Stephan Kuester, Head of Ecosystem Strategy of Startup Genome: Good afternoon. It is my great pleasure to welcome Anura De Alwis here to our Candid Conversation Ecosystem series at Startup Genome. Anura is the Former Chief Digital Economy Officer of ICTA Sri Lanka. That’s the government agency driving the digital economy. Anura, why don’t you introduce yourself and ICTA very briefly?
Anura De Alwis, Former Chief Digital Economy Officer of ICTA: Thank you so much, Stephan. So very good morning, afternoon, wherever the time zone you’re in. ICTA is the apex body driving the national digital transformation. The Digital Economy pillar consists of five areas, Stephan. One is technology industry development that focuses on building the industry and bringing the foreign direct investment to the country and developing the export market. The second piece of that is the most crucial one for today’s discussion, which is the startup ecosystem development. That has development of the ecosystem, the seed funding mechanism, hatching, incubating, investors bringing to the startups, and finally to the exit stage and holding throughout the journey.
The third piece is technology diffusion. That is basically taking technology into the traditionally non-technology industries. For example, how this technology can be used in agriculture, or fisheries, or tourism, or health, likewise. So it’s taking that technology to the non-technology, traditional businesses. The fourth piece is the capacity building. That focuses on government, as well as the technology industry, startup ecosystem capacity requirements. So building the capacity required for the country for the next four years. And finally, the regional development, which has actually divided the country into five regions. And those regions have different needs, from education, to SME development, to policy changes, to the infrastructure, etc. So looking at the different five clusters in the country, looking at their policy and infrastructure needs, and developing so that the industry as a whole can grow. Of course, there is another pillar supporting government, which is the fundamental piece of running business. We also have the digital law pillar, which works closely with us supporting the Digital Economy Pillar.
Stephan Kuester: All right. We are so glad to have you, particularly given that you have such a broad mandate. So we are not only looking at startup ecosystems, but more coming from a digital transformation of the overall Sri Lankan economy, looking after the more centralized parts but also the regional development. So it’s great to have you coming from such a broad perspective. We feel very honored here at Genome to have been working with you, ICTA, and the Sri Lankan startup community more particularly during our assessment and strategy discussions, which we jointly had with your teams in 2020 and 2021. And we were specifically looking at taking the startup community even further than it already has developed in Sri Lanka at this point. When we look at the digital economy and startups in particular in Sri Lanka, I mean, you’re already ranking amongst the top 20 most innovative places in Asia. I’ve seen, I hope the numbers are correct, about 5% of Sri Lankan GDP is already part of the digital economy, not necessarily the startup economy only but the digital economy, which is a fairly high percentage. And looking at trends more globally, the pandemic similarly to other places in the world, certainly my assumption, has accelerated digital transformation of any sorts. How do you see the digital economy overall develop with a view to the next three, four, five years? Is it going to grow even more substantially? Is it following the growth trajectory you’ve seen over the last one or two years? What’s going to happen?
Anura De Alwis: Absolutely. It’s a fantastic question, Stephan. One I really like, because it’s an eye opener for the rest of the world as well for watching. So, I will take the question in at least two directions, one being the industry as a whole, the other one is the component of digital activities in the country. So, the first part is actually the export. So, we are right now looking at the estimates of 2020. As an industry, we stood at around $1.2B, a purely export market, IP services business and also product business that had about high end engineering, nearly 35% of the revenue coming from high end engineering. Now, when you look at the goal that we are driving the country towards 2024, we are looking at the $3B to $5B range. Now in that, we are not only looking at a jump, Stephan. We are also looking at basically turning the pyramid upside down, which means from 35% of the high end engineering/IP building to 60%.
