Tech entrepreneurs update

Entreprise as destiny

When hiking through an aging natural forest, did you ever accidentally burst your foot through an old log and see the wood fibers crumble while bugs and worms scuttle away into the moss or wiggle around your hiking boot? That is a moment to not only gaze at the young shoots, but also appreciate the secrets of an ecosystem’s functionality. Effective decomposition is vital, contradictory as this may sound, to every functioning ecosystem. It liberates resources for re-composition into new uses and, eventually, new structures.

Another characteristic of a successful ecosystem is its ability to respond to disruptions and function with resilience. All ecosystems, science says, are exposed to disturbances. They can range from your boot interrupting the decomposition of that rotten tree to a volcanic eruption that spews an ocean of hot ash for miles around. Either event will disrupt the ecosystem and change it but even a mass destruction event might not eradicate it; when Mount St. Helens blew in 1980 in one of modern history’s most devastating volcanic outbreaks, no one was more surprised than the scientists observing the area after that violent event to see how quickly new plants broke through the cover of ash and how tenaciously life grew back in the surrounding mountains in the United States’ Pacific Northwest.

Natural environments will not deliver this resilience if they are put together by a landscape designer. Both the sheer number of constituents and complexities that are encapsulated in an ecosystem, and the unpredictability and specificities of external variables that are testing its resilience, make it a thankless task and fool’s errand to try and construct a perfect biological ecosystem; and quite probably this is equally true for business environments.

Judging acceleration

Because digital ecosystems are human-driven and thus exposed to Murphy’s Law even more than they follow Moore’s law, it stands to reason that their resilience will only be proven after they have withstood the impacts of external disruptors and risks from new tech to politics, geo-economic forces and climate change factors. Developing and proving this resilience, however, is not a short-term task.

In the days of the New Economy, when the media buzzwords were incubator and cluster (instead of accelerator and tech hub), every aspiring economy, including the Lebanese, was talking about emulating the US information technology revolution by having their version of a Silicon Valley. Shortly thereafter, however, the burst of the New Economy bubble eliminated countless ventures (London-based fashion site, which failed in 2000, was one of the bubble’s top destroyers of Lebanese investor money). The massive disturbance, in ecosystem terms, taught investors and entrepreneurs important and hard lessons of decomposition and set the digital economy back to square one of the long journey to real profitability.

[pullquote]Resilience will only be proven after they have withstood the impacts of external disruptors and risks from new tech to politics, geo-economic forces and climate change factors[/pullquote]

In the current iteration of the innovation ecosystem concept, the digital economy has shown that the lessons of the crash did have positive impacts. But this neither means that the current system is perfect in any way nor that it has already reached full maturity or resilience.

A case in point for yet-to-be-proven value propositions are the accelerator programs. According to the 2016 report by the Seed Accelerator Ranking Project (SARP), a research initiative by US-based scholars Yael Hochberg and Susan Cohen, proliferation of accelerator programs in the US in the past few years has resulted in the emergence of hundreds of programs that do not meet the criteria for calling themselves accelerators. “Even within the group of programs that meet the criterion of an accelerator – a fixed term, cohort based program that includes educational and mentorship components and culminates in a public pitch event or ‘demo day’– there are differences on many critical dimensions, including program structure, management, goals and, most importantly, efficacy. For an entrepreneur considering an accelerator program, finding reliable data regarding the performance of programs is difficult, and there is much confusion and debate regarding how ‘performance’ should be measured for an accelerator,” Hochberg and Cohen write in their report, which was published last month.

Entrepreneurs need more transparency on the performance of accelerators because the exercise is prone to incur a high cost in form of equity. “Equity is an entrepreneur’s most valuable currency, so the non-monetary benefits such as mentorship, network and exposure to future investors are an important part of the decision to attend a program,” they note.

Another scholar, visiting fellow at the Brookings Institution Ian Hathaway, concludes from his research that startups which graduated from “top programs” achieved milestones in fundraising and gaining customer traction. “However, these positive effects dissipate when looking at a broader sample of accelerators: many programs do not seem to accelerate startup development, and in some cases may even slow them down,” Hathaway cautions in a contribution to Harvard Business Review.

While these scholarly findings derive from research into US-based accelerators – whose numbers according to Hathaway have skyrocketed from 16 in 2008 to 170 by 2014 with a flattening of the curve since then – the positive implications and the cautions very likely apply to international programs, with the extra remarks that international programs are still younger and much less researched than their US peers. From the Middle East, at time of writing, only two accelerators in Arab cities met the criteria for inclusion in the Global Accelerator Network (GAN) list of members; one in Cairo and one in Jeddah.

