Sri Lanka emerges as an important location for high-value start-ups

While efforts are under way to transform the environment, the start-up ecosystem in Sri Lanka remains underdeveloped. At both a government level and in the private sector, resources are being committed to encourage and support entrepreneurship. These initiatives appear to be paying off, with a significant uptick in activity occurring in recent quarters and a critical mass having been achieved.

“There are more start-ups than three years ago and a lot of exciting stuff is going on. Corporates are getting on the bandwagon and we are seeing activity in AI, internet of things and drone technology,” Madu Ratnayake, chief information officer and head of business development for Virtusa Corp, told OBG. “For innovation and start-ups it is the perfect scenario.”

1000 Start-ups 

The government’s overarching goal, established around 2013, is to have 1000 start-ups providing 200,000 direct jobs by 2022, with an emphasis on development in the Northern Province. Innovation should maintain the economy on a positive trajectory and provide it with more services to export.

In 2017 Sri Lanka was included, for the first time, among the top-55 global tech start-up centres in the Global Start-up Ecosystem Report, published by Startup Genome. Currently, the total number of early-stage tech enterprises is believed to be between 150 and 300 and the value of the ecosystem is estimated at $30m, according to the report. The sector has great potential given the country’s human resources, history of technological success and geographical location.

Human capital is relatively well developed, with Sri Lanka being a well educated country with technology orientated educational institutions. The 2016 Start-up Survey, published by the Sri Lanka Association of Software and Service Companies (SLASSCOM) found that 86% of respondents had a bachelor’s degree or higher, while 65% of respondents reported having computer science or engineering degrees. The supply and demand situation makes for the highly efficient sourcing of employees and minimal lag times when recruiting. In the Global Start-up Ecosystem Report, it was found that start-ups in the country hire engineers within 20 days on average, the second-fastest rate in the survey.

Official Support 

The Information and Communication Technology Agency (ICTA), which operates under the Ministry of Telecommunications and Digital Infrastructure (MTDI), provides sectoral support. Much of this support is focused on nurturing entrepreneurship, with initiatives including the IT Business Process Outsourcing (BPO) Career Guidance and Entrepreneurship Programme, the Industry Knowledge Enhancement Programme and the IT for Regional Small and Medium-Sized Enterprises and Professionals Programme.

Of particular importance is the ICTA’s Spiralation Seed Funding Support Programme, which offers LKR750,000 ($4897) to start-ups and provides mentoring, training and assistance. The programme was first established in 2010 and has since supported around 40 companies, including Eimsky, which deals in radio-frequency identification technologies, Tenders, a digital tenders company, HypeHash and Paymedia, both payment services firms, and SenzMate, an internet of things and machine to machine solutions company.

Trace Expert City is a government-supported technology park in Maradana, a Colombo suburb. The start-up centre was developed on the site of the former Tripoli Market by the Urban Development Authority, with the construction carried out by the Sri Lankan Army. Additional phases have been planned and include the eventual construction of a high rise structure.

Conferences and competitions are central to efforts to build the country’s ecosystem. For example, SLASSCOM held the FutureX competition for its fourth consecutive year in late 2017, in cooperation with Motorola, attracting 92 applicants with innovative tech solutions. Furthermore, the Federation of Information Technology Industry Sri Lanka sponsors the annual INFOTEL trade show, while the ICTA launched Disrupt Asia in 2017.

Furthermore, in late 2017, the Asian Business Angels Forum (ABAF) was held in Sri Lanka under the theme cross-border investing in start-ups. The event was designed to attract financiers looking for early-stage investment opportunities – more than 70 foreign investors attended. Meanwhile, Google’s Launchpad Accelerator has been opened to developers in Sri Lanka.

