Sri Lanka, as a country, has a very vibrant start-up ecosystem, from traditional entrepreneurs building brick-and-mortar businesses, and social entrepreneurs reimagining how we as businesses and customers impact the lives of those around us, to tech entrepreneurs who change how we interact with the world both locally and globally.
But when all is said and done, the start-up game is not easy. Being an entrepreneur is not easy, and for tech start-ups, this is even more so because you are not simply building a business, you are driving a vision only you can see. With tech start-ups, establishing a start-up is often not the end goal.
After a few years of building a brand and product, most start-ups find themselves at a point where they need to scale up their operations and take their local business global. And at this point, many entrepreneurs run (not for the first time) into a wall with funding. For any business, it is impossible to grow without funding, and for tech start-ups, this is even harder, because they simply do not run in the same world as traditional businesses or even traditional start-ups.
A Sri Lankan Fintech company, PayMedia, recently celebrated a unique start-up milestone, acquiring Rs. 85 million in funding from its banking partner NDB to enable them to scale up their venture. What is unique about this milestone is that this investment by NDB in PayMedia is a departure from the traditional framework of how banks invest in businesses. This funding marks the first time a bank has invested heavily in a tech start-up in the absence of physical collateral, and heralds a start of a new era for start-ups looking for funding to scale up their businesses and take it to the next level.
How funding a start-up usually works
PayMedia Founder and Chief Executive Officer (CEO) Kanishka Weeramunda shared that even as a company in fintech, with close working relationships with several banks (PayMedia was the first to introduce cash deposit machines to Sri Lanka as well as a portfolio of other products in payments and settlements for fintech), securing funding for PayMedia’s scale ups was not easy. “The biggest pain point is it takes so much time for evaluation – anywhere from four to six months,” Weeramunda explained. “And the second biggest challenge is that banks usually propose to fund only 50% of your proposal. For scaling up, that can’t take you anywhere.”
For tech companies, financing from financial institutions like banks is particularly difficult, because of how banks approach funding new businesses and concepts. Tech companies that produce results digitally do not have physical assets that they can put forward as collateral when approaching banks for funding. Weeramunda explained they have the intangible products and services they produce, which have no physical valuation; and even if their companies are growing, what they can do is explain the potential of their offering. “The biggest challenge is explaining this, and when they ask for the bigger picture, we can give them a number but no assurance,” Weeramunda said, adding that this greatly impacts tech companies’ ability to secure funding. “The other side of the story is that 90% of start-ups fail globally, so bankers ask why they should take that risk.”
ICTA’s alternative Credit Evaluation Framework: A new hope?
In recognition of the struggles tech start-ups face, especially when scaling up, the Information and Communication Technology Agency (ICTA) Sri Lanka, as part of its goal to build a more digitally inclusive and prosperous Sri Lanka, has developed a new Credit Evaluation Framework for financial institutions to use when evaluating tech start-ups that takes the nature of a tech start-up’s assets into account.
ICTA Start-up Ecosystem Development Senior Manager Tamasha Fernando shared that the alternative Credit Evaluation Framework, which was developed in partnership with PriceWaterhouseCoopers (PWC) on a pro bono basis, will look at factors like financial standing, market and product feasibility, the start-up founder’s credentials and management expertise, and the potential of the product being scaled globally when evaluating funding proposals from start-ups looking to scale, giving prominence to the intangible components that a tech start-up carries as opposed to physical collateral.
Fernando explained that this alternative Credit Evaluation Framework has been developed specifically to support start-ups looking to scale up their operations after at least three years of building a base for their brand and product. As the framework is still new, ICTA is heavily involved in the process, with Fernando sharing that it is ICTA’s hope that once the framework is established, start-ups will be able to approach banks for funding independently. “For the moment, what ICTA does is get an Expression of Interest (EoI) from tech companies, evaluate them with PWC, and then recommend them to banks for funding. This particular framework is not yet adapted to the entire banking system. Certain banks (four banks and counting) have already adapted to this framework, and those banks can be approached directly, but for other banks, it is highly recommended to go through ICTA.”
