At the October Startup Nation event hosted by First Capital and Hatch, a panel of investors and founders identified major barriers holding back startup funding in Sri Lanka. Broadly, these barriers fall into two categories: policy and perception.
Government Support Key for Startups
Imal Kalutotage, Founder and Chairman of NCINGA, pointed out that startups have a low pool of capital to pull from in Sri Lanka, especially compared to countries like India and Singapore. Despite this, the local funding ecosystem could be improved via government participation.
Kalutotage recalled how Singapore has supported its startups in recent years, such as through investment matching schemes where for every $1 invested into a startup, the government contributed as much as up to $5 in matching funds. Banks were also able to provide collateral-free loans, backed up to 70% by the government, allowing startups to easily access funding.
He said Sri Lanka has the talent for a thriving startup environment, “but we need to build that confidence, support, and backing from the ecosystem.” He added, “I would like to see the government and the financial institutions coming forward more to back this revolution.”
“Currently, Sri Lanka has a small pool of startup investors who are targeted by founders.”
Tax Reform Could Boost Startup Investment
Panelist Mangala Karunaratne, Founder and Director of Calcey, separately said certain tax reforms could incentivise investors to engage with startups as well. Currently, Sri Lanka has a small pool of startup investors who are targeted by founders. Instead of competing for the same investors, Karunaratne suggests introducing tax breaks for investment losses, thereby encouraging more people to become investors, in turn unlocking new capital for startups.
While he is comfortable taking on this risk, others may not be, and tax write-offs may bridge the gap. “These kinds of regulatory improvements have to come.”
Startups Must Rethink Funding Strategies
As an alternative, startups may utilise a blend of funding strategies, Dilshan Wirasekara, Managing Director and CEO of First Capital Holdings. Founders should not hesitate to take on debt to further their companies, he said, especially if terms are favourable. There are several ways to pursue capital.
“It shouldn’t just be off-the-shelf equity,” he commented. For example, startups may obtain loans that can be converted into equity ownership at a later stage. This would help founders avoid selling their company too early and offers investors a more secure entry with potential for future gains.
With interest rates coming down and inflation under control, he added, government-backed investments are no longer seen as the only good choice. As a result, more investors are now looking for higher returns, making startups more appealing.
An Indirect Path to Investor Funding
To round off the session, Ayami Wanasinghe, the South Asia Regional Director of Founder Institute, shifted the focus away from investors to customers, encouraging startups to build demand for their product.
Today, many founders seek investors out as a first step. “It should be the other way around,” Wanasinghe said, redirecting them towards customers. “If you are solving their problem, they are paying you, you are making revenue, and the investors will run after you to invest in your company.”