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Dynamics of the Venture Capital Market in Sri Lanka

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Amila Pathirana

on 23 October 2012

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Transcript of Dynamics of the Venture Capital Market in Sri Lanka

Small size of market – low competitive advantage
Inability to commercialise the innovative ideas
Lack of funds
Lack of trust
Lack of high net worth individuals
Low capital requirements for start up businesses
No proper exit strategies
Cultural issues
Knowledge gap/lack of expertise
VC investments now on long term perspective Barriers to Growth The product/service does not have sustainability
The instability of business model
The technology architecture isn’t scalable
The senior management team is inept
The company doesn’t know what it wants to be (desired status) Failure Factors VC company survival is the biggest challenge

More on equity investment instead of real VC

Investments in long term financing
Power and healthcare
Funding & exit through holding company

Expected return of 20% to 25%

Only on secured investment

Always get connected to the leading entrepreneur or confident party Current Market Trends Lanka Ventures PLC

Blue Ocean Ventures

Venture Engine - A project by Blue Ocean Ventures and Indian Angle Network Current Market Players 1st phase - 1983 - with the tax benefits under section 22 DD of Inland Revenue Act, DFCC, NDB & CDIC started playing a quasi-venture capital role

2nd phase - 1989 - VC companies formally introduced under national industrial policy.
7 VC companies formed (only 2 survived)
10 year tax holiday offered by section 22DDD of Inland Revenue Act of 1990

3rd phase - 2003 - with further tax benefits History of VC in Sri Lanka Innovative enough to create required ROI
Reliability of the inventor/entrepreneur
Business plan
Market demand
Exit route
Payback period
Competencies of operational management Investment Criteria Short-term funds (5 - 7 years) provided by investors to startup firms and small businesses that are high risk with perceived high growth potential which cannot raise debt capital.

Investor receives a percentage of the equity and demands a clear exit route. Venture Capital 1996 initial investment through venture capital companies NDB Venture Investments and People’s Venture Investment Company

Automated the Colombo Stock Exchange

In 2000, Rs. 10/- share sold at USD 2.10 to foreign investors GMO, HSBC and Citibank private equity funds

In 2009, MillenniumIT was sold to the London Stock Exchange Group for USD 30 mn at USD 1.40 per share MillenniumIT Story MBA/12/2964
MBA/12/3130 The Team MBA 513
Strategic Financial Management
  Dynamics of the Venture Capital Market in Sri Lanka Based on primary and secondary research gathered, it appears that the concept of venture capital does not operate well in Sri Lanka.
It is not dynamic in the Sri Lankan market today.
It exists mostly as equity funds rather than venture capital. Conclusion Low credit growth in finance sector - 6% lower than forecasted level
High non performing portfolio in banks
80% of the businesses are SME
Government involvement
Recent foreign based VC establishment - BOV / Venture Engine
Future Expectations Leadership
Dependent on human qualities more than transactional structures
Partnership management
Proof and clarity of innovative concept
Business planning and marketing plan
Triple bottom line planning
Short and long term benefits management
Risk management The Art of Venture Capital Success to failure rate - 1:15
More focused on tax holidays & tax benefits
Lack of expert knowledge
Too much involvement in operational activities
Invested in pioneer projects but not the really innovative projects
Investing in long term projects
Application of debt / equity management style Historical Mistakes Disadvantages / Issues of VC Advantages / Benefits of VC Tony Weerasinghe known as 'Ideas Man' commenced MIT in 1996 through a MBO (Open System Division of CompuerLand Sri Lanka)

Commenced business as a system integrator and moved to the fields of application software and design

Innovative solutions and dynamic management has lead MIT to become a multi-million-dollar company

Operates in Sri Lanka, Boston, New Jersey, London and Mumbai Innovation is Power – MillenniumIT **WSO2 - access to USA venture capital funding Investments of Lanka Ventures PLC 2010 dip due to write off of LKR 250+mn in investments of Lanka Ventures PLC Share of VC in the Finance Market Mr. Naomal Goonewardena Thank you! Venture Capitalists High return on investment
Majority stake in the company
More control on investment unlike other debt investments Beneficiary Funding to expand and value added services – mentoring, alliances, facilitate exit
Entrepreneurs can build their company with OPM
Invaluable source of information, resources and contacts for company’s success Venture Capitalists Beneficiary Liquidity plans of company and venture capitalist may be different High rate of failure
Securing the deal is a long & complex process
Misuse of funds
Inability to meet agreed clauses
Difficult to exit Give up part of ownership for finance
Restrictions imposed as a part of the deal
Investor’s consent for major decisions
Investor’s delegate on Board
High pressure on cash flow Partner - Nithya Partners Mr. Sumith Arangala Chief Executive Officer - Lanka Ventures PLC W.H.Y.G. De Silva
H.B. Goonasekara
C. Gunathilaka
H.M.J.D. Herath
C. Nanayakkara
A.S. Pathirana
K.A.N. Perera
T.I. Perera
E.L.C.S. Silva
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