5 Things You Don’t Know About The Sri Lankan Startup Scene

Note: this article was first published in TechinAsia.

“Address?”

The tuk-tuk driver stared at us blankly.

“Trace Expert City. It’s a tech innovation complex somewhere in the center?”

When the response was just another blank expression, my colleague Nick and I gave up, pulled out Google Maps and navigated the driver through the Colombo traffic, looking for the startup tech hub of Sri Lanka.

As soon as we arrived, it became clear why the driver never heard of it. Sunk one level below the road and hiding behind a red brick wall, a thick line of trees was hiding three railway warehouses.

“The government gave us the permission to use this land and develop the first technology park in Sri Lanka. The aim is to create an ecosystem that supports science, technology and innovation, a place that is conducive to creative thinking and encourages collaboration,” explains Mangala Karunaratne, the co-founder of Calcey Technologies, one of the local software development houses that reside within Trace.

Stepping into Calcey offices, it seems that the vision of the government worked out perfectly. With a climbing wall on your left, pool table on your right, and spiral staircase leading up to a mezzanine floor filled with colourful couches, you might as well have been in Jakarta, Singapore or any other established startup ecosystem.

And if you ventured to a garage just a few meters down the road, you would have seen Sri Lanka’s first super electric car, designed to accelerate from 0 to 100 km/h in 3.6 seconds, leveraging nano-technology to reduce its weight.

It all seemed to be there — the vibe, the ideas, the excited programmers typing away on their keyboards. So what is actually happening in the Sri Lankan startup scene?

After spending almost three weeks working with the Lankan entrepreneurs through our Seedstars World programme, this is what we learned:

1. Geopolitics can play to your advantage

With all the startup glory and spotlight directed at India, Sri Lanka has somehow escaped the world’s attention. And no wonder.

Being an island nation with a population of just above 20 million, previously suffering from civil war and natural disasters, it is natural that the local ecosystem has been left to its own devices, unobserved and unintruded by international players or investors.

Nevertheless, the situation is far from dire. The Sri Lankan civil war ended over 6 years ago, and since then the country’s geopolitical outlook is much more positive.

Where the tricky triangle of relationships between India, Pakistan and Bangladesh can leave the subcontinent’s founders at a loss of where to take their product next, the case of Sri Lanka is straightforward. It is the only country in the region to have free trade agreements with both India and Pakistan, which gives Lankans access to over 1.3 billion consumers, and the discussions with Bangladesh are also ongoing.

From the startup community’s perspective, a small population can also work to your advantage.

According to the local entrepreneurs, there is a maximum of two degrees of separation between you and the person you want to reach. This close-knit community then becomes extremely beneficial when looking for help, advice or connections to potential investors.

And how do the Sri Lankan startups compete with their giant neighbour, India? The answer is simple — they don’t.

Instead of scaling to India, where they would be immediately dwarfed by the existing competition, the founders focus their attention further eastwards, to Singapore or Malaysia. There, the competition is naturally less fierce, and the market size more comparable to what they know makes it a near perfect “second” destination.

2. The talent pool is on the rise

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Anybody visiting Trace Expert City will quickly understand that if there is something that Sri Lanka has in abundance, it is its technical talent.

With majority of the startups originating from the software development houses, such as Calcey Technologies or Creative Solutions, running into founding teams with four or more developers on board is not uncommon.

This trend is further strengthened by the returning diaspora, which is a phenomenon that other countries can only dream about.

“Given the peace dividend, we are experiencing a growing number of returnees equipped with valuable global experience wanting to make an impact in Sri Lanka,” explains Ruwindu Peires, the chairman of SLASSCOM, the national chamber for IT industry.

Chalinda Abeykoon from York Street Partners, concurs, “The civil war ended almost 10 years ago, and the Lankans who left the country in search of better education opportunities in the United States are now coming back to their families. With degrees from Stanford or MIT, they are well equipped to fix many of the problems that the war left behind. Not to mention that the competition here is also less fierce than in Silicon Valley.”

3. It is the right time for acceleration programmes

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While the talent is definitely there, formalised education is a harder nut to crack. None of the country’s universities is ranked in the top 500 in the global university ranking, and even the University of Colombo, arguably the best education institution in the country, is able to accommodate only 11,000 students on an annual basis.

With over 3 million people aged between 18 to 24, it comes as a no surprise that Sri Lankans are forced to look for education abroad, or decide to enter workforce without any formal training.