Growing with diversity

According to Hathaway’s paper Accelerating growth: Startup accelerator programs in the United States, there are indications that accelerators bring benefits to participating companies and broader startup communities despite little systematic research having been done because of the newness of the accelerator programs. “Regional development leaders need to recognize that ideas, talent, capital and a culture of openness and collaboration are all vital to regional startup communities, which are best thought of as innovation ecosystems involving complex interaction among entrepreneurs, investors, suppliers, universities, large existing businesses and a host of supporting actors and organizations,” he advises.

The recommendation resonates with what Executive has experienced as stakeholder in complex interactions that are shaping and are expected to sustain an innovation ecosystem in Lebanon. Situated outside of the narrow network of organizations and actors with vested interests in running the system, the magazine has for years been committed to analyzing entrepreneurial companies and the system itself, as evidenced by the magazine’s role in the Global Entrepreneurship Week and our annual selection and recognition of the top 20 entrepreneurs starting in 2012.

Thus when examining the current state of development in the Lebanese innovation ecosystem we opted to review perspectives from both stakeholders and companies. We moreover looked at both intrinsic factors such as the latest new investment funds that have entered the supply chain of funding companies in the stage of formation, and at extrinsic and intangible factors that play a role in Lebanon – mindful of the insights regarding complexity that real-life ecosystems afford us.

The first thing that emerges from the Top 20 selections since 2012 is a strong correlation between the Executive list of top entrepreneurial ventures and the company names which one encounters as winners in competitions, funding events and highly rewarding exits. Just to give one reference, the companies Diwanee and Shahiya, which achieved notable exits in March and November of 2014, were recognized by Executive as Top 20 Entrepreneurs in 2013 and 2012, respectively. Fundamentally, companies recognized by Executive as entrepreneurs have since their Top-20 listing created positive impacts in areas from health-tech and fintech to communications, software, entertainment and beyond that to developments in the agriculture, environmental and alternative energy sectors.

For our present reality check on the evolution of the Lebanese innovation ecosystem, we turned to three companies from the Top 20 Entrepreneurs in Science and Technology, which Executive had recognized in November 2014. We selected companies working on three hot topics, namely cyber security, economic data and renewable energy.

One of the companies – cyber identity protection vendor myki (see interview here) – has participated in several startup competitions and acceleration exercises abroad; the two others – Economena Analytics and Sharp Minds (interviews here and here) – have pursued their growth without the use of acceleration programs. Their choices have also differed in financing: Sharp Minds and myki have negotiated fundraising rounds in 2015; Economena has chosen to seek no funding in 2015.

When it comes to their view of the financing environment, the verdict is two-and-a-half-thumbs up between the three companies. The experiences of all three validate the progress that has been made possible by Circular 331 and the gradual diversification of the funding landscape through the formation of additional providers (see story here). The comparatively minor hiccups that still mar the funding side are a certain lack of transparency – as Economena’s Tamim Akiki points out, no such thing as an annual report on Circular 331 has been produced – and cumbersome bureaucratic requirements, which both applicants and fund managers confirm to Executive on or off the record.

[pullquote]Entrepreneurs need more transparency on the performance of accelerators[/pullquote]

Three thumbs are also pointing skywards in terms of access to talent. All three companies speak highly of their human capital; Antoine Saab and Nadia Moussouni at Sharp Minds tell Executive that they found top-notch talents among fresh graduates at local universities and among people in the labor market. “We have been very lucky to find true talent among people who came back from abroad but then found themselves in the crisis in Lebanon,” Moussouni says.

For myki, being located in Lebanon at their present stage of development was an advantage that was too good to give up even in exchange for an investment when this would have come with a requirement to relocate to another country. According to myki’s co-founder Priscilla Elora Sharuk, the benefits of having a strong local network and market knowledge were non-negotiable.

While all three firms confirmed the value of their involvement in the growing Lebanese innovation ecosystem, there were also thumbs-down verdicts in important areas. The insufficient size of the local market made all three firms scoff at the possibility of focusing their growth strategies here. Moreover, using Lebanon as sole operational base is not a proposition from the perspective of a self-respecting tech startup.

As other young entrepreneurs like the goggle-with-heartbeat-monitor producer Instabeat (Top 20, 2012) and automatic-guitar-tuner maker Band Industries (Top 20, 2014) have also found out, Lebanon is not a place for prototyping a hardware device and the industrial logistics are at best cumbersome. This important deficiency seems to have informed decisions of aspiring companies such as myki and Sharp Minds to the point that the latter established a subsidiary to set up what Saab describes as testing & certification and quality control center, plus logistics hub in the city of Burgas on the Bulgarian Black Sea coast.

With respect to the values and lessons of organic development, the entrepreneurship environment is clearly benefiting from the diversity and engagement of its people. Taken all together as a batch of corroboration, the experiences of the entrepreneurial teams both validate and challenge the Lebanese innovation ecosystem.

Thomas Schellen

Thomas Schellen is Executive's editor-at-large. He has been reporting on Middle Eastern business and economy for over 20 years.