With an audacious goal to play a small but impactful role in helping Sri Lanka become a high-income country by 2048, Sri Lanka@100 is deep-diving into the country’s SME sector to help accelerate growth. The Sri Lanka@100 business development platform, implemented by global management consulting firm, Stax Inc, is one of such initiatives to focus on Sri Lanka’s mid-market businesses in their journey of growth.
Despite being the backbone of Sri Lanka’s economy, the SME sector faces numerous challenges including access to resources and new markets remain weak. For Stax, the potential in the sector is immense and waiting to be untapped. The ambitious initiative is funded by the US Government’s development arm, the United States Agency for International Development (USAID).
The thought leaders behind this initiative, co-founders, Dr. Kumudu Gunasekera and Ruwindhu Peiris discuss the genesis of Sri Lanka@100 and its vision.
Tell us about the genesis for the Sri Lanka@100 idea. Both, Ruwindhu and you were the centre of this, so how did this come about?
Kumudu: We are both passionate about giving back to our country. We have been delving into different areas of the startup ecosystem, and we recognized that our strengths lay in helping the private sector grow faster. So, we have been working with the larger corporates here in Sri Lanka. But, we soon realized that there was a whole segment that we were not exploring, the mature SME sector. We then did a few projects with this segment to understand how they work, and they were like a sponge, taking the opportunities and ideas, and adopting them. While the larger corporates can access business advisory and consultancy services, the mid-market firms and SMEs in Sri Lanka have really lacked access to these services.
Most of these companies also have a high dependency on the national budget and government policies when it comes to developing their business plans, lobbying governments etc. To reduce that dependency they have to expand outside Sri Lanka, by building brands and building export markets. Only then can these companies build on their full potential and grow. We felt there were other similar mid-sized SMEs that we could help in accelerating growth, in the next three to five years, with the right mindset, right policies in place, and access to the right markets.
We then collaborated with USAID and they were keen on helping the mid-market and SME sector, which is crucial for realizing Sri Lanka’s growth plans. USAID was the ideal partner to collaborate on this platform model because of its decades-long reputation to improve investments and expand opportunities for local private firms. We want this to be a model project that can be replicated across other countries.
How Sri Lanka @100 will contribute to Sri Lanka’s economic growth, with inclusivity as a key value?
Selected mid-market companies will receive high-quality business advisory services to optimize internal operations, enhance product portfolio, access new markets, attract smart capital, and create next-generation businesses.
A model to be replicated globally
Sri Lanka@100 is a private sector-led initiative focused on the growth of mid-market enterprises – funded by USAID.
Reed Aeschliman, USAID’s Mission Director for Sri Lanka and Maldives, lauded the vital role programmes like SL@100 play in assisting mid-market firms in these difficult times. “The value created by the growth and development of small and medium enterprises is paramount to Sri Lanka’s growth trajectory to an advanced economy status. As we build on our past partnerships with the private sector, we are exploring ways and means to help local firms to effectively navigate challenges, develop growth strategies, create employment opportunities and maximize profits and productivity.”
USAID is the development agency of the United States Government responsible for foreign aid. USAID has provided development and humanitarian assistance worldwide for 60 years. The U.S. Government has invested over Rs. 350 billion (US$2 billion) to benefit the people of Sri Lanka. To find out more about USAID’s work in Sri Lanka, please visit usaid.gov/sri-lanka.
You both run a business consultancy in Colombo. This is not typically what a consultancy would get involved in, this is a little unorthodox. So, how did you make the connection?
Ruwindhu: I guess it is more the passion than anything else that brought us back to Sri Lanka. We both had opportunities out there, but we came back, and stayed, because we are happy to be pushing the boundaries of our direct circle of influence and are hopeful of the ripple effect these actions will have.
Earlier, we were part of the angel network, investing in the startup ecosystem, but that space became very mature. But, this middle layer, we felt, was not getting the right attention. So, we decided to take our services to this layer.
If you set KPIs on this project, what do you think those can be?
