating a larger product mix, increasing the odds of a great idea and building up an entrepreneur’s skill-set. However, it can be seen that start-ups that focus on growing one product have the ability to generate greater revenue, possibly due to the fact that these players can focus their resources on developing a higher quality product. Diversification may be better suited for a later stage—following the execution of a successful primary product; when companies have more resources to develop a more sophisticated offering, as well as investigate new markets. Start-ups that received funding from external sources (i.e., banks, angel investors etc.) were shown to have a higher growth rate than start-ups that were funded through personal savings. Adequate access to debt capital however was listed as a major problem for aspiring entrepreneurs, particularly for start-ups catering to the food/drink and education sector. This may explain why the majority of aspiring entrepreneurs (62%) look to either personal savings, or family and friends for funding. Although present day start-ups can usually kick-off with no involvement from external investors, it is evident that this may be the difference between simply starting a business and building a sustainable one. Attracting external investors requires entrepreneurs to go through a vetting process— formulating a sound business plan, one that will persuade the investor to take a worthy risk. A start-up that does gain access to external funds may grow more rapidly— connecting a product with a larger audience takes up considerable resources and planning, therefore a bigger marketing budget is more likely. Start-ups with big name backers also attract the visibility and reputational benefits that a self-funded project only receives from becoming successful. Furthermore, access to external funding gives businesses the capital to attract and hire greater talent to build upon a good idea. Investors may even join in as partners; a motivated, smart and connected partner may have benefits beyond just access to capital, active investors will likely be guides in critical business decisions – which in turn could impact the growth rate of a business. The dynamism of the tech start- up environment allows for a limited response time, access to external funding may be the key to accessing a market before it peaks. There is currently a mismatch between what investors see as potentially high growth sectors, and the sectors entrepreneurs are catering to. This misalignment between areas of interest could be the reason for lack of funding. Sectors such as education, transportation and healthcare have gained significant interest from investors, but rank low in the interest of entrepreneurs. Entrepreneurs looking to initiate a business are beset by this asymmetric information— adverse selection problems arise when investors are unable to distinguish high from low quality ideas and rather place emphasis on the prevailing success of a specific industry. This short term-centric credit rationing has exacerbated the underinvestment of start- ups in Sri Lanka. Forums encouraging a dialogue between entrepreneurs and investors will be an integral part of bridging this knowledge gap. SLASSCOM aims to align the interests of investors and entrepreneurs through a multitude of platforms; setting up forums to establish an open mechanism to share ideas and mentor start-ups, media campaigns to strengthen awareness around entrepreneurship and, organize events to showcase Sri Lanka’s start-ups to further attract investors. The survey showed that a large number of existing and aspiring entrepreneurs saw the lack of convenient online payment gateways such as a major operational issue. Sri Lanka is currently restricted from receiving payments through PayPal, hindering many business owners from growing their businesses globally. Although a variety of other payment gateways are available, PayPal is said to have more than 173 million active users worldwide. The restricted access to PayPal has been as a result of the Central Banks regulations to curb illegal money laundering. Majority of Sri Lankan businesses however still have access to smaller international gateways such as 2Checkout and MoneyBookers; it is imperative that the government addresses these issues as it could prove to be a major growth obstacle to Sri Lanka’s start-ups. 5.0 Barriers to Growth for Start-ups 5.1 Specialization 5.2 External Funding 5.3 Addressing Market Needs 5.4 Restricted Access to Online Payments 12 With over 50% of aspiring and existing entrepreneurs opting to utilize personal savings to start their business, it is evident that external funding and the lack of support from the banking system are clear barriers to Sri Lanka’s start-up ecosystem. The current slump in global capital markets and Sri Lanka’s risk averse nature of investors has led them to look for more stable avenues for investment. A mutual fund catering exclusively to start-ups can be considered an alternative to the conventional investment paths for venture capitalist and angel investors— diversifying risk as well as portfolio, while having potential to bring in exponential returns. Encouraging enterprises and individuals to make angel investment in the IT/BPM industry by extending triple tax deductions for angel investments of up to Rs.25 million rupees with matching investment from the state; funds will be required to be managed via a chosen development bank. The current restrictions imposed on foreign investors should be relaxed— private foreign investments are risk free to the country and whilst providing funding for start-ups, they bring with it the advantages of advanced technology, management best practices and assured markets. This