EXTERNAL CRITICAL SUCCESS FACTORS FOR 
THE GROWTH OF STARTUP SOFTWARE 
DEVELOPMENT COMPANIES IN SRI LANKA 
 
 
 
By 
J. C. Nanayakkara 
 
 
 
The dissertation was submitted to the Department of Computer Science 
and Engineering of the University of Moratuwa in partial fulfillment of 
the requirements for the Degree of MBA in Information Technology 
 
 
 
Department of Computer Science and Engineering 
University of Moratuwa 
 
November 2007
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DECLARATION 
 
“I certify that this thesis does not incorporate without acknowledgement any material 
previously submitted for a degree or diploma in any university to the best of my 
knowledge and belief it does not contain any material previously published, written or 
orally communicated by another person or myself except where due reference is made 
in the text. I also hereby give consent for my dissertation, if accepted, to be made 
available for photocopying and for interlibrary loans, and for the title and summary to 
be made available to outside organizations” 
 
 
 
……………………………..     …………………….. 
Signature of the Candidate      Date 
 
 
 
 
To the best of my knowledge, the above particulars are correct. 
 
 
…………………………. 
Supervisor 
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ABSTRACT 
Sri Lankan software industry is still in its tender stage. It is an industry which needs 
minimum of investment with potentially high returns in a short period of time. 
Therefore, many small and medium scale software firms have been started. But only a 
few could grow successfully, while some were struggling to survive and others have 
failed.  
 
This research attempts to achieve three objectives. The first is to identify the external 
factors that affect the growth of infant software development companies. Secondly, 
we wish to identify the most significant factors. The third is to identify the 
relationship of firm’s successes and failures on most significant factors. The focus is 
on software companies that develop software for the local market. 
 
Based on literature and interviews with industry experts and entrepreneurs, a list of 
possible factors which may affect the growth of startups was prepared. A theoretical 
framework was formulated and a questionnaire was prepared to collect data. The 
sample was selected from among the software companies started between the year 
2000 and 2006 having at least one local project completed. 
 
Based on the responses and the data analysis carried out, unavailability of IT 
workforce, telecommunication, electricity, acknowledging the local products and tax 
holiday schemes were identified as the most critical for the growth of startup software 
firms. 
 
It is recommended to expand the IT training capacity in the country to produce 
required professional workforce. Software development centers can be setup in the 
vicinity of such training centers to get capable students on a part-time basis. The 
government can provide an encouraging environment with the infrastructure in place 
and incentives for startups.  
 
Key Words 
Software Industry, Startup Software Companies, Critical success factors 
 
 
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ACKNOWLEDGEMENTS 
 
First of all, I would like to thank Dr. Sanath Jayasena of the University of Moratuwa, 
my supervisor for this project, whose guidance and instructions paved the path for me 
to complete this research successfully. 
 
I would also like to thank the coordinator of the MBA-IT batch, Ms V. Nanayakkara, 
the staff of department of Computer Science and Engineering, and all my batch mates 
for the encouragement given. 
 
I would like to express my special thank to Mr. Mohammad Azmeer, CEO, 
Conceptnursery.com, for sharing his vast knowledge in entrepreneurship and startup 
companies. 
 
I would like to thank Mr. Yashas Mallawarachchi for his constructive advice and 
releasing me from office work during the difficult times without hesitation. 
 
Furthermore, I would like to thank all the personnel who participated in the survey for 
taking their precious time off their busy schedules. 
 
Finally, I would like to thank my wife and son, for tolerating my disappearance during 
the dissertation writing.  
 
