The most common ecosystem disturbances are fast and furious. Earthquakes. Floods. Fires. Not so Circular 331. The initiative by Banque du Liban (BDL), Lebanon’s central bank, provided a long-awaited capital injection into the country’s entrepreneurship ecosystem. But it’s a disturbance more akin to climate change than a meteor strike. Organisms long part of the ecosystem are adapting to the new disturbance, and it’s acted as a draw to bring new biomass into what is still a relatively small space for the startup-minded.
In late March, central bank Governor Riad Salameh indicated Lebanese banks had committed $243 million to the ecosystem, around half of what 331 makes available (i.e., 3 percent of commercial and investment banks’ Tier 1 capital, an amount that grows year-on-year as bank profits increase). To date, only around $50 million has been deployed.
While Executive heard no shortage of complaints (some of them contradictory), no one the magazine spoke with for this article feared the money would go uninvested. The newness of the idea and associated processes as well as the ecosystem’s relative immaturity, several interviewees say, are among the factors hindering a more speedy deployment. After all, according to Executive’s research on the topic and an engagement with the country’s new Startup Ecosystem Think Tank, Lebanon is the only example of a central bank orchestrating and executing a policy to nurture an entrepreneurship ecosystem (as opposed to a country’s executive or legislative branches of government taking such a policy initiative).
Clearing the backlog
Prior to 2010, venture capital (VC) and private equity (PE) funds were not doing much in Lebanon. Between launching in 2006 and losing two of its key investors four years later, entrepreneurship organization Bader’s Building Block Fund (BBF) invested in — and quickly exited — exactly one company. And it wasn’t even Lebanese. A local bank’s attempt at a VC fund in the same time period folded before deploying a dime. The only success story during these years was the 2008 launch of Berytech Fund I. For two years, Berytech basically owned VC and PE space in Lebanon. A competitor emerged in 2010 with the birth of Middle East Venture Partners (MEVP), which launched its own MENA-focused fund that same year and took over management of the BBF, currently known as the BBEF.
Combined, these three funds totaled around $23 million. Post-331, both Berytech and MEVP raised new funds focused mainly on Series A investments with a combined total value of $120 million ($50 million for Berytech and $70 million for MEVP). Berytech has deployed around $20 million (announced in one batch in December 2015) and MEVP $29 million, representatives of each tell Executive. Both Berytech Fund II Manager Paul Chucrallah and MEVP Managing Partner Walid Hanna say that these deployments are largely backlog investments, meaning the deals are not exactly new, but neither had the cash available before 331 to make them. Aside from that commonality, the two men have divergent views on the months and years ahead.
Chucrallah says he’s comfortable doing one or two investments over the next few years and is not overtly concerned about deal-flow in the ecosystem. Hanna, on the other hand, focuses almost exclusively on pending pipeline problems in a 30-minute conversation with Executive. “The problem is Lebanon is very small and [existing and new] VC funds are competing for pipeline that doesn’t exist,” he says.
Concerning fund efforts to fill the pipeline in the future, both point to Speed@BDD, to date the country’s only startup accelerator — an ecosystem component meant to help early-stage companies mature at a rapid pace. Berytech Fund II and MEVP’s 331-compliant Impact Fund each invested in Speed, and both Hanna and Chucrallah say they’re hoping for more capital soon. In October 2015, the central bank’s 331 point person, Marianne Hoayek, told Executive that Speed would be receiving investment from local banks with a 100 percent guarantee (even safer than the standard 331 guarantee of 75 percent). She explained that the central bank was giving banks 100 percent guarantees if they invest in ecosystem components like accelerators. Hoayek was not available for an interview for this article. Hanna says Speed’s investors are still pushing for 100 percent guaranteed money. Chucrallah was less specific on how the funds were lobbying the central bank for more capital for Speed. “Whatever happens, we will take it,” he says.
Closing a gap
Seed funding for startups – a need angel investors meet in many other markets – was largely lacking in the first two years after 331 was published. While Speed pumps $30,000 into the companies it accelerates, it became the only game in town after AltCity’s Bootcamp – a pre-accelerator, meaning they nurture entrepreneurs from the idea stage, earlier than the ventures Speed accepts – stopped doing equity investments in late 2015. That won’t, however, be the case for long. Lebanese entrepreneurs – and twin brothers – Ghaith and Abdallah Yafi found success abroad and returned to the country with the goal of raising their own VC fund after doing some angel investments in 2013, they tell Executive.
By the end of April, they say, they plan to formally launch a seed-stage focused fund, dubbed B & Y Venture Partners, making use of around $40 million in 331 money. As the Yafis spoke to Executive in late March, they explained the exact fund size was still being finalized as the fund’s 20-plus investors were busy putting final signatures on the fund’s legal documents. When it launches, it will have a temporary advantage of being the sole seed-only fund catering to the Lebanese market. Moreover, the Yafis describe it as a “hybrid” fund, meaning between $10 and $15 million comes from private investors and will not have the same limitations as the $40 million in 331 money local banks have contributed.
“We understand private investors today will not invest in a fund where only the banks are subsidized,” Abdallah explains. So, he says, they adjusted the risk-reward profile to draw in non-bank money.*
B & Y may not for long be the sole seed-only fund in the market. Other new players are looking at early-stage opportunities including Cedar Mundi Capital. The fund has an appetite for seed investments, according to Bassel Attieh, co-principal at Cedar Mundi and executive VP at Kuwait’s International Financial Advisors KPSC. Attieh speaks to Executive in a short email exchange, and explains that Cedar Mundi is a joint venture between International Financial Advisors and Spain’s Alma Mundi Ventures. The fund, Attieh explains, received central bank approval in October 2015 and hopes to raise between $50 million and $70 million. He adds that “at least nine banks and one financial institution have firmly committed so far.”