There are reasons for doing that. Number one is a country with 22 million population, we are not going to compete with countries with a 1,000 billion population, because it’s economies of scale. Everything is not going to be there if you do that, number one. Number two is because we have been identified as very successful over the years, Stephan, coming from a small kind of IT development services organizations to high end product captives like Pearson, which I headed for this job, like you know, three years ago. Then the IFS, then we talk widely about education, the likes of big MNCs, and HCL now in Sri Lanka. So we want to turn that also from 35% to 60% when we grow from three to five billion businesses. That’s one side of the coin.
The other side is that you talked about digital percentage. So, the percentage of the digital economy contributing to the gross domestic product today stands at 4.37, which we did this year for the first time using IRF guidelines. Now what it means is compared to a country like America, America probably at about 12, 15%, closely. When you look at any tiger economies, there are between eight to 12%. You go to a country like China, it is about 35%. So comparatively, we are low. But as a developing country, when you set the target, I think we are, I wouldn’t say great but quite okay. But when we go towards the $3B to $5B goal, not only the export, we also have a target going towards 15% of the economy on digital, which means the banks, that social life, day-to-day transaction of whether you’re an individual or business, to increase from 4.3 and on or, like you said, approximately 5% threefold.
So, to do that, we also have initiatives and effort put in place to convert both the government to be the digitally friendly government, which means those and operating mechanisms to be more digital-oriented, plus change the laws and the business environment also to face these challenges and make towards that so that our digital economic contribution to the GDP will also grow. So the reason I mentioned both these, Stephan, is not just a revenue goal, but also converting everyone’s lifestyle into that. I hope I gave both perspectives.
Stephan Kuester: That makes perfect sense. As you know, I’m sitting here in the UK. We’ve probably reached about 10 to 12% of overall GDP and job creation. And you can see even as a citizen, you can see the positive effects. All of a sudden, your transport infrastructure gets better because it gets more seamless, etc., etc. Education gets better because it is more digitized, etc. So you see the broader effects, and that’s great to hear. You mentioned a number of large corporations, companies you’ve been involved with and that you try to attract to Sri Lanka. What I would like to explore a little bit with you and what we’ve seen in many places all over the world is the role of the startup community in assisting and driving, assisting, supporting this larger digital transformation, including for larger corporations, for SMEs, for the government, etc. So how do you see, how important is the role of the startup community that you have been creating and fostering to help drive the overall digital transformation in Sri Lanka?
Anura De Alwis: It’s the most crucial one. If you look at the developing countries; forget about the developed countries like you. But if you consider all the developing countries, Stephan, you can see the crux of the finance or the economy depends on the SME success. Because SMEs have the highest growth potential, the lean in structure, they’re adopting very fast technology in the business environment. So, taking that as a key point, I mean, you can call it like startups also in this SME category, right? So, that would say that if we can bring a few startups to be successful, and then if we can create a few unicorns from that, the economies like us will become really, really fascinated by the success. So, to do that, that is our goal. Right? So, to your question, how important? It’s of the highest importance. The government as a state body, as well as the government, all of us realize that, if there is something that we should invest here, it should be a few areas. Everyone knows, number one being Telco and infrastructure because without that, the country itself, some of the companies grown in Sri Lanka, 40%. Exponential growth during the last one and a half years. So that Telco is a demanding thing.
And the second thing that comes along with that is education, digital education. And I’m very proud to say that not only the startup ecosystem, but digital education, policy driving, is also done by us. So we basically make sure of that. Number three, from a business perspective, we have to find more and more funding and create a conducive environment for those tech startups to grow. So that is the primary focus and one of the focal points, not just the government or the private sector association, everyone.
So in order to do that, Stephan, just a little bit more than your question. We have started removing certain barriers startups have, like deregulating certain things. For example, certain things like custom laws, the tax laws, then the company registration table, rules, etc. We are changing them. So we’re, on one side, engaging with the government, creating what we call “startup friendly government.” That’s a concept we launched about six months ago, and working very hard with Sri Lankan government is used to make these friendly for the startup ecosystem. So the reason I brought that up is just to give one example how much importance we have placed in our national agenda for startups, particularly techno startups.