Kumudu: There are a few key performance indicators (KPIs) as we are keen on driving outcomes. There are two elements to the platform: one is the portfolio of companies. Our plan is to onboard around 50 high-potential mid-market companies from diverse sectors, of which, we have already onboarded 13. For the portfolio companies, we have a revenue KPI. We have portfolio managers who oversee the portfolio companies, and each of them has a revenue target to grow the portfolio by 4X-5X. That is more of an operational and quantifiable KPI. The other element is at a platform level. We want these 50 companies to also have inclusive growth.
We don’t want this project to be Westernprovince centric. We are actively looking at identifying companies across the 25 districts. That is very important to us. A third element is women’s participation. Not merely onboarding women-owned businesses, but companies where there is a significant women labour force participation across all levels.
Stax works with fairly large companies. How different Is the engagement with SMEs?
Ruwindhu: When we work with SMEs, we are often working with the founders themselves, so there is a very active and high level of participation, and things move at a faster pace. The flip side of course is that they lack a second layer, which puts more pressure on them since they have to manage the operational aspects of the business and also think of strategic growth, which can be challenging. We take this as an opportunity to help them create a second layer, so that the operational side of the business can be taken care of by a leadership team, which then gives the founders more time to focus on growth.
You have now onboarded 13 of your goal of 50 companies. What growth numbers do you expect to be achieved over three years?
Kumudu: We started off with a 3X to 5X growth for the portfolios, but once we delved into the details, we found it was very nuanced, from company to company. For instance, with a technology company we are looking for 8X-10X growth, and there are some very interesting tech companies in the portfolio that have a lot of potential. We have some interesting agri companies in the portfolio as well, and their growth goals would be different.
That’s on a growth multiple, but how about the revenue level?
Kumudu: Revenue-wise we are looking at Rs250 million to about Rs1.2-1.3 billion revenue per annum. That is the spectrum. We have companies at the top of the Rs1.2-1.3 billion range as well as the Rs250 million. There may be one or two companies below Rs250 million, but they are more tech or high-growth companies
What are those defined goals, and how does this partnership really work?
Kumudu: We are signing these companies up for five years, but we are actually looking beyond that. We want to make this platform self-sustaining, and we are developing a unique revenue model, where these companies will give back to the platform when they accelerate growth. For example, if a portfolio company is to establish in Kenya and succeed, we will have a mechanism to have a success-based income flow back to the platform. So, the platform becomes self-sustaining over the longer term.
Ruwindhu: The other element that’s interesting is the ability of these companies to be a pipeline for investors. These are companies that have gone through a selection and vetting process, and that’s always of value to a private equity investor. Together with these companies, we are coming up with some very ambitious plans which will require capital. We are currently working out the engagement model to engage with investors on this.
Kumudu: To support the growth journey, we have also partnered with the National Development Bank (NDB) as the banking partner. As part of our partnership, NDB will provide financing facilities at attractive rates, so that these companies will have the bandwidth to invest in growth. In addition, we are also helping companies in the lower bracket to get to the Rs250+ million range, through a series of capacity building programs and we are hoping to work with the district chambers across all the districts on this.
INCLUSIVE GROWTH: PATHWAY TO HIGH-INCOME NATION STATUS
Sri Lanka@100’s, Rashmi Peiris Paranavitane shares her insights on the sector, and how SMEs can be a part of the nation’s growth journey, with the Sri Lanka@100 initiative.
As the Manager of the SL@100 initiative, tell us what being a part of this means to you?
Rashmi: We want to help Sri Lanka become a high-income nation within 100 years of independence, underpinned by inclusive growth for all Sri Lankans. Becoming a high-income country by 2048 is an audacious goal, and it will require the efforts of the private sector, government, and civil society to make it happen. Sri Lanka@100 is focused on how we can fuel the private sector – especially the mid-market firms to be a catalyst for that growth.
What are those challenges confronting Sri Lankan SMEs, and how can Sri Lanka@100 help them deal with each of these?