will also open up the possibilities of bringing in websites such as ‘Kickstarter’— one of the largest crowdfunding platforms for start-ups— that have a played a pivotal role in uplifting the start-up ecosystems in countries like Australia. A government supported technology investment fund is proposed to support businesses at different stages. Proactively engaging in private public partnerships has led to the rapid development of start-up ecosystems in countries such as Singapore where the government has put into place initiatives such as the $1B ‘Technopreneurship’ Investment Fund, offering up to $2M per start-up. The survey showed that over 50% of existing and aspiring entrepreneurs find the lack of affordable workspace to be an issue. Furthermore, the cost of electricity which remains one of the highest among countries of similar standing is a key concern if Sri Lanka is to compete as a tech start-up hub. Fostering incubators and co-working spaces that provide low- cost space, and subsidized electricity is proposed to tackle heavy costs of operation during the company’s infancy. Public- private partnerships to identify suitable areas to be converted to ‘incubator zones’ offering affordable rental and electricity rates as per a pre-defined scheme. Over 50% of aspiring and existing entrepreneurs consider brand recognition and the ability to attract foreign clients as an issue; it is evident that majority of existing entrepreneurs are yet to identify its national marketing strength and branding as an important factor to differentiating their businesses. Furthermore, the recognition of start-ups by the government and initiatives taken to position the country as a start-up hub has played an instrumental role in developing the start-up eco system in places such as Hong Kong. It is recommended that fund be created under the supervision of the IT/BPM Industry Advisory Committee of the EDB for: • The continuation of country reports by globally recognized commentators and analysts (Gartner) to provide a credible view of the ground realities. • Invitation of foreign media and press to promote and highlight Sri Lanka as a Start-up hub. • Sri Lankan entrepreneurs attending and taking part in high level events such as ‘Tech in Asia’, to gain exposure to the international market. • Continue focus on e-Government initiatives with a “Buy Sri Lankan” policy It is evident that there exists a culture of low risk taking propensity amongst aspiring entrepreneurs in Sri Lanka. When evaluating feedback from the survey respondents it can be seen that majority do not see social and cultural factors as conducive to developing start-ups. Furthermore, aspiration to go beyond the local market is not adequate even for start-ups within the Rs.150M revenue band. It is recommended that a consolidated effort be made to influence the mindsets of students, parents and the public to generate more interest in start-ups. Primary and secondary education should be structured to foster entrepreneurial thinking whilst inculcating the learning and application of essential core skills into curricula. 6.0 Path to growing Sri Lanka’s Start- up Ecosystem 6.1 Funding 6.2 Business Costs 6.3 Branding Sri Lanka as the next Start-up Hub 6.4 Entrepreneurial Mindset 13 SLASSCOM plans to initiate, incubate and accelerate the start-up ecosystem in Sri Lanka through focused plan targeted towards the key areas mentioned below: • Diaspora-Connect: Identifying Diaspora with high potential business ideas and matching them with the necessary local tech talent required to bring the idea to reality. • Identifying Start-ups with similar interests to current government ICT initiatives— to encourage government participation and interest. • Industry-wide alignment through events similar to ‘Sri Lanka Tourism 2.0’ for potential high growth industries to position Sri Lanka as a unique destination for start-ups. • Establish a partnership with IIPL— an accelerator based in Singapore— to promote the regional expansion of high potential start-ups. 87% of the IT/BPM workforce are from areas outside Colombo, this has created an environment of increased urbanization and living costs. Analysis of the geographic spread of the survey respondents revealed majority of the investment community and aspiring/existing entrepreneurs were from Colombo. It is important to ensure inclusive growth in order to achieve national prosperity— initiatives such as the entrepreneurship workshop held in Jaffna to create awareness of start-up potential of regions outside Colombo. Tax incentives for existing IT/BPM companies to set up operations outside Colombo will ensure a balanced development of the ecosystem and infrastructure throughout the country. Access to experts that have an objective view of the business —similar to that of an investor — can be paramount to streamlining a company’s goals and providing it with a long- term plan to fruition. Specialist input towards a realistic valuation may aid the funding process by providing lenders with a more credible foundation to invest, while consultation on strategy and in-depth market research will allow the company to follow a focused path to growth. Possible government subsidies will help start-ups gain access to professional help to better understand markets, identify pathways to organic growth and discover untapped areas of opportunity. Furthermore, steps should be taken to organize similar initiatives to SLASSCOMS Xeleration, Sri Lanka’s first accelerator program with regional access; which provides start-ups with immersion into the international forum and, mentoring from entrepreneurs and domain experts whilst providing exposure to valuable networks to help capitalize on regional growth opportunities. 