Supporting startup ecosystems is a policy matter. How governments respond to the looming economic crisis will depend on several factors. Among them is the importance they place on small and medium enterprises. SMEs contribute to 52% of the national GDP and 45% of total employment in the country. Needless to say, in the eye of the storm, startups have found it challenging to find shelter. Many of them left to their own devices are now struggling to survive.
Recently, KPMG and Hatch published a report about the local startup ecosystem. Focusing on the COVID-19 crisis, it covers how state policy can support startups. The report highlights key challenges startups are facing during this crisis. Recognizing these challenges, both parties offered their recommendations for policies addressing these issues.
Sri Lanka and aspiring towards a tech-driven economy
For Sri Lanka to develop a tech-driven economy requires all stakeholders working together. Only then can we achieve the ecosystem of the future. The report highlighted key enablers to achieving the perfect world for entrepreneurs. These enablers include equity investors, industry associations and chambers, incubators/ accelerators. Most importantly, the government.
Recognizing their importance, Jayantha De Silva, Chairman of ICTA, has assured government support for startups. It’s essential they’re given the right direction and support to move forward. It’s rudimental that the recommendations to assist startups to align with national policy. Thereby allowing both the private sector and government to work together. In turn, delivering positive returns for all.
An innovative culture would support sustainable economic growth with local ecosystems. In doing so, strengthening value chains to build a country’s economy during a crisis. The response to support local businesses must go beyond recognition and communicating services. Instead, policies are needed that bring about positive change for a brighter future.
SLASSCOM estimates there are 400 registered startups in Sri Lanka in 2019. It’s expected that by 2022 there will be 1,000 startups. Hence, there is a need for policy initiatives that can support local startups. These can take the form of funding mechanisms, tax exemptions, and stimulus packages to name a few. KPMG & Hatch recognizing the local context have pushed for such policies in their report.
Transformative drive and global recognition of Sri Lankan startups
Socio-economic challenges have sprouted with the spread of the coronavirus. Citizens look towards the direction of the state for guidance. Businesses have seen a dramatic change in landscapes and value chains. A digitalization drive has seen businesses adopt online practices. Meanwhile, eCommerce platforms have outlined the new normal.
Today, SMEs contribute to 52% of the national GDP. As this figure rises, local startups are also seeing international recognition. A noteworthy example being IFC’s investment of $2.5 million in PickMe. Another example is acquisition of nCinga by Zilingo for $15.5 million. Recognizing startups as a key driver of economic growth is essential. For the government to maintain this trajectory of growth, it must implement the right policies.
Challenges and recommendations
The challenge of acquiring capital has existed pre-COVID. The current situation only deepens the trouble for SMEs. For banks, startups are a high-risk venture. Hence, startups find their initial funding from an entrepreneur’s immediate community. Shiluka Goonawardane, Principal for Deal Advisory at KPMG, reported that 70% of startup funding comes from friends and family.
The Sri Lankan government has introduced several relief measures for businesses. The CBSL with instructions from the Government of Sri Lanka introduced a new refinance facility under the Saubagya COVID-19 Renaissance Facility. The allocated 150 Billion rupees for the loan scheme is directed towards businesses affected by the outbreak and applications can be submitted to the Participating Financial Institutions (PFIs). These benefits include loan moratoriums and offering working capital at concessionary rates. Yet, most tech startups are marginalized from utilizing these measures. Often this is because they lack collateral that meets the requirements of PFIs.
Recognizing startups as a separate sector could pave the way for banks to partner with state institutions. Thereby, opening the door for measures allowing startups to bypass collateral conditions. One such measure could be government guarantees for banks when lending to startups. Another recommendation is to help banks identify the risk profile of startups. This would mean evaluating factors such as their business model and human capital when applying for loans. Jeevan Gnanam, a cofounder of Hatch, shared that banks can work with accelerators to do so.
Alternatively, startups can seek funding from investors. However, the current regulations offer little incentive for potential investors. Easing these regulations allows the government to work with private industry to support startups in many ways. One of them being facilitating crowdfunding platforms. Another is to offer tax incentives for angel investors in early-stage companies.
