Amongst the many panel discussions, workshops, and pavilions of Disrupt Asia 2018, there was one area that was exclusive to a select few. This was the investor forum. Inside this space, which was the Orange Electric office on weekdays, a group of investors had gathered inside. Here’s what we learned inside this mysterious world about funding startups.
The Sri Lankan Startup Ecosystem 101
The first session of the Investor Forum at Disrupt Asia 2018 was an introduction to the Sri Lankan startup ecosystem. This was conducted by Sachindra Samararatne – Program Manager at ICTA. He opened by sharing that many undergraduates don’t consider building a startup. They go through the entire education system until they obtain a degree and then seek stable jobs at companies.
As such, there needs to be a change in their mindset. Sachindra believes this can be achieved through the many workshops and hackathons aimed at university students. These programs would encourage them to come up with ideas and also check the feasibility of these ideas. Sachindra then went onto share a few examples of resources available to startups.
Afterward, he spoke of preparing startups for seed funding. He gave the example of Mora Ventures, which works with teams inside the University of Moratuwa to make them investor-ready. “This is a good model we are trying to replicate. We’re collaborating with so they’ll know how to pitch and answer your questions,” says Sachindra to the investors about the program.
Sachindra then moved onto talking about accelerators and incubators. These help established startups grow. He shared a few examples of such accelerators and incubators in Sri Lanka, which are: Spiralation, Venture Engine, John Keells X, Hemas Slingshot.
He also pointed out that these offer opportunities for startups to meet investors. And these meetings can encourage the startups to think about things they might have never thought of otherwise. Sachindra then concluded by talking about awards. He stated that awards rarely trickle down into something of real value. However, in Sri Lankan culture, the recognition allows entrepreneurs to go to their families with credibility.
Angel Investing 101
Following Sachindra’s introduction to the Sri Lankan tech startup ecosystem, we saw a panel discussion. The focus of this panel discussion at Disrupt Asia 2018 was angel investing. And the moderator of this session was Ashique Ali – Director at Talliance.
The first panelist we saw speak was Keith Wallace – Chairman and Managing Partner at DeInvesteerdersClub. He kicked off the discussion by briefing the audience on what being an informal investor is all about. Mangala Karunaratne -Founder & CEO of Calcey Technologies shared similar sentiments. He also added that not every investor should be on the board. Instead, there should only be one investor on the board to support the founder.
But this requires all the investors to trust each other. If not the startup is guaranteed to fail. Keith further elaborated on this point. He shared that old investors should be open to new ones. But when startups fail, certain investors decide to never invest in them again. So an approach Keith suggested was to have them hang out with experienced angel investors. By being around experienced angel investors, newer investors understand how they make deals. At the same time, it also fosters a sense of camaraderie amongst investors.
Investing in the founders of startups
Afterward, Ajith Fernando – Director & CEO at CAL highlighted that success for startups is a double-edged sword. This is because as the startup grows, the expectations of its investors can change. As such, Mangala said, “Put yourself in the founder’s shoes. That’s a good question to ask.” It’s important for an investor to empathize with a founder.
“Many founders don’t like to raise money from Sri Lankan investors.” – Mangala Karunaratne
Mangala expanded upon this point by saying, “You don’t win by screwing the founders. You win by making them successful.” Keith then shared that before investing in a founder he visits them at home. This is to check how much support they receive from their family. If they don’t have this support, then it’s questionable to invest in them.
Later, the panel touched on what they looked at before investing in startups. Ajith shared that he looks at what sector the startup operates in prior to investing in them. Meanwhile, Mangala says he simply asks whether people would pay money for what the startup is offering. And Keith says he prefers to take his time and get to know the founders before investing in them.
Helping startups grow
“We’ve got to build our credibility. Many founders don’t like to raise money from Sri Lankan investors. They always want to go outside because they think Sri Lankan investors are out to screw them and micromanage them,” shared Mangala. This he says is the perception of investors amongst many founders that he meets.
However, he admits that founders should expect a degree of micromanagement. This is simply because, at the end of the day, the founder has taken money from the investor. Keith elaborated on this by saying that he’s noticed there’s a different language between founders and investors everywhere. And there are times when investors have to be hands-on and burst any unrealistic perceptions the founders have.
Keith went onto highlight that good entrepreneurs also know what their investors bring to the table. He explained this through an example of a successful entrepreneur. This entrepreneur approached three investors. One investor helped the business cut its costs by 30%. The second investor offered support from a logistics company. The third investor opened up a new market for the entrepreneur. Keith concluded by saying, “We need to be able to add something other than money to help a business grow.”
The legal details when investing in startups
The final session of the Disrupt Asia 2018 Investor Forum was also panel discussion. This session was moderated by Lahiru Pathmalal – Cofounder & CEO of Takas. And the focus of this panel discussion was identifying and understanding the legal procedures involved when investing in startups.
Savantha De Saram – Senior Partner at D. L. & F. De Saram opened by sharing that there are certain decisions founders can’t legally take on their own. As per the Sri Lanka Companies Act, such decisions would require the majority of shareholders to approve it. However, he admits that this shouldn’t stop a company from making decisions. Especially since some investors like to be hands on.
Agreeing to valuations and making investments simple
Afterward, we saw Aruna Perera Director – Corporate Finance and Valuation at PWC Sri Lanka share his thoughts. He explained that before looking at valuations it’s necessary to check whether a startup is ready to raise funds. This involves simply asking questions as to whether a startup has an MVP or customers.
But even then it’s hard to agree on a valuation. Furthermore, Aruna also highlighted the importance of a strong revenue model regarding this process. Ultimately, a startup is very dependent on its founder. And many founders are willing to negotiate as long as they retain control.
Later, Savantha explained the importance of properly issues shares, protecting IP, and taxes. He pointed out that in many cases, founders haven’t considered about the taxes they have to pay. He also shared that in many cases, founders have set up proprietorships. This can be restrictive for the business when it seeks investments.
This is why he argues investors should carry out the process of due diligence. It’d help ensure the company is properly incorporated and they understand the taxes to be paid. However, Aruna pointed out that in some instances due diligence is far too costly for some investments.
Questions from the audience
Aruna later moved to answer one of the questions from the audience. This one was regarding expanding beyond Sri Lanka. He shared that in his experience, the biggest challenge will be cultural. As a company enters other countries, it needs to rework many things. This includes its policies, culture, and maybe even the way it provides its services.
Meanwhile, Savantha mentioned that Sri Lankan companies can access other markets. This is relatively simple as long as they meet the regulations and have the support of a good accountant. He also pointed out that GDPR regulations only apply if the company is dealing with an EU state. But we in Sri Lanka don’t have any such data privacy laws he shared in conclusion.
There was a lot more at Disrupt Asia 2018
As the investor forum came to an end, we made our way outside. Through the pavilions and art exhibits, we made our way towards the workshops and other parallel sessions. Later as the night set in we made our way back to the main stage to witness the end. To find out more, check out our hub here for all things Disrupt Asia 2018.