Supporting
startups
through the
COVID-19
Crisis
June 2020
Document Classification: KPMG Public
2
© 2020 KPMG Sri Lanka, a Sri Lankan partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International
Cooperative, a Swiss entity. All rights reserved.
Disclaimer
― This report contains basic information obtained from publicly available sources. This report does not
purport to be all inclusive or to contain all the information that may be required.
― Whilst the information provided herein has been prepared in good faith, no representation or warranty,
expressed or implied or tacit, is or will be made, and no responsibility or liability is or will be accepted by
KPMG or by any of their respective officers, employees, advisers or agents (the “Team”) as to or in relation
to the accuracy or completeness of this report or any other written or oral information made available to
any recipient or its advisers and any liability thereof is hereby expressly disclaimed.
― None of the Team accepts any liability or responsibility for the accuracy or completeness of, or makes any
representation or warranty, express, implied or tacit, with respect to any future state of affairs (including
the achievement or reasonableness of any future projections, prospects or returns) and with respect to the
information contained in this report, or information on which this report is based or with respect to any
other information made available or to be made available, whether in written or oral or other format, to any
recipient or its advisers. Any liability is accordingly expressly disclaimed by any act of omission on the part
of the Team, whether negligent or otherwise.
― Any decision based on this report shall rest solely with the decision maker.
Document Classification: KPMG Public
3
© 2020 KPMG Sri Lanka, a Sri Lankan partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International
Cooperative, a Swiss entity. All rights reserved.
Contents
Page
— Sri Lanka towards a technology driven economy
5
— COVID-19 pushes a transformation drive
6
— Local startups gaining global attention
7
— Key challenges for startups (amplified by COVID-19) and recommendations
8
— Difficulties in raising funding
9
— High cost burden
11
— Other costs and taking advantage of COVID -19 related developments
12
— Other considerations
13
— Supporting startups – a policy matter
14
Document Classification: KPMG Public
4
© 2020 KPMG Sri Lanka, a Sri Lankan partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International
Cooperative, a Swiss entity. All rights reserved.
Glossary of terms
BOI
Board of Investment
CBD
Central Business District
CBSL
Central Bank of Sri Lanka
CSE
Colombo Stock Exchange
EPF
Employees’ Provident Fund
ETF
Employees’ Trust Fund
ESOP
Employee Stock Ownership Plan
GoSL
Government of Sri Lanka
ICT
Information and Communication Technology
PPP
Private Public Partnership
SLASSCOM
Sri Lanka Association of Software and Service Companies
SLT
Sri Lanka Telecom
SME
Small and Medium Enterprises
UDA
Urban Development Authority
VRS
Voluntary Retirement Scheme
YoY
Year on Year
Document Classification: KPMG Public
5
© 2020 KPMG Sri Lanka, a Sri Lankan partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International
Cooperative, a Swiss entity. All rights reserved.
Industries the startups are involved in1 (2019)
Sri Lanka towards a technology driven economy
Technology development at a policy level
— Sri Lanka continues to strive towards becoming a
technology based economy with the current
leadership also placing great emphasis on the
sector.
— In the process of attaining the above status,
strategic investments are to be carried out to embed
technology into every sector of the economy, while
encouraging a culture of technological innovation.
— Creating the right ecosystem for startups has been
considered vital in achieving this goal. This trend is
evident globally as well, where promoting local
startups has become one of the key goals of policy
makers to achieve sustainable economic growth.
The startup ecosystem of Sri Lanka
— Prior to COVID-19, the startup ecosystem in Sri
Lanka was growing in line with the development
areas such as communication and IT which have
contributed to a rapid growth in the number and
scale of startups.
— SLASSCOM estimates 400 registered startups in Sri
Lanka in 2019 and estimates that the country will
reach its 2022 goal of 1,000 startups.
‒ The local start up ecosystem benefits from high
literacy levels, technical expertise, a well developed
internet infrastructure and an advantageous
location.
— For the purpose of this document we have
considered startups as companies who are less
than five years old and are technology focused or
technology enabled.