Stephan Kuester: It is fascinating to hear how you brought together the different government departments, because too often when we look at younger activation phase ecosystems, responsibilities are a bit fragmented, and you get all these frictions and barriers that still exist. It is great to hear how you come together and make this really a national priority. On that note, Anura, you mentioned a number of activities, strategic initiatives in funding, in education, in removing administrative barriers. We looked at our research, you know, assessment for you. We looked at startup output, as we call it, the sheer number of startups, and that’s kind of important as startups are experimental. Failure is part of it. So size, to a degree, matters. And I’d just be interested when you look at the startup ecosystem. What are you doing to further increase the already very respectable number of startups in your ecosystem, the risking, attracting new talent to the ecosystem to make this leap of faith, and becoming an entrepreneur instead of becoming a corporate executive? Are there any particular and noteworthy activities, initiatives that you’re pursuing to drive more people, to attract more people to entrepreneurship?
Anura De Alwis: Absolutely, Stephan. So I will give you first a preface or a frontline statement. Now, if you look at the Sri Lankan startup ecosystem, it has grown 13% this year alone. And thanks to Genome for the fact finding for us, and I must thank for that. And then secondly, that is valued right now at $132M. So yeah, you can compare developed nations and say it’s very low, but as a country, 13% growth within the pandemic year, this year alone is a huge achievement. Now we can’t stop and celebrate here, Stephan, because this is not an achievement, it is only one step of the journey. So how we increase the numbers coming into the system is the way to increase the output. Because you know, more and more input creates more output. So all this time we had in that one minute explanation, Stephan, all this time in Sri Lanka, as the apex body, we ran Spiralation, which is actually seed funding. We could seed fund every year for about 20 companies. We have now seed funded, over the 10 years, 100 companies, right? But we want to expand that more. Now further, we went to the STEP program that actually started incubating and helping the companies. And even with this year, we have hired a third-party company to incubate because when we don’t have capacity, we bring external parties for assignments.
Now, not only that now, we have launched recently, because when we looked at everyone’s focus on startup, scale up, to exits, kind of. But we thought, “Well, there’s something wrong in the pipeline.” If you start with a startup, you have only a little bit of numbers to deal with. But we have launched, this year, the 10,000 Ideas program. We actually hired three to four organizations of paid assignments to go to universities and schools and create these 10,000 ideas. So that when you create, let’s say, 10% of that, Stephan, we can have 1,000 easy. So that 1,000 can easily go into the startup ecosystem and get through the whole funneling.
Another one we launched last week was we created the entirely free pre-startup, which means they are not startups. They are in the ideation stage, like the 10,000 Ideas program. They come to our lab facility downstairs, which is called SPARX. S-P-A-R-X. SPARX Lab where they will be incubated to get to a startup. So we provide the entire facility, including internet, all free of charge, so long as they apply and register with us. So these are some of the programs that we have created over the many years. And I can tell you, Stephan, we had about 400 startups at the beginning of this year, very happily saying it’s over 600 by now. The year has not ended. This goes above and beyond the numbers we targeted for this year. Plus, we had one company that exited in Singapore at 15 times the investment. So we want to get 15 or 20 of them in the next year or two years. So add that to all of these efforts. And we are trying to bring incubator companies externally and companies like the Dhwani Foundation from India to support our ecosystem, which is in the programs that we launch. The number of activities that we increased this year, I’m certainly saying that the amount of activity is sometimes not manageable within our team but we want to do more, Stephan, because this is to do more, get more into the system. Maybe some fail, that’s okay. More fail, that’s okay. But output will be high.