J. Chandana Nanayakkara. 
 v 
TABLE OF CONTENTS 
1.0 INTRODUCTION ..............................................................................................1 
1.1 BACKGROUND AND MOTIVATION .........................................................................1 
1.2 PROBLEM STATEMENT ..........................................................................................2 
1.3 RESEARCH OBJECTIVES.........................................................................................2 
1.4 OVERVIEW OF THE STUDY.....................................................................................2 
1.5 IMPORTANCE OF THE STUDY .................................................................................3 
2.0 LITERATURE REVIEW ..................................................................................4 
2.1 SRI LANKA SOFTWARE INDUSTRY ........................................................................4 
2.2 EXTERNAL FACTORS AFFECTING THE GROWTH OF STARTUP IT COMPANIES........5 
2.2.1 Helping Bodies .............................................................................................5 
2.2.2 Work Force ...................................................................................................7 
2.2.3 Infrastructure.................................................................................................8 
2.2.4 Government Stability..................................................................................10 
2.2.5 National Vision ...........................................................................................10 
2.3 MEASURES OF SUCCESS OF STARTUP SOFTWARE COMPANIES ............................11 
2.3.1 Persistence in the Market ............................................................................11 
2.3.2 Growth Rates ..............................................................................................12 
3.0 RESEARCH METHODOLOGY AND DESIGN ..........................................13 
3.1 THEORETICAL FRAMEWORK ...............................................................................13 
3.2 DEFINITION OF VARIABLES .................................................................................14 
3.2.1. Helping Bodies ..........................................................................................14 
3.2.2 IT Workforce ..............................................................................................14 
3.2.3. Infrastructure Facilities ..............................................................................15 
3.2.4. Stability of the Government.......................................................................15 
3.2.5. National Vision ..........................................................................................15 
3.3 HYPOTHESIS........................................................................................................16 
3.4 SAMPLE SELECTION ............................................................................................16 
3.5 DATA COLLECTION .............................................................................................17 
 
 
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4.0 SURVEY RESULTS.........................................................................................19 
4.1 DEMOGRAPHIC INFORMATION.............................................................................19 
4.2 ANALYSIS OF HYPOTHESIS 1 ...............................................................................21 
4.2.1 Existence of Financial Institutes .................................................................21 
4.2.2 Existence of Special Funds / Funding Agencies.........................................22 
4.2.3 Existence of Incubators...............................................................................23 
4.2.4 Summary Results for Existence of Helping Bodies....................................24 
4.3 ANALYSIS OF HYPOTHESIS 2 ...............................................................................25 
4.3.1 Unavailability of IT Workforce ..................................................................25 
4.3.2 Strict Labor Laws in the Country ...............................................................26 
4.3.3 Summary Results for IT Workforce ...........................................................27 
4.4 ANALYSIS OF HYPOTHESIS 3 ...............................................................................28 
4.4.1 Cost and Quality of Electricity ...................................................................28 
4.4.2 Cost and Quality of Telecommunication ....................................................29 
4.4.3 Existence of Technology Parks (Clusters)..................................................30 
4.3.4 Summary Results for Infrastructure Facilities ............................................31 
4.5 ANALYSIS OF HYPOTHESIS 4 ...............................................................................32 
4.5.1 Stability of the Local Economy ..................................................................32 
4.5.2 Summary Results for the Stability of the Government...............................33 
4.6 ANALYSIS OF HYPOTHESIS 5 ...............................................................................34 
4.6.1 Acknowledging Local Products/Firms .......................................................34 
4.6.2 Tax Holiday Schemes .................................................................................35 
4.6.3 Software Piracy and Copyright Laws .........................................................36 
4.6.4 Summary Results for Infrastructure Facilities ............................................37 
5.0 CONCLUSIONS AND RECOMMENDATIONS..........................................38 
5.1 FULFILLMENT OF OBJECTIVES.............................................................................38 
5.2 DISCUSSION ON KEY FINDINGS ...........................................................................40 
5.2.1 Existence of Helping Bodies.......................................................................40 
5.2.2 IT Workforce ..............................................................................................42 
5.2.3 Infrastructure...............................................................................................45 
5.2.4 Stability of the Government........................................................................46 
5.2.5 National Vision ...........................................................................................47 
5.3 RECOMMENDATIONS ...........................................................................................49 
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5.4 LIMITATIONS OF THE RESEARCH .........................................................................50 
5.5 FUTURE RESEARCH .............................................................................................50 
6.0 REFERENCES.....................................................................................................51 
APPENDIX 1: SURVEY QUESTIONNAIRE........................................................53 
 
