Start-ups: Fishing for small fish in a large pond
Sri Lanka’s start-ups have come a long way – powering innovation, pushing limits and boosting the extraordinary influence entrepreneurs have on the marketplace. As a result venture capitalists, which sort of ignite start-ups, now have a big pool to choose from. So much so that a local venture capitalist had met over 250 start-ups last year alone.
Mr. Kishan Nadarajah.
BOV Capital (Blue Ocean Venture), the first venture capital fund focused on early-stage startups in the country, now has two funds and Kishan Nadarajah, Principal BOV told the Business Times in an interview that the fund is eyeing more start-ups in five key sectors.
Big pond
In this effort, he met with some 250 start-ups last year alone but ended up putting cash in just three. So he has so many to choose from. This, he says may not be so bad, because it will further push start-up entrepreneurs to strive for excellence. Venture Capital is a distinctive vertical in finance that fetch two very singular worlds as one – financiers, entrepreneurs at one end and professionals at the other with a lot of experience to operate start-ups. “A start-up must have a good ‘elevator pitch’ and robust investor pitches to draw the interest of a VC,” he explained the entire time noting that local talent is unprecedented.
BOV’s fund I has invested in nine companies over the last five years. Out of this, seven are Sri Lankan and the balance are Indian. nCinga, Linear Squared, Simplex, ZigZag, Roar, Takas and Omac are all local start-ups while Aecumen (digitising data on buyer behaviour in stores) and Trivillas (which aggregates all villas in the South East Asian region) are Indian.
Software-as-a-service (SaaS) firm nCinga Innovations was acquired by Singapore-based fashion platform Zilingo for US$15.5 million this month. This is one of the largest tech exits in Sri Lanka in recent times and also the first exit for the fund after a 100 per cent return by nCinga. The fund, he said has completed half its life, and will be exiting from about three more firms either through IPOs or trade sales.
BOV fund II now has cash to invest and is looking at companies with Fintech (the integration of technology into offerings by financial services companies in order to increase their use and delivery to consumers) being an area that they are very bullish about. “We are looking at investing in Fintech companies. Still banks in Sri Lanka carry out traditional business. But Fintech will disrupt traditional banking in a big way. We are aware of this and we are very upbeat on this sector,” he said. He added that the fund is in discussions with a prospective Fintech start-up which is building a lending platform. “We have a dire need of carrying out lending in a non-traditional way.”
Solutions-based start-ups
Also SaaS start-ups are on the cards. As an example, Mr. Nadarajah noted that a customer or a company does not need to buy a Microsoft package to use it but instead can use it monthly by paying a fee. “Most big companies in the enterprise software are becoming SaaS. We are looking at start-ups which can come up with solutions based on SaaS.”
Healthcare start-ups are also in their radar. “With tech, we feel that healthcare can be impacted at grassroots levels. For an example with the Mydoc app, anyone can access a doctor 24/7 spending only Rs.2,” Mr. Nadarajah said. He also said that taking healthcare to the rural areas is easy as smartphone penetration in Sri Lanka is currently at over 40 per cent and growing.
Education is yet another sector the fund is eyeing. “This is a sector that is even more exciting. I feel that the education system in Sri Lanka is massively broken. But with technology, information is out there for everyone to access. However the lack of English knowledge is a big issue. We want to discuss with companies who use technology to democratise education through tech,” Mr. Nadarajah noted. He added that he met a few companies which are in education, but they had solutions more on exam preparation or which is popularly known as test prep. “But that is not very attractive and it isn’t creative thinking. I still have not found someone who has made a breakthrough in education.”
Direct sales
Direct-to-consumer (selling your product directly to your end customers without third-party retailers, wholesalers, or other middlemen), is another area that is not prevalent in Sri Lanka which BOV has set its sights on. “With a phone call or a touch of a button products are bought by consumers. With technology more products are moving fast and the middleman is eliminated,” Mr. Nadarajah said. This is transforming how people shop. In the process, brands, across the whole lot from detergens to sneakers, are totally changing consumer preferences and expectations. Mr. Nadarajah also added that large brands are being created through such tech-based platforms.
The fund rarely looks at firms which are in the seed (initial) stage. “We generally go for companies that are in Series A stage (the second stage of start-up financing and the first stage of venture capital financing) – which can scale up quickly,” Mr. Nadarajah added.
According to the Sri Lanka Association of Software and Service Companies (SLASSCOM), 55 per cent of Sri Lanka entrepreneurs’ start-ups are generating early revenues but only 14 per cent new start-ups are growing into new markets. New IT innovations can reverse this low 14 per cent rate to higher levels, analysts say. There are a lot of projects and a lot of themes that are ready to be defined for international capital but all these need to be scalable models which can go regional.