Consumer durables
& apparel
47.6%
Financial services
19.1%
Software
13.1%
Engineering
7.1%
Offshore
accounting/software
& IT
4.8%
Education
4.8%
Other
3.6%
‒
Incubators and accelerators are growing at an increasing pace which provide the much needed
guidance and mentoring for startups in Sri Lanka. In the recent past, there has been an emergence of
angel investors and venture capital funds who come in with “Smart Money”. However, with COVID-19,
these funds have also dried up for businesses.
91.7%
Adult literacy rate
32.9 Mn
Mobile
subscriptions
(c. 150% of
population)
11.8 Mn
Broadband
connections
(c. 54% of population)
44,3%
Digital literacy rate
1 – ~96% of the startups are based on some software solution
Sources: SLASSCOM, TRCSL, Department of Census and Statistics,
CBSL, World Bank, President’s manifesto 2019
Entrepreneurs
Government
Incubators/
accelerators
Equity
investors
Industry
associations and
chambers
Key enablers
Document Classification: KPMG Public
6
© 2020 KPMG Sri Lanka, a Sri Lankan partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International
Cooperative, a Swiss entity. All rights reserved.
COVID-19 pushes a transformation drive
The ‘new normal’
‒ The impact of the COVID-19 pandemic has rippled through every aspect of society, creating various
economic and social challenges. As social distancing continues to limit usual human interaction, Sri Lanka
is starting to embrace the ‘new normal’, where lifestyle patterns and the business landscape, has been
driven towards a trend of digitalization.
Sources: Hatch, CBSL, KPMG analysis
‒ During the lockdown, adoption of e-commerce platforms have increased drastically, and
this trend is expected to continue in the medium to long term, as the GoSL continues to
strictly enforce social-distancing.
‒ Sri Lanka saw more than 15 delivery related startups emerge from the COVID crisis.
While social distancing becomes a norm and online payments become commonplace,
these start-ups are poised to grow into enterprises of tomorrow.
‒ The digitalization drive triggered by the pandemic is likely to continue, giving rise to a
need to develop remote working infrastructure, enterprise automation, websites and other
relevant systems.
‒ Telehealth and telemedicine systems have seen new registrations and channeling grow
rapidly. Going forward, these platforms are expected to play a huge role in a socially
distant community.
‒ Startups will have to critically re-evaluate their business models, keeping in mind the
direction of the business in the short-term. Entrepreneurs should keep an eye out for
opportunities, especially in areas where the current status quo is failing to deliver.
‒ Government support will be required to sustain the momentum towards digitalization,
during and after this pandemic. The government has already relaxed a lot of regulations
to facilitate some initiatives as discussed in the following pages of this document.
Outlook for startups in a post-COVID Sri Lanka
Document Classification: KPMG Public
7
© 2020 KPMG Sri Lanka, a Sri Lankan partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International
Cooperative, a Swiss entity. All rights reserved.
Local startups gaining global attention
Landmark transactions in the startup space
— Some of Sri Lanka’s startups have gained international recognition and acceptance as indicated by some
of the transactions outlined above.
— Startups are expected to be a key economic driver going forward for Sri Lanka, which is already a heavily
SME based economy. SMEs contribute to 52% of the national GDP and account for 45% of the total
employment of the country.
— The growing popularity of Sri Lanka as a destination for business expansion is also reflected through
several foreign startups such as Daraz, Ikman, Oyo, Carmudi, etc. However, further regulatory support
would be required to position Sri Lanka as a startup friendly economy and attract more foreign capital.
Startups of Sri Lanka during COVID-19
— The lockdown from COVID-19 has accelerated the need for technology driven startups. We can see this
through the proliferation of last mile delivery companies during COVID-19.
— Furthermore, Sri Lanka witnessed a multitude of homegrown startups, who are taking the lead to solve
issues and contribute in areas where the system has failed to deliver. Some key areas with significant
development are as follows:
USD 2.5 Mn
Investment
USD 15.5 Mn
Acquisition
Delivery platforms
Eg: Simplex, Grasshopper
Online shopping
Eg: Takas.lk , Catchme.lk
FinTech
Eg: Directpay, OgoPay,
Iloan, HeliosP2P
TeleHealth
Eg: Odoc, Mydoc
Food and Agtech
Eg: Sozo, Spectrify.AI, Honest
Greens, Ananta Sustainable
E-learning
Eg: Siplo, Online accounting
Sources: SLASSCOM, KPMG analysis
Key challenges
for startups –
Amplified by
COVID-19
Document Classification: KPMG Public
9
© 2020 KPMG Sri Lanka, a Sri Lankan partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International
Cooperative, a Swiss entity. All rights reserved.
