Many people dream of starting a business, but for Sri Lankan entrepreneurs, financial constraints often turn this dream into a daunting challenge. While traditional funding methods like bank loans and personal investments have long been the norm, a promising alternative, crowdfunding, remains significantly underutilised in Sri Lanka.
Understanding Crowdfunding
Ms. Dhanuja Somathilake
Crowdfunding is a method of raising money for a particular project or cause by asking a lot of people to donate money using online platforms, usually in small amounts and usually in a short period. It enables entrepreneurs to pitch their ideas directly to potential backers, bypassing the complexities of traditional financial institutions. Globally successful platforms like Kickstarter, Indiegogo, and GoFundMe have demonstrated how crowdfunding can democratise access to capital, enabling innovative ideas to flourish. In Sri Lanka, however, crowdfunding remains a nascent concept. Many perceive it as primarily suited for charitable causes or community support projects. Yet, its potential for fuelling startups and small businesses is immense, especially during the country’s ongoing economic challenges.
The Necessity of Crowdfunding for Sri Lankan Startups
Sri Lanka’s economic crisis has significantly strained traditional funding avenues. High interest rates, stringent loan requirements, and limited venture capital options have left many startups struggling to secure financing. Crowdfunding could provide a lifeline by avoiding traditional barriers. Because entrepreneurs can connect directly with backers, eliminating the need for collateral or a credit history. Further, a successful crowdfunding campaign signals market demand, boosting confidence in the venture by validating business ideas. Moreover, crowdfunding platforms allow entrepreneurs to cultivate a loyal customer base from day one by building a community. Anyhow these benefits, the adoption of crowdfunding in Sri Lanka remains limited.
Methodology
This study adopts an interpretive approach and a qualitative research design to explore barriers to crowdfunding adoption among startups in Sri Lanka. The research seeks to gather in-depth insights from representatives of crowdfunding platforms who possess firsthand experience in the field. Five key representatives were purposively selected from prominent crowdfunding platforms in Sri Lanka, and Semi-structured interviews were conducted during November 2024, with each session lasting 30 to 40 minutes. An interview guide with open-ended questions facilitated the discussions, encouraging participants to share detailed perspectives.
Initial interviews yielded valuable insights, with data saturation observed after three sessions. To confirm this, two additional interviews were conducted, making a total of five. The recorded interviews were promptly transcribed, with careful attention given to accurately translating key terms into English. Thematic analysis was employed to analyse the data, involving systematic coding to identify recurring themes and patterns. This approach enabled the study to uncover significant barriers faced by startups in adopting crowdfunding, as well as actionable insights to address these challenges.
Barriers to Crowdfunding in Sri Lanka
This research highlights the barriers to adopting crowdfunding in Sri Lankan startups. One of the most significant obstacles is that many Sri Lankans don’t know what crowdfunding is. For those who have heard of it, the understanding is often limited to donation-based platforms used for charity work, such as during the COVID-19 pandemic. Entrepreneurs, particularly in rural areas, lack exposure to the broader applications of crowdfunding and its potential to fuel business growth. Additionally, educational institutions and professional training programs rarely cover crowdfunding as part of financial literacy, leaving future entrepreneurs unaware of this option.
Sri Lanka’s cultural norms and social perceptions also play a dominant role in this matter. Many view crowdfunding with scepticism, associating it with begging or pyramid schemes. This perception deters entrepreneurs from seeking funds through these platforms, fearing judgment from their communities. Moreover, trust is a significant issue. Sri Lankans often prefer face-to-face interactions and tangible transactions, making the idea of contributing money to a virtual campaign less appealing.
The absence of a clear regulatory framework for crowdfunding in Sri Lanka further complicates matters. Currently, there are no specific laws governing crowdfunding platforms, leading to confusion about their legality and reliability. This regulatory vacuum discourages both entrepreneurs and potential investors who are unsure about the risks involved. In some cases, crowdfunding transactions have even been flagged as suspicious by financial institutions, highlighting the need for better awareness among banking officials and a supportive regulatory environment.
For crowdfunding to succeed, entrepreneurs need access to reliable technological and infrastructure facilities like the Internet, video production tools, and digital literacy. A compelling campaign often requires a well-produced video to attract backers, but many startups lack the resources to create such content. While internet access has improved in urban areas, rural entrepreneurs often struggle with connectivity issues and limited access to the necessary technology.
Necessary Changes for Progress
For crowdfunding to become a viable option for Sri Lankan startups, several systemic changes are necessary. Entrepreneurs, investors, and the general public need greater exposure to crowdfunding. Awareness campaigns, workshops, and educational programs can help demystify the concept and highlight its potential. To overcome cultural scepticism, crowdfunding platforms must prioritise transparency and accountability.
Clear guidelines on how funds are used and regular updates to backers can foster trust. Policymakers must develop laws that provide legal clarity and protection for all stakeholders involved in crowdfunding. This includes setting up mechanisms to monitor platforms and ensure funds are used as intended. Further, improving internet access and digital literacy, particularly in rural areas, is essential. Initiatives to provide affordable video production tools and training could also help entrepreneurs create compelling campaigns. Also, the collaboration between the government, financial institutions, and crowdfunding platforms can create an ecosystem that supports startups.
For instance, platforms could partner with banks to offer hybrid funding models that combine traditional loans with crowdfunding.
Leveraging Crowdfunding for Future Entrepreneurs
If you’re a potential entrepreneur in Sri Lanka, here’s how you can prepare to launch a successful crowdfunding campaign. First, educate yourself. Research different types of crowdfunding, from donation-based to equity-based models, and choose the one that best suits your needs. Second, tell your story. Clearly articulate your vision and why your business idea matters. Use visuals to make your campaign more engaging. Third, build a network. Leverage social media and local community groups to spread the word about your campaign. Fourth, plan strategically. Set realistic funding goals and offer meaningful rewards to backers. Transparency about how funds will be used can increase trust. Last, learn from feedback. Engage with backers and respond to their questions. Their feedback can help you refine your business idea and strengthen your campaign.
Looking Ahead
Crowdfunding holds immense potential to transform how startups in Sri Lanka access capital. By breaking down the barriers of awareness, cultural perceptions, and regulatory challenges, this innovative financing model could unlock opportunities for entrepreneurs across the country. For aspiring business owners, the message is clear: Don’t let traditional funding hurdles stop you from pursuing your dreams. With the right approach and support, crowdfunding can be a game-changer for Sri Lanka’s entrepreneurial landscape.
By Dhanuja Somathilake
Senior Lecturer, Department of Accountancy and Finance, Faculty of Management Studies,
Rajarata University of Sri Lanka