Stephan Kuester: That’s so great to hear. Because in, as we call it, activation phase ecosystems, the lifecycle model in Sri Lanka sits right in the middle of it, to look after the organic growth built out of this community, 10,000 Ideas leading to 1,000 startups, as you put it, and you’re almost approaching these numbers. It’s exactly the right way to go, and you’re ready to take the community with you. That leads, obviously, in something I really want to get a little bit into detail with you because you’ve created a very innovative early-stage funding provision, which obviously is important if you get to, let’s say 10,000 Ideas, 1,000 startups. The next question, obviously, is pre-seed and early-stage funding. After all, it is the lifeblood of any tech startup. And in our research, we quantify the availability and also the existing gaps in early-stage capital in Sri Lanka, not uncommon activation stage ecosystems. So we are really interested in what you’re planning in terms of interventions. And in regard to that, you’re breaking new ground with the alternative credit framework. It would be really interesting for others, other ecosystems to learn from your example as well. What is it? At whom do you aim it? Why did you choose to design this new funding instrument?
Anura De Alwis: Fantastic question again, Stephan. So, now I said the deregulation is one of the fundamental things we went into 29D regulations in 14 government institutes, without that we believe these poor startups or young startups cannot succeed. While we’re doing that, we also found, Stephan, that still a developing country, the banks have a very negative look at some of the startups and scale ups and they believe in technology. They believe, because some of them don’t understand because they are traditionally happy to give, you know, loans or etc. to the traditional way of assessment. For example, long ago, you needed a huge, like a house to get money borrowed or something versus maybe 10, 15 years ago, it was turned to, if they look at your salary only, and they probably give you 15 times of your salary banks, loans or you know, like top-up loans, personal things or personal loans.
Now, it’s the era that we’ll look at with complete no collateral basis. So we basically decided now, it’s the 3.0 version of the banking system where we should enable, particularly a country like us. So we worked with PwC, an international consulting company. We actually worked with them on a pro bono assignment with them. So we looked at it and they came up with a credit scoring system. Now who it is aimed at, it’s aimed at technology startups. And then it looks at technology startups, those who do not have collateral, do not have any fixed assets. They look at the product of the company that is building, like Product Nation. The owner of the company, their credibility. If I’m the founder, what’s my credibility? What’s my background? That kind of thing. And thirdly, the markets that I’m trying to go with that product. And finally, the finance, which means the audited finance, three years, and the predictive finance for the next three to five years.
So looking at those four areas, we use the credit scoring system to say this company’s now qualified. So without collateral, a country like us, we have introduced this system to nearly 10 banks, I’m very proud to say, which is about now, three to four months old, maybe five months, and by now, it’s been onboarding stage and one back really went very… It hit the nail very hard. They actually granted full loans by now; you have approximately $150M+ for four companies. So that was granted through the system. So the challenge is that if the companies are performing well, those granted companies, the banks, we learn from that, like AI, like their neural networks start learning it. And at the same time, the banks are more and more adopting that technology, the startups get more successful. So the aim is to get technology startups now, right now they have tech scale ups. And we believe, Stephan, this alternative credit scoring system will not only grow our technology startup, but also the change of the mind of traditional bankers, and I wish that we pressure them hard to do that.
Stephan Kuester: Alright, congratulations to this new development. It reminds me of highly sophisticated credits, multi-dimensional credit scoring systems you would find in the mortgage industry or elsewhere, that are really groundbreaking in overcoming the old collateral requirements that they put forward that are such an impediment for most young startups that I’ve found, so great to hear. As a candid question, do you need to provide any government guarantees, any backstopping to the banks? Or are they accepting that this new model of credit scoring is actually reliable enough and passes their risk management provisions?
Anura De Alwis: So, great question. So we don’t put on any government guarantees. But what we did was, when we introduced the credit system, Stephan, they basically did not take 100%, as it is, of course, their risk assessment team. Every bank adjusts the scoring system a little bit to fit their system. So no bank guarantee, but assessment through these multi-dimensional, the four dimensions they’re looking at. Through that, they assess through their system with our credit scoring scheme, and then they will grant the loans to the company directly without our intervention, but we and PwC… the idea, the beautiful part of that is at the slate, ICTA and the PwC came to define the scoring. So that is a huge acceptance in the bank because it’s not like something you found in a book or something. It works for this environment. It works for our culture. It works for the technology startups. So that’s how it was introduced. So there is no bank guarantee or any government guarantee we give today. No, it is not required. That’s not the idea.