•
Self funding
• Friends and
family
• Grants
•
Incubators/
Pre-
accelerators
• Self funding
• Crowd
funding
• Angel
investors
•
Incubators/
Pre-
accelerators
• Crowd
funding
• Angel
investors
•
Financial
institutions
• Accelerators
• Angel
investors
•
Financial
institutions
• Venture
capital firms
• Accelerators
•
Financial
institutions
• Venture
capital firms
• Private
equity firms
01
02
03
04
05
Concept
Pre-seed
and seed
Start-up
stage
Growth
Expansion
Maturity
•
Financial
institutions
• Private
equity
• Public
markets
06
Key challenges
— Historically, lending was limited for startups due
to being considered high risk ventures with no
collateral assets.
— Several startups including tourism, retail and
manufacturing face cash flow constraints which
worsen the situation.
— GoSL has introduced several relief measures
for SMEs, including loan moratoriums and new
working capital facilities at concessionary rates.
However, most startups have limited access to
these facilities mainly due to lack of collateral.
Difficulties in raising funding (1/2)
Capital providers in Sri Lanka’s startup cycle
Debt
Key challenges
Sources of funding for startups
.
Equity
Self
51%
Family
19%
Angel investors
12%
Banks
8%
Venture
capitalists
4%
Other sources
6%
Document Classification: KPMG Public
10
© 2020 KPMG Sri Lanka, a Sri Lankan partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International
Cooperative, a Swiss entity. All rights reserved.
Suggestions and recommendations
Short/medium-term
— Recognition of startups as a separate sector to
SMEs, where banks can be less stringent on the
requirement of collateral and instead evaluate
the business model and the human capital when
providing loans.
— Relief loans to be extended to new startups and
not only to existing clients.
— Encourage banks to work with
investors/incubators/accelerators to assess
risks of providing debt to startups through a
separate program or credit line.
Difficulties in raising funding (2/2)
Debt
— Certain regulations in Sri Lanka place limitations
on equity and product crowdfunding, such as
the number of people that can invest into a
private limited company. Most BOI granted
concessions and other tax reliefs have also
been removed in the recent past, resulting in
very little incentives for potential investors.
Suggestions and recommendations
Medium/long-term
— Promote investments in startups by way of
relaxing certain regulations and providing tax
concessions on returns. Eg: tax write offs for
angel investors in early stage companies or
funds.
— Reduce minimum investment requirements to
qualify as a BOI venture.
— Restrictions on equity and product crowdfunding
to be minimized. The government can work
hand in hand with the private sector enabling
platforms to source and allocate funds.
— Establishing the framework for a limited liability
partnership (LLP) structure to eliminate double
taxation for investors/shareholders.
Equity
Sources: Hatch, SLASSCOM, KPMG analysis
Document Classification: KPMG Public
11
© 2020 KPMG Sri Lanka, a Sri Lankan partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International
Cooperative, a Swiss entity. All rights reserved.
Cost composition of startups
Key challenge
— Staff expenses are a significant portion of
operating expenses for startups. Especially for
those operating in fields which require certain
skillsets.
Suggestions and recommendations
Short/Medium term
— Deferral of EPF/ETF payments by at least 06 –
12 months. This will ease the cash flow burden
on the companies and also increases the
immediate disposable income of employees.
— Creating a separate startup fund from the
EPF/ETF payments, which will be reinvested
into the business.
Long term
— Providing an option for startups employees to
apportion (subject to an upper limit) their
EPF/ETF contribution towards ESOPs of the
company. This can be structured based on an
independent valuation of the company.
— This will also promote greater participation of
the employees in the business, a secondary
market for this ESOPs can be setup with
support from the Colombo Stock Exchange.
High cost burden
Staff expenses
Sources: Hatch, SLASSCOM, KPMG analysis
Key challenge
— Cost of skilled or experienced labor for startup
businesses
Current status of employment
— COVID-19 has had a particularly adverse
impact on the apparel and tourism sectors.
— Further, significant levels of economic activity
throughout the country has come to a stand-still,
where most companies have resorted to laying
off contract employees and imposing pay cuts
on all levels.
