Effects of COVID-19 on the Sri Lanka Tech Startups : Survey conducted by Startup Genome
It is very evident that to achieve the objective of an IT workforce of 300,000 and reach US$ 3 Bn of annual foreign exchange revenue generated via knowledge services sector and electronics sector by end of 2024, tech startups in Sri Lanka have to play a significant role as it is one of the most fast-growing spaces in most of the emerging countries. In 2019, the global startup economy was valued at US$2.8 trillion and growing over 10 percent every year, which is about three to four times faster than the rest of the economies. With the world’s transition to a digital economy, technology startups and their ecosystems have become more important and the jobs they create are more sustainable because they are better adapted to our economic future. The current COVID-19 crisis has accelerated the digitization of the offline economy, making tech companies even more important.
Foreign Direct Investments (FDIs) on innovative startups including startup exits is one of the major components of the objective above. Having understood the importance of nurturing startups, the Government has included a key milestone in the National Export Strategy (NES) as well. There are a growing list of policies to be refined and actions to be taken in order to support the startup ecosystem to achieve the above milestone. Unfortunately, Sri Lanka currently does not possess a comprehensive document to use as reference and as a result decision-makers have limited knowledge on where the country stands when compared to other countries with similar setup due to this lack of information. As the country move towards achieving US$3Bn foreign exchange revenue by 2024, it’s really important to benchmark the current ecosystem and understand the areas the ecosystem should focus on to accelerate growth. Improving the startup ecosystem performance requires a proper assessment and quantification. With that thought, the ICT Agency of Sri Lanka (ICTA) partnered with Startup Genome this year in order to assess our startup ecosystem and find out where we stand in the global rankings.
ICTA has been working with Startup Genome since 2017 and Sri Lanka was included in the Startup Genome Global Report in 2017. Startup Genome is the world-leading innovation policy advisory and research firm, where they have advised on ecosystem development strategies and action plans for more than 40 governments. Startup Genome’s mission is to help cities all over the world grow their startup ecosystems.
With the COVID-19 outbreak worldwide, the global economy was adversely affected in the most unexpected ways imaginable. Which in turn had a huge impact on the global startup communities.
To better understand the impact of COVID-19 on startups globally, and equip governments with tools and actionable insights to support their innovation ecosystems, Startup Genome launched an initiative titled COVID-19 and Startup Ecosystems Series and published a report analyzing the Impact of COVID-19 on Global Startup Ecosystems.
Some of the key findings of this global survey are as follows:
● Global venture capital funding has dropped by about 20 percent since the onset of the crisis in December 2019.
● China, the first country to get hit by the Coronavirus crisis, had a drop of over 50 percent in funding relatively to the rest of the world in January and February. Nonetheless, China has seen a rebound in March, although with numbers still lower than pre-crisis levels. Asian ecosystems (excluding China) also saw a major drop beginning in January, with no rebound as of March.
● The United States has so far experienced only relatively small changes in startup funding since December 2019: a drop of less than 10 percent by March.
● European ecosystems only saw drops in funding activity starting in March, of about 10 percent compared to December — the last continent among all regions of the world to see an impact on number of tech investment deals.
● 41 percent of startups have 3 months or fewer cash runway by end of April. This means that if these companies do not change their cash flow situation and do not raise additional funds, they will die.
● For startups that have raised Series A or later rounds, 34 percent have less than 6 months worth of cash — a danger zone in the current situation where fundraising is difficult.
Nearly 1,500 respondents have answered the survey across all continents and in over 50 countries, while Sri Lanka had 107 respondents — the highest response rate Startup Genome has received from a country. All credit should go to our startup ecosystem partners, our startup founders who have supported us in the survey by spending their valuable time and effort. And last but not least, our volunteers who have done a tremendous job by following up the survey by expecting nothing in return. Your hard work paid off. (Download Sri Lanka — Startup Genome Insights Dashboard)
According to the survey responses Startup Genome received from Sri Lanka, over 85 percent of startups have less than three months of cash runway left and out of that, 43 percent of startups are in red zone with a cash runway left just for less than one month. It was quite alarming as it is just 10 percent in the global survey.
Before the crisis, it was around 18 percent and it has increased by 25 percent during the last 4 months.
Not only the capital, but the number of unemployment claims also continues to mount around the world. Startups, unfortunately, have to make difficult decisions regarding their employees. For companies with full-time staff, 74 percent had to let go of their full-time employees. Most of the cuts so far have been relatively small — about half of the companies reducing their workforce have laid off 20 percent or less of their staff.
When we broaden the scope to look at all staff, including contractors, part-time workers, and consultants, the vast majority of companies have reduced labor costs. In Sri Lankan context, we see that 37 percent of companies have managed to survive without doing any layoffs but they have stopped all recruitments. 10 percent of the startups have laid off only part-timers and consultants. At the same time, on a positive note, another 5 percent of startups have increased their labor cost by hiring new employees.
When it comes to full-time employee lay-offs, it clearly indicates that the jobs which are mainly performed as supporting services, such as sales and marketing, and value additions such as research and development have a huge impact as those have become somewhat redundant in the current context with the financial difficulties.
An overarching problem for startups as a whole and the economy in general, is the significant drop in demand — and thus revenues. A sizable share of companies was very heavily hit: 39 percent of local startups have seen their revenue drop by more than 80 percent and 22 percent has a 100 percent revenue decline. Only 8 percent in average has 100 percent revenue decline when it comes to the global startup ecosystem.
In Sri Lanka, 47 percent of startups are cutting costs more than 20 percent and 6 percent had to cut costs aggressively with more than 80 percent.
Nonetheless, despite the squeeze in reducing costs, tech startups are uniquely positioned to continue operating even in lockdown scenarios. Unlike many traditional businesses, 88 percent of local startups were able to continue working during lockdowns, even if there is a significant disruption.
According to local founders and startup executives, the top three most helpful policy responses for their businesses would be, in order:
1. Government Supported Loans to support company liquidity (24%);
2. Grants to support company liquidity (20%); and
3. Support to protect employees, like payroll supplementation (14%)
This survey includes companies from every startup sub-sector such as AI, Digital Health, EdTech, Life Sciences, etc. that tackle various markets such as B2B, B2C, B2G are at different funding and lifecycle stages. This analysis only includes technology-driven startups, excluding young businesses in non-technology sectors. This is a preliminary analysis and this survey will continue for few more months to analyse the behaviors and the health of startup ecosystems under the new norm.
References
Governments, Don’t Let your Startups and Scaleups Die: The Importance of Well-Designed Funding Policy in Times of Crisis https://startupgenome.com/reports/well_designed_funding_policy_crisis
The Impact of COVID-19 on Global Startup Ecosystems: Global Startup Survey https://startupgenome.com/reports/impact-covid19-global-startup-ecosystems-startup-survey