The next challenge to address would be the cost composition of startups. It’s estimated that 60-70% of startups costs are on staff expenses including EPF/ETF. To overcome this, a short term policy recommendation was the deferral of payments. It would be for a period of 6-12 months. A longer-term recommendation was to explore the option of allowing employees to invest it back into the business. This could take the form of an Employee Stock Ownership Plan. For this, the support of the Colombo Stock Exchange is necessary.
Among the hardest hit by the COVID pandemic are the tourism and apparel sectors. Facing unprecedented challenges, companies have resorted to laying off staff. The report estimates layoffs have affected 400,000 direct workers in the apparel sector. In the tourism sector, its estimated 170,000 direct workers were laid off. For startups, this presents an opportunity. While providing employment, they can gain skilled expertise to grow. Government subsidies easing the cost of labour can go a long way towards supporting this.
With regard to the cost factor, tech-oriented startups rely on supporting infrastructure. More often than not, they have high overheads such as utilities and rent. Coworking spaces have become a popular phenomenon as businesses seek to cut costs. There exists the potential for government institutions, such as the UDA, to identify and establish co-working properties at subsidized rates.
The report also discusses state collaborations with local Internet Service Providers. In doing so, exploring options to offer relief to startups of their utility payments. Such measures would allow ISPs to assist the development of a healthy startup ecosystem. There were several other short-term recommendations in the report as well. Among them were to relax import restrictions and extend better credit to gig economy workers. The report also called for improvements in the bidding process for government tenders. Officially, 10% of these tenders are allocated for SMEs. But startups still face challenges when bidding for them.
Regional policy models
Comparisons of country responses help identify policy measures that have worked to kickstart slowing economies. By observing initiatives in other nations to incentivise startups, we gain great insights. It allows us to reflect on how effective governments are responding to the COVID-19 dilemma.
The pandemic forced governments to offer creative solutions when formulating their responses. In Malaysia, the government set up a dedicated agency to tackle venture debt. It also launched a programme for startups to cover their cash flow shortfall due to the pandemic. Additionally, banks received government guarantees when lending to startups.
India too has launched several measures to support SMEs through the crisis. A $13 billion stimulus package was introduced for affected SMEs. Corporate tax was also reduced alongside other funding mechanisms being made available. India’s IT industry is a key driver of its economic growth. For startups, support is readily available from 250+ accelerator-incubator systems.
In China, the ‘Torch’ programme by the Ministry of Science and Technology has supported hi-tech businesses for 30 years. The programme offers funding and support from consultants to help businesses grow. Chinese government policy aims to support startups to generate new opportunities. Tax reductions, energy cost reductions, and social security benefits are a few examples of these initiatives.
In Vietnam, you’ll find one of the largest startup economies in South-East Asia. The report credits this to the nation’s young and digitally savvy population. It’s National Technology Innovation Fund offers accessible loans and grants to startups. The government also offers tax breaks, delays in land use fees, and lower bank rates.
Supporting startups through systemic policies
Startups can revolutionize the gold standard for industries. In the wake of the COVID pandemic, they hold the key to accelerating a slowing economy. The report highlights 3 key areas where startups need support. They are: facilitating easy access to credit, infrastructure provisions, and conductive regulations.
The report prepared by KPMG & Hatch offers an insightful starting point to explore how to support startups. They come in all forms of models. Some offer disruptive innovative practices to homegrown businesses. The startup sector represents immense diversity. Identifying gaps in research currently published and other barriers can stimulate conversation. In turn, influencing policy reforms.
According to the World Bank, female participation in the Sri Lankan labour force sits at 36%. The data highlights a skilled and educated demographic with untapped potential. Cofounder of Hatch, Brindha Selvadurai noted that female entrepreneurs are keen to build startups. She also highlighted the need to offer mental health support for founders during this crisis.
According to census data, 77% of the Sri Lankan populace resides in rural areas. In a perfect world, it would be to establish ecosystems everywhere. At each corner of our little pearl in the Indian Ocean, there would be equal opportunities. The analysis and recommendations of the report by Hatch & KPMG offer the guide to a positive framework. Now it’s up to our elected officials to mull over and (hopefully) make effective decisions. Decisions that will extend government support where needed and bring about positive policy regulations.