Suggestions and recommendations
Short/Medium term
— The startup will provide employment to these
individuals and take advantage of their domain
expertise to grow their business. GoSL can
consider supporting these startups by
contributing to some of the salary costs.
Access to skilled personnel
~400,000 direct
workers in the
apparel industry
~170,000 direct
workers in the
tourism industry
60%-70%
Staff cost as a % of total costs
Document Classification: KPMG Public
12
© 2020 KPMG Sri Lanka, a Sri Lankan partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International
Cooperative, a Swiss entity. All rights reserved.
Regional distribution of startups
Key challenges
— Most startups, especially tech-oriented ones rely
heavily on supporting infrastructure such as,
physical office spaces, networks, cloud storage
facilities, etc. These costs are usually difficult to
rationalize.
— High rental rates in the CBD area has made co-
working spaces a popular phenomenon.
— As social distancing requirements will continue
to be active for the medium term, demand for
physical office space will dampen as remote
working becomes a norm.
Suggestions and recommendations
Short/Medium term
— The GoSL to provide concessions/subsidies on
utilities and infrastructure. Subsidies provided
can include:
-
ISPs such as Sri Lanka Telecom and Dialog
Axiata PLC to provide infrastructure and
other relevant services at subsidized prices.
- Relief on utility payments (electricity and
water) for the next 06 – 12 months, while
these companies recover.
Long term
— GoSL, along with the UDA, BOI or any other
institution, to setup and provide designated
workspaces in properties held by these
institutions on a PPP basis at subsidized rates.
Booming sectors
Opportunity
— New startups have emerged and existing
companies operating in the above sectors have
seen unprecedented growth, during COVID-19.
— Existing businesses from other sectors are
expanding their business models and moving
into areas such as deliveries and online sales.
— Not all new ventures will survive. Those with
agile business models equipped to operate in
the long run will require the necessary support.
Key challenge
— Limited resources and support.
Suggestions and recommendations
Short/Medium-term
— GoSL can identify, co-sponsor and promote
startups supplying essential goods during the
pandemic. In a bid to promote social distancing,
the public can be encouraged to use such
platforms as an alternative to traditional outlets
such as supermarkets. GoSL has already
partnered with privately owned ridesharing apps
for deliveries.
— GoSL can also consider incentivizing larger
corporates in their respective industries, to work
with startups and provide necessary support in
terms of infrastructure and expertise.
— Bankers can work with established startups who
engage gig-economy workers to monitor credit
parameters for these workers.
Taking advantage of COVID related developments
Sustaining COVID-driven growth
Delivery
platforms
Online
shopping
FinTech TeleHealth
Sources: Hatch, SLASSCOM, KPMG analysis
Infrastructure
92%
2%
1%1%1%1%1%80%
85%
90%
95%
100%
Western
Eastern
Nothern
North central
Central
Uva
Southern
Document Classification: KPMG Public
13
© 2020 KPMG Sri Lanka, a Sri Lankan partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International
Cooperative, a Swiss entity. All rights reserved.
Key challenge
Suggestions and recommendations
Other considerations
Other recommendations and suggestions
Sources: Hatch, KPMG analysis
Short term
— In a bid to control the pressure on the exchange
rate, the GoSL restricted all imports except
those of essential products.
Medium term
— Due to the time bar restrictions on claiming
loss allowances and capital allowances, most
startups are unable to receive the full benefit of
these allowances as these businesses usually
take a long time to become profitable.
— For any startups involved in essential services,
which require the use of specialist equipment to
be imported, the government to consider
providing special permission to import these
products.
— Measures to be introduced specifically for
startups to effectively claim tax reliefs and
consider adjusting time-bound restrictions to be
more in line with the business cycles of the
startups.
Mismatch between the business and tax
timelines
Import restrictions
Extending better credit for gig economy workers — The GoSL can consider making these changes
permanent and provide opportunities for
startups that have already established
themselves as business enablers for gig
economy workers (i.e. plumbers, electricians,
cab drivers, etc.).
— In addition, the need for physical collateral, has
made it difficult for gig economy workers to
access credit.
— Startups face difficulties in competing for
government tenders with established suppliers.