Rashmi: Some of the main factors that hinder the growth of SMEs are firstly, their lack of access to business advisory services – especially in areas outside the Western province. These services are also quite expensive and outside the reach of SMEs.
Secondly, Sri Lankan corporates are heavily dependent on the small local consumer base, and on favorable government policies to gain a competitive advantage over peers. This has created a mindset within Sri Lankan corporates, where local and national policy initiatives have a disproportionate impact on a company’s success, as opposed to its competitive advantage through innovative products and services.
Thirdly, Non-Inclusive Growth: Sri Lanka’s economic growth has not been broad-based and inclusive across gender, and regions. Certain regions outside of the western province lack access to business development services.
Fourthly, Poor Productivity – Companies across the agricultural and manufacturing sectors have been slow to adopt technology, and optimize internal processes, to boost productivity.
In addition, businesses in Sri Lanka, especially the small and medium-sized enterprises, which are mostly family owned businesses, use gut-based decision-making as opposed to adopting fact-based, data-driven insights for management decision-making. Access to financing remains a key bottleneck for SMEs across the board.
How can an SME apply and qualify to be a part of the Sri Lanka@100 initiative?
Rashmi: SMEs interested in joining the Sri Lanka@100 platform can submit their applications online, through our website https:// srilanka100.lk/for-mid-market-firms/. However, there is a rigorous screening process prior to selecting these companies. In the first round of screening, the shortlisted companies are invited to make a pitch presentation. Based on the pitch presentation SL@100 will invite the selected companies to join the platform as portfolio-level companies.
We are industry agnostic and the 13 companies we have already onboarded span across multiple sectors ranging from agriculture, insurance, manufacturing to technology. In our screening we mainly evaluate the potential to scale up, and the ambition of the senior leadership of the companies that apply to join our platform. We call for applications on an annual basis. The application cycle for 2021 has closed, and the next cycle will open later this year. We encourage high-potential companies to apply and partner with us on their growth journey.
NDB BANK: A FINANCING PARTNER – SO THAT THEY MAY GROW
Together on an impact-driven journey with SL@100 is NDB bank. Having joined the initiative as the exclusive banking partner, NDB is geared to provide financing facilities to these companies, so that they can invest in growth.
According to NDB, VP-Business Banking, Indika Ranaweera, “a majority of Sri Lankan businesses are under the SME segment which is the backbone of our economy. NDB bank has closely associated and supported this segment over the past four decades, and in critical situations, NDB has always been at the forefront of supporting SMEs. In line with this, NDB bank came up with the ‘Jayagamu Sri Lanka’ initiative, mainly to assist and direct SMEs and exporters during the pandemic.
Thus, in an effort to uplift this segment NDB tied up with the Sri Lanka @100 platform, in order to strengthen and support the SME sector, and provide non-financial assistance required to develop this sector. We strongly believe this partnership will be successful and further enhance our services to this segment. As the Exclusive Banking Partner to SL@100, NDB will provide value-added services and financing solutions to companies onboard the Sri Lanka@100 platform. In addition, NDB and SL@100 will collaborate on hosting capacity building programmes and webinars, to educate SMEs on financial services and solutions available to them. The partnership will help the SL@100 portfolio companies to expand, and thereby contribute to the growth of the SME ecosystem in Sri Lanka.”
HOW SL@100 WILL HELP ADDRESS THE CHALLENGES FACED BY SMEs
- Provide access to best-in-class advisory services. Accessing Stax resources as well as supported by eco-system partners such as banks and financial institutions, business advisory service providers and district chambers of commerce etc.
- Support companies in identifying and entering new markets that will accelerate revenue growth by providing market intelligence, go-to-market strategies etc.
- Promote women-led/women-owned businesses as well as companies that have a significant female workforce. Nearly 40% of the SL@100 portfolio companies are women-led or women-owned, while over 60% of the companies have a significant geo footprint outside of the Colombo district.
- Guide companies to adopt fact-based, data-driven decision-making.
- Facilitate access to smart capital – by positioning them to attract new capital, through its exclusive banking partner NDB and other investors.