ECONOMYNEXT – The Asian Development Bank (ADB) has said demand for equity finance by Sri Lankan start-ups and small businesses is growing and recommends the government set up a pilot fund with US$10 million to begin with.
“Over the next 5 years, we project that the demand for equity financing by start-ups could reach $200 million,” the bank said.
The government can play a catalytic role by directly investing in the fund, alongside private investors, the ADB said.
To fund its capital contribution, it also recommended the government pursue a loan from ADB.
The aim is to provide risk capital to support the growth of start-ups and Small and Medium-sized Enterprises (SMEs) which do not have adequate access to finance.
“The government is recommended to consider a pilot fund size of $10 million to test the concept before pursuing larger-scale capital commitments,” the ADB said.
The bank said in a new study there are two distinct types of SMEs: high-growth start-ups and low and moderate-growth established SMEs, each with very different cultural, operational, and financial profiles.
“While both categories require equity or risk capital, the nature of their financing needs is quite different. The demand for capital from start-ups is more obvious and well-articulated in the market, as many of them are actively seeking external equity investment,” the ADB said.
Established SMEs are also constrained by limited capital bases, as most are self-funded by entrepreneurs and complemented by collateralized loans from commercial banks.
“We estimate there is a need of $0.5 billion–$1.0 billion in risk capital from established SMEs,” the ADB said.
(COLOMBO, March 16, 2018)