Difficulty in bidding for government tenders
— Provide opportunities for startups to provide
disruptive solutions for legacy systems in
addition to the 10% procurement requirement.
Document Classification: KPMG Public
14
© 2020 KPMG Sri Lanka, a Sri Lankan partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International
Cooperative, a Swiss entity. All rights reserved.
Supporting startups – a policy matter
Several countries have taken measures to promote startups to drive sustainable economic growth.
Furthermore, governments have offered several relief packages to support the startups as a COVID-19
policy response.
Facilitating easy access to
credit
Provision of adequate and
low cost infrastructure
facilities
Flexible regulations and tax
requirements for startups
1
2
3
— The Chinese government provides startups with funding as means of generating new
opportunities for the slowing economy.
— China’s Ministry of Science and Technology has been conducting the nationwide “Torch”
program for over 30 years which finances and consults services for hi-tech firms.
— The government policy initiatives for startups during COVID-19 include tax and fee
reductions, exemptions, financial support, social security benefits, energy cost reduction
and incentives for medical supply donations.
China
Vietnam
— Vietnam has risen to be one of the largest startup economies in South East Asia owing to
support from the government to develop its young and digitally-savvy population.
— Funding for startups is easily accessible through established government avenues such
as the National Technology Innovation Fund which provides preferential loans and grants.
— As measures towards battling COVID-19, the government is issuing incentives in the form
of tax breaks, delayed tax payments, delay in land-use fees, lower bank rates and support
to obtain loans.
‒ The key areas of focus to support startups are
credit, infrastructure and conducive regulations.
‒ Sri Lanka can take examples from these larger
players and setup a framework of its own to
develop the startup ecosystem in the country.
‒ This document discusses some of the key
challenges faced by startups in Sri Lanka which
have amplified during the pandemic. Certain
policy recommendations have been outlined
based on our analysis.
India
— India’s IT industry is one of the key drivers for new startups.
— Startup India is a flagship initiative of the government. The ecosystem is supported by
over 250+ accelerator-incubator systems, ~500 institutional and 2,000 active investors.
— Government incentives for COVID-19 affected SMEs (inclusive of Start ups) include,
USD 13 Bn stimulus package, reduction of corporate tax and other funding mechanisms.
The business community has requested further incentives for startups due to inherent
issues in the industry.
How Sri Lanka can facilitate startup development
© 2020 KPMG Sri Lanka, a Sri Lankan partnership and a member firm of the KPMG network of independent member firms affiliated with
KPMG International Cooperative, a Swiss entity. All rights reserved.
The following staff have contributed in the
development of this publication.
KPMG
Karthikeyan Somasundaram
Director, Deal Advisory
Dhinali Peiris
Associate Director, Deal Advisory
Shavindra Perera
Senior Manager, Deal Advisory
Abdul Azeez
Senior Consultant, Deal Advisory
Nilupul Weerasinghe
Senior Consultant, Deal Advisory
Ruvandi Rupasinghe
Associate Consultant, Deal Advisory
Steering committee from Hatch
Lakshan De Silva
Co-Founder/CEO, iLoan
Chalinda Abeykoon
CEO, LAN
Ravith Silva
Founder, Karstation
Kanishka Weeramunda
Founder, PayMedia/Directpay
Alagan Mahalingam
Founder/CEO, Rootcode Labs
Partners
Media partner
Document Classification: KPMG Public
The KPMG name and logo are registered trademarks or trademarks of KPMG International.
The information contained herein is of a general nature and is not intended to address the
circumstances of any particular individual or entity. Although we endeavour to provide accurate and
timely information, there can be no guarantee that such information is accurate as of the date it is
received or that it will continue to be accurate in the future. No one should act on such information
without appropriate professional advice after a thorough examination of the particular situation.
kpmg.com/lk
© 2020 KPMG Sri Lanka, a Sri Lankan partnership and a member firm of the KPMG network of
independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights
reserved.
Shiluka Goonewardene
Principal - Head of Deal Advisory,
Deputy Head of Markets
T: +94 77 773 2778
E: sgoonewardene@kpmg.com
Jeevan Gnanam
Co-Founder – Hatch,
Founder – Orion City,
CEO – St. Antony’s Industries Group
T: +94 77 738 5000
E: jeevan@hatch.lk