Start-ups need re-evaluation of business models and government boost: KPMG

By Shabiya Ali Ahlam
Local start-ups should critically re-evaluate current business models by taking into account the direction of the business in the short term, to add fresh impetus to the sector and greater emphasis from the government is required to position Sri Lanka as a start-up-friendly economy to move forward, advisory firm 
KPMG said.

While entrepreneurs are expected to keep an eye on opportunities, especially in areas where the current status quo is failing to deliver, KPMG stated that the need of the hour is further regulatory support, since the growing popularity of Sri Lanka as a destination for business expansion is reflected through several foreign start-ups setting foot in the country.

“The key areas of focus to push start-ups are credit, infrastructure and conducive regulations. Easy access to credit should be facilitated, whilst also providing provision of adequate and low-cost infrastructure facilities and having in place flexible regulations and tax requirements,” KPMG stated in its latest report that was 
launched yesterday. 

The report focused on supporting start-ups through the COVID-19 crisis. 

KPMG pointed out that certain regulations in Sri Lanka place limitations on equity and product crowdfunding. Such include the number of people that can invest into a private limited company. It stressed that most Board of Investment (BOI)-granted concessions and other tax relief measures in the recent past have resulted in “very little” incentives for potential investors.

KPMG stated that investments in the start-up space should be promoted by way of relaxing certain regulations and providing tax concessions in return. 

Such concessions include tax write-offs for angel investors in early stages of companies and reducing minimum investment requirements to qualify as a BOI venture.

Furthermore, it suggested that restrictions on equity and product crowdfunding should be minimised. For this, KPMG advised that the government can work hand in hand with the private sector, enabling platforms to source and allocate funds.

KPMG also called for the establishment of a framework for a limited liability partnership (LLP) structure to eliminate double taxation for investors and shareholders.

On the area of debt, the advisory firm stressed the need to recognise start-ups as a separate sector from SMEs, so that banks can be less stringent on the requirement of collateral and instead evaluate the business model and the human capital, when providing loans.  “Relief loans should be extended to new start-ups and not only to the existing clients. Banks should be encouraged to work with investors, incubators and accelerators, to assess the risks of providing debt to start-ups through a separate programme or credit line,” KPMG said.

Prior to COVID-19, KPMG highlighted that the start-up ecosystem in Sri Lanka was growing in line with development areas such as communication and IT, which have contributed to a rapid growth in the number and scale of start-ups.

According to the estimates from the Sri Lanka Association of Software and Services Companies (SLASSCOM), there were 400 registered start-ups in Sri Lanka in 2019 and the number is expected to reach 1,000 by 2022.