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LIST OF FIGURES 
 
Figure 2.1: The early stages of a company and the available sources of capital ...........6 
Figure 2.2: Electricity Tariffs ........................................................................................8 
Figure 2.3: Telecommunication Tariffs .........................................................................9 
Figure 3.1: Theoretical framework ..............................................................................13 
Figure 4.1: Age analysis of firms.................................................................................19 
Figure 4.2: Employee distribution ...............................................................................20 
Figure 4.3: Percentage of local projects handled by the firms.....................................20 
Figure 4.4: Mean value comparison of helping bodies................................................24 
Figure 4.5: Mean value comparison of IT workforce..................................................27 
Figure 4.6: Mean value comparison of infrastructure facilities...................................31 
Figure 4.7: Mean value of stability of government .....................................................33 
Figure 4.8: Mean value comparison of the national vision..........................................37 
Figure 5.1: Educational background of employees .....................................................43 
Figure 5.2: Characteristics of the IT workforce...........................................................43 
Figure 5.3: Staff composition ......................................................................................44 
Figure 5.4: Employer perception about labor laws......................................................44 
Figure 5.5: Impact of interruption and cost of electricity ............................................45 
Figure 5.6: Quality and cost of telecommunication.....................................................46 
Figure 5.7: Firm’s products and services dependency on local economy ...................47 
Figure 5.8: Firm’s project portfolio .............................................................................48 
Figure 5.9: Employer’s concern for the intellectual property rights............................48 
  
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LIST OF TABLES  
 
Table 4.1: No. of responses for existence of financial institutes .................................21 
Table 4.2: Correlation analysis for existence of financial institutes............................21 
Table 4.3: No. of responses for existence of special funds/ funding agencies ............22 
Table 4.4: Correlation analysis for special funds/ funding agencies ...........................22 
Table 4.5: No. of responses for existence of incubators..............................................23 
Table 4.6: Correlation analysis for the existence of incubators...................................23 
Table 4.7: Correlation analysis for the existence of helping bodies ............................24 
Table 4.8: No. of responses for unavailability of IT workforce ..................................25 
Table 4.9: Correlation analysis of unavailability of IT workforce ..............................25 
Table 4.10: No. of responses for strict labor laws in the country ................................26 
Table 4.11: Correlation analysis of labor laws in the country .....................................26 
Table 4.12: Correlation analysis of IT workforce........................................................27 
Table 4.13: No. of responses for the cost and quality of electricity ............................28 
Table 4.14: Correlation analysis of the cost and quality of electricity ........................28 
Table 4.15: No. of responses for the cost and quality of telecommunication..............29 
Table 4.16: Correlation analysis of the cost and quality of telecommunication..........29 
Table 4.17: No. of responses for the existence of technology parks ...........................30 
Table 4.18: Correlation analysis of the existence of technology parks .......................30 
Table 4.19: Correlation analysis of the infrastructure facilities...................................31 
Table 4.20: No. of responses for the stability of local economy .................................32 
Table 4.21: Correlation analysis of the stability of local economy .............................32 
Table 4.22: Correlation analysis of the stability of the government............................33 
Table 4.23: No. of responses for acknowledging local products/firms .......................34 
Table 4.24: Correlation analysis of acknowledging local products/firms ...................34 
Table 4.25: No. of responses for tax holiday schemes ................................................35 
Table 4.26: Correlation analysis of tax holiday schemes ............................................35 
Table 4.27: No. of responses for software piracy and copyright laws.........................36 
Table 4.28: Correlation analysis of software piracy and copyright laws.....................36 
Table 4.29: Correlation analysis of national vision .....................................................37 
Table 5.1: Rank assigned for the external factors........................................................39 
Table 5.2: Hypothesis results.......................................................................................40 
Table 5.3: Collateral requirement of financial institutes .............................................41 
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Table 5.4: Collateral requirement of funding agencies / special funds .......................41 
Table 5.5: Services provided by incubators.................................................................42 
 
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LIST OF ABBREVIATIONS
 
BOI - Board of Investment of Sri Lanka 
CDMA - Code Division Multiple Access 
CEO - Chief Executive Officer 
EDA - Exploratory Data Analysis 
GDP - Gross Domestic Product 
ICTA - Information and Communication Technology Agency 
IPR - Intellectual Property Rights 
IT - Information Technology 
R&D - Research and Development 
SEA - Software Exporters Association 
SLASI - Sri Lanka Association for Software Industry 
SLCVA - Sri Lanka Computer Vendors Association 
SME - Small and Medium Enterprises 
SPSS - Statistical Package for the Social Sciences 
VC - Venture Capital