Stephan Kuester: That’s impressive. Anura, we shall be watching how the alternative credit framework is developing. You’re breaking new ground and that, I bet, is of huge interest for other younger ecosystems that are looking for alternative funding instruments. So thank you so much for sharing that. We are nearly approaching the end of our Candid Conversation interview, but if you would look at our international audience, investors, talent, founders, why should they come to Sri Lanka? What would be the most important things to look at?
Anura De Alwis: So I think simply, Stephan, if I give two or three reasons, number one, of course we are a small nation, but we are very focused. Now if you look at, like I said, if you really look at the London Stock Exchange product that was built into Sri Lanka or maintaining Sri Lanka today, Pearson higher education like I was leading earlier. The products are built in Sri Lanka. Right? The IFS, a financial system. The Innovation Center in Sri Lanka. So what is the reason they call these MNCs? Three examples I can give even while he recently came, while EducationUSA, another publicly sold company in Sri Lanka.
So what are the reasons? Why are they coming to Sri Lanka? It’s simply because they understand the talent pool here. We have a very, of course, a small, approximately 200,000 skilled workforce in technology. But we have developed products to the global market, solid, sound products. And that’s one reason, and the proof is these companies. Right? The second, is that the government is very friendly to develop the ecosystem, whether it’s a startup or whether it’s an MNC, whether it’s export, so we have friendly regulations, rules that we are implementing.
Number three, the latest development is the digital laws that we are putting in place, which is the Data Protection Act, for example, which is waiting for the final Parliament voting, which brings probably GDPR-equivalent protection to those companies who do business with Sri Lanka. So that aspect alone shows, Stephan, not only the government regulations, you know, ease of regulations doing business, plus the MNCs already in building global products, but also further with the digital law being enhanced, and we are strengthening a very promising region, we are ahead of many other neighboring countries. So these three reasons, I think, are more than enough for any investor, any MNC to believe why they should pick Sri Lanka. And also, we are bringing the techno parks community. There are five techno parks we are bringing now, multi-facilities that also give lots of facilities for these companies to commence a career with a lot of offers.
Stephan Kuester: Anura, to summarize: a highly conducive and highly organized government initiative, really ambitious. You made a point going from $1B to $5B as a broad development, digital transformation development across nation by nation, right? Really large deep talent pools, affordable talent, highly experienced talent. You just mentioned it in the startup environment, but also in a more traditional corporate environment. But coming from a digital skills perspective, certainly a great asset. And I think to the beginning of our conversation, you made a really interesting point, that you’re investing in digital transformation and new concepts of innovation, in what many may see as traditional sectors: agriculture, tourism and hospitality, etc. All these niches that are now coming up that are now following the digital revolution that we’ve seen elsewhere, maybe five or six years ago. So hugely interesting, the areas of focus that you’re pursuing.
Anura, thank you very much for the opportunity to hear from you and what you’re doing and your ambitions for Sri Lanka. Congratulations to what you’ve already put in place. And we will be looking with great interest how the Sri Lankan startup ecosystem develops. And particularly, and this might be really interesting for international audiences in similar markets, how the alternative lending instrument is progressing. Congratulations for having put it in place and for acting so decisively in addressing the seed stage, the early-stage funding gaps that we all clearly saw last year. It’s incredible. Six months later, you get a solution. That is so interesting and something others may wish to learn from. Thank you very much, Anura, for being with us today.
Anura De Alwis: Thank you so much, Stephan and Startup Genome, a huge thank you wholeheartedly. Coming from industry now to stateside for less than one year. I see how much work you guys are doing and helping entire global startups. So huge thanks for the Meritorious work and the great work you do. Thank you so much, Stephan. It was very nice talking to you.
Stephan Kuester: It was an honor supporting you. Thank you very much, Anura.