Like B & Y, it will have a hybrid structure, with around 10 percent of the fund’s capital raised “committed by the founders of the fund” and not restricted by 331. “The fund will be investing between $500,000 and $1 million in Seed Stage opportunities and between $1 million and $5 million in Series A&B opportunities,” Attieh says, without specifying how much equity the fund will be asking for.
Cedar Mundi announced its first ticket of $1.5 million in December, investing in ChefXChange, an online portal for finding private chefs. While it will help close the seed funding gap, Cedar Mundi is arguably also the kind of adaptation BDL was hoping for when drafting 331. The managers are foreigners whose expertise will theoretically benefit the entire ecosystem, and their first investment – which has a Lebanese expatriate co-founder – is only now moving its headquarters to Beirut in order to receive an investment under 331. Cedar Mundi has “nine other active deals in the pipeline.”
When Executive last spoke to BDL’s Hoayek in October, she said there would soon be two or three seed-focused funds on the market. Reporting for this article, Executive heard rumors that five new funds would begin operating soon. One, Azure, will focus on fashion with a digital component as was first revealed in Executive in November. The magazine was unable to reach the managers for this report. Executive could not reach the four other funds that will allegedly be launching soon.
VC funds, of course, are not the only funding source for Lebanese entrepreneurs. As noted above, angel investors play a prominent role in seeding startups in other markets. However, as Theo Khoury of AltCity’s Bootcamp explains, “There isn’t an angel culture in Lebanon.” Bootcamp has not seen much interest from angels in the startups it’s incubating. That is not to say there are absolutely none in the country. Sami Abou Saab, Speed’s CEO, says the accelerator has piqued the interest of at least four high net worth individuals, three of whom offered investments which respective startups have yet to accept.
Investing in human capital
Although Circular 331 does not actually include the word “technology”, it mandates that banks (and the funds managing their 331 money) invest only in startups that rely “on knowledge economy and support of creative intellectual skills (Intellectual Capital).” In the field, it is being interpreted as a “tech-only” initiative and there are no shortage of complaints about human capital deficiencies in coding as well as software and application development. Startups can’t grow without the right talent, so the lament goes.
While Lebanon has private coding crash courses — such as Teens Who Code and Le Wagon, founded in 2014 and 2015, respectively, and SE Factory, a Bader and Nawaya Network initiative launched in March — there’s a new player on the market making use of the aforementioned 100 percent guarantee offered by BDL. Also launched in March, Torch offers a free, three-month coding course with an eye on both servicing and helping further develop Lebanon’s startup ecosystem. Co-founder Youssef Jalloul explains that Torch aims to graduate coders with ideas for startups (and would take a 4 percent equity stake in any young companies it graduates) but concedes many coders “don’t have an entrepreneurial mindset.”
He says he expects many graduates to simply look for better jobs in the fields they’re interested in than the ones they have now. Jalloul explains that some of Torch’s first batch of students studied computer science but could only find work answering phones in call centers. Even if Torch does not itself produce a high volume of startups the way Speed and Bootcamp are expected to, Jalloul still sees the program adding value to the ecosystem through these talent investments. He adds, while giving Executive a tour of the company’s expansive top-floor office, that Torch may add startup incubation to their portfolio of services as they certainly have the space.
On its naturalist foray into the ecosystem, Executive also finds an adaption at the UK-Lebanon Tech Hub. Initially focused on accelerating early-stage startups (and taking them to London for international exposure), Director Nadim Zaazaa tells Executive that future acceleration cycles will focus on more established startups looking to scale their operations. Part of the reason, he says, was a feeling at the Tech Hub that Speed and Bootcamp are helping the early stage companies well enough. The initiative, brokered by the UK and Lebanese governments, has a two-year lifespan. Asked if that’s also something that might mutate soon, Zaazaa smiles and says “April”, in reference to an event the Tech Hub was planning at the time of the interview in March.
New market, new model
Flat6Labs, an accelerator founded in Cairo in 2011, will be launching in Beirut this summer, CEO Ramez Mohamed tells Executive. This news comes on the heels of back-to-back announcements in 2015 and 2016 at Arabnet, a regional technology conference hosted in Beirut, that the company would be coming to Lebanon soon. Mohamed says Flat6Labs has been in contact with Arabnet, its local partner, and the central bank for one year. And, unlike in other markets, Flat6Labs in Beirut will not be an accelerator, he says. Rather, it will be a fund but will offer startups in which it invests the same sort of accelerator services it offers in other markets. He adds, however, that because the company will not be registered as an accelerator, it will not be seeking a 100 percent investment. Flat6Labs’ Lebanese fund will total $20 million, Mohamed says.
Elephant in the room
One factor neither the ecosystem nor the central bank can control, however, is the regulatory framework in which the system is operating. Lebanon’s capital markets are laughable, says Henri Asseily of Leap Ventures, which is managing a $71 million Series B fund, and the legal procedures for setting up a fund and making investments are cumbersome and time consuming, he adds.
Since Lebanon actually lacks a law governing venture capital and private equity funds, all funds in this country are legally registered as holding companies. Asseily adds that the risk aversion of pre-331 investors into startups produced complicated term sheets that also make it difficult for Leap to make follow-on investments into existing startups. He says Leap is eyeing two big investments that, if they go through, would mean the fund is more than 50 percent deployed. And aside from the legal troubles, Asseily is worried there is not enough series B money in the system. “We have to go bigger,” he says.
* This article has been modified from the print version.