“Traditional” accelerators and incubators are also practically non-existent.

While the software houses are churning out amazing technical founders, this does not necessarily solve the shortage of talent in other fields, such as design and business.

Compensating for the lack of mentorship, the entrepreneurs turn to online resources, such as MOOCs and Steve Blank classes, but since the curriculum is developed for higher income markets, not all of the learnings can be replicated back home.

Nevertheless, the situation is picking up, slowly, but surely. The MIT Global Startup Labs have been running their education programme in the country since 2011, and the Singaporean accelerator, JFDI, also opened a call for applications to assess the viability of running a pre-application programme there.

To compensate for the lack of accelerators, the key local ecosystem players, such as Startup Sri Lanka and SLASSCOM, are also taking proactive steps to expose the startups to international mentorship on a regular basis.

Through the financial support of ICTA, Sri Lankan startups were able to showcase their products at conferences such as Mobile World Congress, or participate in a month-long acceleration programme in Singapore, in collaboration with Bash! and IDA.

4. The future looks bright for co-working

As in any other nascent ecosystem in the region, Sri Lankan entrepreneurs still experience the proverbial fear of “stealing ideas”.

Not surprisingly, the co-working mentality has not fully kicked off yet, and Colombo is still in need of the large, colourful open spaces that allow startups to work in a more relaxed atmosphere, access stable internet connection and share their ideas.

“While creating shared office spaces with the help of Regus is a step in the right direction, they still miss the right startup spirit. Understandably, it is very hard to recreate if you never visited the spaces that are in Singapore, Jakarta or in the other developed markets,” explains Mangala.

“That is why we are travelling around the region, and constantly looking for an inspiration to start our first co-working space. Slasscom has been immensely helpful in that respect, keeping their mind open to all sort of crazy ideas.”

5. Developing right investment environment

So what about investments?

Over the past decade, the Sri Lankan economy has seen a robust annual growth of 6.4 percent, which is well above its regional peers, and the GDP per capita puts it ahead of the other South Asian countries. Because of these positive developments, the country recently achieved the middle–income status, and put it on par with its larger neighbours, making it a promising target for curious investors.

The rise of the angel investor scene can be most tellingly showcased by the annual Lankan Angel Network reunions. Taking place on a regular basis, they attract more than 100 angels from all around Sri Lanka and India, with members such as the vice president of Google Southeast Asia and India, Rajan Anandan, or the president of the Indian Angel Network, Padmaja Ruparel.

Foreign venture capital firms are also eyeing the market, but the market size of 20 million still raises a few eyebrows.

But despite its size and turbulent past, the country has one of the most favourable laws encouraging foreign direct investment in South Asia. Not only is a total foreign ownership permitted across almost all areas of the economy, but the country also closed bilateral investment protection agreements with 28 countries, and has double taxation avoidance agreements with 10 more.

Where does this leave us?

When we travel with Seedstars World around Asia, we compare different ecosystems and the startups they create. Frequently, in this modern age of tech, the question remains: does the ecosystem live up to its reputation, or is it over-hyped?

It seems that this is the pitfall that comes with the ‘buzz’ that surrounds tech startups. Questions are now being raised in the more mature markets in the region, where people are doubting the actual value the startups are producing. The issue of a ‘bubble’ has been raised time and time again.

In the case of Sri Lankan startup scene, we’ve never seen such a clear example of mismatched expectations. While the ecosystem’s reputation is practically non-existent, the startups it produces are innovative, lean and scalable. In short, the ecosystem is producing a lot of potential value, but no-one is reporting it.

Unfortunately, for the startups to gain more recognition, the founders not only CAN travel to Singapore (and further afield), but actually MUST travel in order to meet with potential investors and grow their businesses. It is a truly unique moment for the ecosystem’s development, due to its unprecedented growth, where the investor network simply hasn’t caught up yet.

Furthermore, the ecosystem is producing quality startups with very little infrastructure. Most startups work from home: there are no co-working spaces, and formalised training (post university) is limited. The startups that are creating value are literally doing so with an engineering degree, a modest corporate tenure, an entrepreneurial spirit and a spare room.

At Seedstars, our motto is ‘talents are everywhere’. After an exciting three weeks in the ecosystem finding and analysing the best startups, it wouldn’t be unfair to say ‘talent is everywhere, especially Sri Lanka’.

And can you imagine where they could help with just a bit of help?