One of the banks that have already adapted to this alternative Credit Evaluation Framework is NDB Kohuwala. Branch Manager Kuraish Sappidin applauded the framework, sharing that it is “a lovely move from ICTA and PWC through which we can shift traditional banking to the next level”. Sappidin also shared that it is his hope that this framework will form the basis for a new national policy, saying: “These are initiatives we need to take. Most private banks have given consent to join within this framework, giving huge potential and opportunities to everyone to tie up to banks and grow their potential.”
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From L to R: NDB Kohuwala Branch Manager Kuraish Sappidin, ICTA Start-up Ecosystem Development Senior Manager Tamasha Fernando, PayMedia Founder and Chief Executive Officer (CEO) Kanishka Weeramunda, and ICTA Start-up Ecosystem Development Director Sachindra Samararatne[/caption]
Taking advantage of this alternative funding framework
With PayMedia being one of the first companies to be able to secure funding through this alternative Credit Evaluation Framework, Weeramunda shared that it is important for tech start-ups, and their founders, to leverage themselves properly ahead of approaching banks with proposals for funding. “You need to make yourself ready,” Weeramunda said. “Banks will not listen to each pitch. You need a credible track record as a founder. You need to be in the start-up ecosystem for some time,” adding that someone with no track record of failing is as suspicious as someone who has had several failures.
Weeramunda also urged founders not to skimp on bookkeeping, sharing that many new and growing businesses take shortcuts with their accounting, leading them to fail audits, which costs them funding opportunities. This also ties back to having the right team in place to manage different aspects of the business, and is one of the key criteria of the Alternative Credit Evaluation Framework.
Weeramunda’s third and most important tip for start-ups looking to scale and looking to make use of the alternative Credit Evaluation Framework to do this is getting their product right. “Your solution should be marketable, and something you’re looking at expanding from local to global. You need evidence that what you’re producing has more expandable capabilities in the future.”
In all, start-ups looking to scale should be able to convince investors and banks that they are viable across the board. “You can’t have an idea and go pitch tomorrow; you need to have done the start-up and come to a situation where, if you get this extra funding, you can scale up. Your spirit should be ‘give me your money and let me show you how I can grow’.”
From L to R: NDB Kohuwala Branch Manager Kuraish Sappidin, ICTA Start-up Ecosystem Development Senior Manager Tamasha Fernando, PayMedia Founder and Chief Executive Officer (CEO) Kanishka Weeramunda, and ICTA Start-up Ecosystem Development Director Sachindra Samararatne[/caption]
Taking advantage of this alternative funding framework
With PayMedia being one of the first companies to be able to secure funding through this alternative Credit Evaluation Framework, Weeramunda shared that it is important for tech start-ups, and their founders, to leverage themselves properly ahead of approaching banks with proposals for funding. “You need to make yourself ready,” Weeramunda said. “Banks will not listen to each pitch. You need a credible track record as a founder. You need to be in the start-up ecosystem for some time,” adding that someone with no track record of failing is as suspicious as someone who has had several failures.
Weeramunda also urged founders not to skimp on bookkeeping, sharing that many new and growing businesses take shortcuts with their accounting, leading them to fail audits, which costs them funding opportunities. This also ties back to having the right team in place to manage different aspects of the business, and is one of the key criteria of the Alternative Credit Evaluation Framework.
Weeramunda’s third and most important tip for start-ups looking to scale and looking to make use of the alternative Credit Evaluation Framework to do this is getting their product right. “Your solution should be marketable, and something you’re looking at expanding from local to global. You need evidence that what you’re producing has more expandable capabilities in the future.”
In all, start-ups looking to scale should be able to convince investors and banks that they are viable across the board. “You can’t have an idea and go pitch tomorrow; you need to have done the start-up and come to a situation where, if you get this extra funding, you can scale up. Your spirit should be ‘give me your money and let me show you how I can grow’.”