7.0 What’s in store for 2016? 7.1 Opening up markets to Start-ups 6.5 Regional Inclusivity 6.6 Strategic Input • Develop partnerships with relevant institutions to encourage the teaching and cultivation of an entrepreneurial mindset at an early age. • Synergize an appropriate university/ institute to offer a ‘SLASSCOM Tech Entrepreneurship’ to help identify ideas with high business potential. • Create a structured industry mentoring mechanism focused on product engineering to refine offerings of start- ups with high potential, with the ultimate aim of doubling its value. 7.2 Improving Skills of Entrepreneurs 14 • Establish cost-friendly co-working space with an effective shared services network (legal, secretarial, HR, marketing, etc). • Forum with banks to help promote start-up friendly credit facilities through a dedicated model for infant IT/BPM companies. • Support existing accelerator programs to mentor and grow high potential start-ups. • Identify key bottlenecks in the prevailing regulatory framework and advocate with respective bodies. • Organize events in association with Kandy IT week to create awareness of entrepreneurship in areas outside of Colombo. • Recognize successful existing tech start-ups through extensive media coverage. • Create an open-source forum for entrepreneurs to share and mentor each other by their area of expertise. In addition the initiatives above, SLASSCOM hopes to engage in dialogue with the government and other regulatory bodies to discuss implementing the following: • The introduction of free or subsidized work space for high potential start-ups for up to a year. • Reduction of Incorporation fees from the currently stipulated Rs. 20,000 to Rs 5,000 for IT start-ups with a Rs. 500 annual fee, and the removal of the fees imposed on companies looking to liquidate. • Undertake targeted capacity building for high value entrepreneurs in areas such as digital marketing, UI/User Experience design and life-cycle management. In addition to this, start-ups will be educated on how to attract investors and facilitate management buyouts. • Relaxed regulations on foreign-hires to enable start-ups to receive expert consultation and guidance. 7.3 Enhance access to Technology, Infrastructure and Funding 7.4 Improve and simplify the regulatory environment 7.5 Enhance cultural and community engagement 7.6 Other Initiatives Over the past few years Sri Lanka has made significant progress in areas related to physical infrastructure development in order to promote business. However, Sri Lanka appears to be of weak standing with regards to institutional coordination; ranked relatively low for the cost of registering a business and time taken to enforce a contract (although higher than most other South Asian countries). The bureaucratic bottlenecks are exacerbated by limited access to finance, a comparison of the strength of collateral and bankruptcy laws to protect the rights of borrowers and lenders ranks lower to other developing countries. Sri Lanka secured three out of twelve important policy prescriptions based on the strength of legal rights that facilitate lending for business start-ups, behind countries such as Vietnam and Cambodia which scored seven and eleven respectively. With approximately 80% of businesses being SMEs contributing to over 50% of the nation’s GDP, it is necessary that these regulatory hindrances be managed to establish an enabling environment. The success of creating a global start-up hub can be accredited to creating a conducive ecosystem— an enabling government policy direction, social awareness, entrepreneurial skill development, business acumen and seed funding. Sri Lanka’s thriving service sector, technology and finance skills base and a growing IT/BPM ecosystem makes it a prime candidate to become a regional start-up hub. A focused national program driving key issues, aligning the interests of the public and private sectors, and increasing awareness as per the recommendations made will drive the country towards achieving this goal. 8.0 Conclusion 15 Section 1 • Competitive Benchmarking: Sri Lanka Knowledge Services. ATKearney. Available from: https://www. atkearney.com/documents/10192/430128/country_ competitiveness_study-sri_lanka.pdf/7d3033a4-5935- 41d8-bf99-a1462bf7d553 [Accessed January 12, 2016]. • Location and Connectivity. Board of Investments. Available from: http://www.investsrilanka.com/why_sri_ lanka/location_and_connectivity [Accessed January 10, 2016]. Section 2 • Annual Report 2014. Central Bank of Sri Lanka. Available from: http://www.cbsl.gov.lk/pics_n_docs/10_ pub/_docs/efr/annual_report/ar2014/english/5_ chapter_01.pdf [Accessed December 20, 2015]. • Doing Business in Sri Lanka. Doing Business. Available from: http://www.doingbusiness.org/data/ exploreeconomies/sri-lanka/ [Accessed January 11, 2016]. Section 3 • Digital Travel in Tel Aviv. Tel Aviv Non-Stop City. Available from: http://www.telavivstartupcity. com/#!digital-travel/c1yu8 [Accessed January 18, 2016]. References-SLASSCOM 16 Startup Sri-Lanka is a brand represented by SLASSCOM’s Entrepreneurship Forum. A national initiative to educate, enable and empower entrepreneurs, startups and investors in building a startup ecosystem in Sri-Lanka Sri Lanka Association of Software and Service Companies (SLASSCOM) 2nd floor, McLaren’s Building, # 123, Bauddhaloka Mawatha, Colombo 4, Sri Lanka corpoffice@slasscom.lk | +94 114 062223-7 http://srilankaitbpm.com/startup-ecosystem-in-sri-lanka/ https://www.facebook.com/StartupSriLanka/?fref=ts http://www.slasscom.lk/startupsrilanka http://www.lankanangelnetwork.com/default.php http://readme.lk/business-setting-startup-sri-lanka/ http://roar.lk/startups/hottest-sri-lankan-startups-2015/ Contact Us Useful Links </p>