International Partnerships

In March 2017 Ericsson, Mobitel and the MTDI signed the 5G Island of Innovation memorandum of understanding, intended to stimulate the development of 5G internet of things innovation and entrepreneurship. Furthermore, South Korea’s National IT Industry Promotion Agency initiated the 2017 K-Start-up Grand Challenge in Sri Lanka, targeting companies with a prototype seeking to enter the Korean market or sell their product on a global basis. The top-50 entrants received a four-month accelerator programme in Pangyo Techno Valley, the top-25 companies received $27,000 to establish an entity in South Korea and the winning team received $100,000.

Meanwhile, the Korea Eximbank is supporting ICT education and e-learning in Sri Lanka. This includes the establishment of centres for the provision of educational materials and network systems. In late 2017 China pledged RMB2bn ($291m) to Sri Lanka in official aid, the lion’s share of which is for ICT infrastructure. Furthermore, Huawei is set to continue to award scholarships as part of its Seeds of the Future programme to promote technological transfer.

Raising Funds 

Some doubts remain around financing as few venture capital (VC) funds exist locally, while the country is not particularly well known to the international investment community. Traditionally Sri Lankan investors have not shown a great appetite for risk and tended to favour quick returns. They have also generally favoured companies with international connections and shown hesitancy to invest in ventures that are strictly domestic, with exit risk being a serious issue. Without an effective Nasdaq-type board or tech giants seeking frequent acquisitions, it remains unclear where investors in innovative companies would find their payout.

“It is a positive thing to encourage more start-ups,” Ashok Pathirage, chairman and managing director of Softlogic Holdings, told OBG. “But it remains to be seen how this will be achieved as capital is not easy to find.”

Nevertheless, Blue Ocean Ventures (BOV), the country’s first seed fund, entered the market in 2012 and has since invested in around 10 companies. BOV’s portfolio includes Tripvillas, a holiday rental site; OMAK Technologies, a restaurant solutions company and Roar Media, a news platform. Most of the rest of the funding community is comprised of groups, associations and incubators, with few VC funds active until recently.

Examples include, Crowdisland, Sri Lanka’s first crowdsourcing platform. Founded in 2016 it offers equity investment in early-stage start-ups. Venture Engine, which matches investors with entrepreneurs. Hemas Slingshot and Ideas2Fund, backed by MTI Consulting, also facilitate pathways to funding. The Lankan Angels Network, a platform for investors connected with ABAF, seeks to support the country’s ecosystem. Companies supported include the ticket site BusSeat, Lanka BPO Academy and Wild Trails, an ecotourism firm.

In late 2017 Malaysia’s Axiata, the majority shareholder of Dialog Axiata, provided $15m to form a VC fund for technology start-ups in Sri Lanka. The fund was launched in December 2017.

In terms of office space, Orion City, an IT park founded in 2009, offers rental space solutions for start-ups. Hatch, a local incubator and accelerator, announced in late 2017 that it will be creating the country’s largest shared office for start-ups. The facility will offer a wide range of low-cost options, from temporary desks to full offices, with an estimated 600 work stations available, along with common rooms and mentoring services.

International observers have noticed a change in the country’s investment environment. According to the Global Start-up Ecosystem Report, early-stage funding is growing at one of the fastest rates in the world. One positive indicator is the acquisition of start-ups by major corporations. In 2016, 87.6% of the issued shares of the online medical services platform eChannelling were purchased by Mobitel for the sum of LKR732m ($4.8m). Furthermore, in mid-2017 telecommunications provider Omobio acquired the radio-frequency identification and internet of things firm eIMSky.

Payments 

Since 2015 Sri Lanka has been working to develop a National Payment Platform (NPP) to enable the convenient transfer of funds between individuals, corporations and the government. This would dramatically alter the operating environment for start-ups. 99x Technologies was chosen as the service provider and TechCERT conducted the security audit, while KPMG was responsible for the risk and governance framework. When operational the NPP will allow anyone to establish their own payment gateway. The NPP is only a messaging system and is not involved in the actual settlement of funds. However, the central bank has stated that the NPP will be considered a settlement system and be subject to full regulatory oversight.