Financing the Startup Lifecycle: A Mixed-Methods Analysis of Capital Gaps in Sri Lanka's Entrepreneurial Ecosystem

Abstract

Purpose – Access to capital is repeatedly named as the binding constraint on entrepreneurial ecosystems in emerging economies, yet most empirical studies treat “funding availability” as a single, undifferentiated construct. This paper disaggregates that construct using the financial-growth-cycle logic of startup finance, asking whether angel/seed capital, venture capital, and pre-IPO/expansion capital play distinct roles in Sri Lanka's startup ecosystem, and how the regulatory framework conditions the conversion of capital into ecosystem outcomes.

Design/methodology/approach – The study uses a sequential explanatory mixed-methods design. The quantitative strand applies Partial Least Squares Structural Equation Modelling (PLS-SEM) to survey data from Sri Lankan ecosystem participants, testing the effect of an aggregate Availability of Funds (AF) construct on Startup Ecosystem Performance (SEF), directly and indirectly through Quality Digital Infrastructure (QDI), alongside the Regulatory Framework (RF) construct. The qualitative strand maps Sri Lanka's funding landscape onto Berger and Udell's (1998) five-stage financial growth cycle, drawing on secondary evidence – angel network records, venture capital databases, government innovation fund disclosures, and stock exchange data – to evaluate capital availability stage by stage.

Findings – The quantitative model confirms that Availability of Funds has a significant direct effect on ecosystem performance (β = 0.136, p = 0.043) and a significant indirect effect through digital infrastructure (β = 0.083, p = 0.014). The qualitative mapping shows this aggregate result conceals real stage-wise heterogeneity: angel and seed capital is present, though concentrated among a small number of actors; institutional Series A venture capital is effectively absent, constituting a “missing middle” that undermines scaling; and growth-stage and pre-IPO capital remains largely undeveloped domestically, with acquisition-led exits substituting for public listing. Regulatory Framework significantly shapes digital infrastructure (β = 0.171, p = 0.005) and functions as a contextual enabler that determines how efficiently available capital converts into ecosystem performance.

Originality/value – This is among the first studies to combine validated PLS-SEM evidence with a stage-mapped qualitative funding audit for a South Asian startup ecosystem. It shows that composite, survey-based funding constructs can mask structural discontinuities that matter enormously for policy, and it offers a replicable diagnostic – statistical modelling paired with lifecycle-stage mapping – for identifying exactly where in the financing pipeline intervention will do the most good.