Breaking new grounds: The Council for Startups

Sri Lanka’s thriving tech industry has proved time and again that it is not about only rising to the top but also taking as many companies as possible up that growth trajectory.

Determined to create new-age companies, the well-established industry players have stepped up efforts to allow new start-ups to emerge and contribute to making the sector one of the highest revenue earners to the country.
In an effort to create a one-stop shop for start-ups, a team of sector leaders came on to one platform to establish the Council for Startups, an initiative that kicked off no sooner the pandemic struck.

Council for Startups Chairman Prajeeth Balasubramaniam, in an interview with Mirror Business, recently shared the current scenario the local start-ups are faced with, plans to creative a conducive environment and the way forward charted to go beyond the borders of Sri Lanka.

Following are the excerpts from the interview. 

What led to the establishment of the Council for Startups, given that there are other initiatives already in place? 
Sri Lanka’s start-up ecosystem is still at a very early stage of development and this ecosystem was non-existent prior to 2009.  Unlike India, Sri Lanka being a very small market has been a good test market to launch products and services. Valuations come much cheaper and it’s a great place to test concepts. 

I have been an angel investor since 2005. The partners of BOV have a collective experience since 1995. The company was created in 2009, with a small fund to help start-ups grow and create the awareness and build the ecosystem. 

In 2012, I founded the Lankan Angel Network (LAN), which is the first and largest network of angel investors in Sri Lanka. The Venture Engine programme today is the largest private sector-driven start-up conference in the country, with over Rs.2 billion funding since its inception. 

In 2016, we created the first Venture Capital funding for Sri Lanka and the company was based out of Singapore. 
In 2017, we created the Digital Innovation Fund, which helped funding digital start-ups. I am currently on the board of Hatch, which is a leading accelerator and incubator in the country. 

However, despite having these programmes that boosted the start-up ecosystem, there was something lacking – a ‘one-stop shop’ for start-ups to reach out to, for any information they require. 

These programmes were all started to boost the ecosystem.

Bridging this gap what was led to the establishment of the Council for Startups. We attempted to kick off this initiative back in 2016, when I was in the National Steering Committee but it wasn’t executed.

Determined to having this initiative kick off, it was decided that we make the Council for Startups, a private sector initiative, created via the Ceylon Chamber of Commerce and National Agenda Committee. 

What is the council going to do differently?
A good ecosystem is essential for any start-up to survive. In a robust ecosystem you need a good investment climate, access to information and markets, incubators and accelerators and a good infrastructure to make it conducive for start-ups. 

This transformation will cut across sectors, lead to the creation of hundreds of new companies, millions of jobs and will bring significant new investment into the economy. Getting there will require many changes to the ecosystem, including creating awareness, creating a large network of mentors, who can work with these companies, helping entrepreneurs build capability, providing seed and follow on funding and helping companies to accelerate their growth globally. 

As highlighted for the previous question, the Council for Startups will serve as a one-stop shop. This unique proposition is what makes it stand out from the previous establishments.

What is the contribution of start-ups to the economy to date? What are the sectors that have potential?
Let me answer this with a question. Why have exports reduced? Why have we not innovated and become more efficient compared to our regional peers. 

The low hanging fruits for exports are the SMEs. We have over Rs.1.2 billion in tech exports and every industry stands to benefit from tech. 

To answer this specifically is tough at this point of time since the necessary information for this has not been captured well enough to quantify. 

Funding had been an issue that has been highlighted for years but it continues to be an issue. Why is that?
The current structures for venture fund investors are not tax efficient, as any profits on disposal are taxed at a corporate level of 24 percent. The current system also does not account for the fact that a majority of the venture investments will fail and generate losses for the investor. The sector suffers from a dearth of private investment and growth capital, due to the high risk involved and perceived low returns.

For this we propose: There is a need to provide growth stage capital for start-ups in Sri Lanka, so we propose an advantageous tax structure for investors in designated funds, similar to that provided for investors in SL REITs.
We propose for the investment to be made via a dedicated fund incorporated in Sri Lanka. These funds could be regulated with an authority designated by the Finance Ministry and the start-up council. 

What support does the council require from the government?
The council has identified few areas that require attention and support from the government.

Firstly, just as for REITs, the government could help impact, angel and venture capital funds set up in Sri Lanka avoid double taxation.

A ‘Fund of Funds’ must also be set up to bridge the gap of growth capital for innovative start-ups.

The government should also consider exploring a start-up city/hub where all start-ups and funds are set up.
Lastly, the government should look towards building productised companies. 

How does angel funding fare in the current depressed climate?
The private sector has not slowed down. We created the Rs.100 million fund with 100 angels giving Rs.1 million. This was launched in 2020. It is imperative that we keep this momentum going and for that the government must also extend its support.

What is the impact of the COVID-19 pandemic on the start-up ecosystem?
There certainly was an impact. Some start-ups witnessed a slowdown and this is because we do not have the digital network the other countries have. If not for that, I am confident that all tech companies would have thrived.