Over the past four or five years, it has been conceived, announced, born, developed, mapped, hyped, challenged, expanded, reassessed, praised, mapped again, hyped to excess, and questioned. But all the talk makes it hard to assess the true state of Lebanon’s tech entrepreneurship ecosystem in 2017.
Finance—in form of the funds mobilized under Circular 331, an initiative by Banque Du Liban (BDL), Lebanon’s central bank, to invest in startups—has been the driving force behind transforming a loose collection of tech entrepreneurs into a budding ecosystem, and fund managers say that ecosystem is quietly thriving. Established funds see their portfolios developing nicely, and do not anticipate the pipeline of interesting startups to run dry any time soon, pointing as an example to recent demo days at Smart ESA, an accelerator that was launched in 2016. Flat6Labs and Azure, two new venture capital funds, have experienced more interest than they had expected. As Flat6Labs’ Fawzi Rahal explains it, “Clearly, it’s a disadvantage in being late to the game [by setting up several years after others], but we’re not sure [the] game was ready if we were earlier. [The] pipeline is better than it was years ago. I’m not sure that will stay true two years from now, but it’s better today than it was. All other accelerators have been increasing the numbers they accept year on year.”
Angel investors are stepping in to plug the funding gap between acceleration and raising the first round of VC funding, known as the valley of death (see story). Foreign interest in the ecosystem’s development has not waned, as demonstrated by the UK’s willingness to support the UK–Lebanon Tech Hub, an international initiative kick-started by a collaboration with BDL and the UK government through the British Embassy in Beirut. But foreign investors are not making unrealistic gambles: Although its original goal was to create 25,000 jobs in the tech sector and entrepreneurship directly, the UK has revised its aim down to 25,000 jobs related to the entrepreneurship sector, of which about 5,000 will be directly in tech, and the other 20,000 induced jobs in more traditional areas, such as food delivery and printing.
All of this speaks to more stability in the ecosystem. Those working within it say the reduction of the hype of previous years is both understandable and welcome. The ecosystem is becoming “a bit more rational and organized,” according to Jad Salameh of the venture capital fund Phoenician Funds. As Executive was investigating this month’s series of articles about entrepreneurship, the World Bank offered an assessment of Beirut’s technology scene, finding that the “tech start-up ecosystem in Beirut is an early- to middle-stage ecosystem that has passed its nascent growth phase, but is still far from maturity,” an evaluation no one interviewed saw as off the mark.
Stakeholders describe a generally collaborative environment with many funds co-investing on deals, leading to increased transparency, if only for those on the inside. While the funds know what each are doing, many either do not have websites or do not update them with detailed information about their investments, making following the money from the outside difficult. And BDL, the author of Circular 331, has not published any figures or reports detailing how the nearly $650 million in public money the circular made available is being spent.
It is clear, however, that the ecosystem has experienced financial excesses of varying kinds and severities, including overhyped events, inflated funding demands, large honorariums to external consultants, a lack of transparency, audit challenges, governance issues, and even creative accounting or allegedly fraudulent practices. The central bank has made attempts to curb abuses, issuing circulars addressing these alleged problems. One regulation, for example, required funds and players who have been sitting at the table for a few years to intensify their reporting practices. While this is sometimes useful, it can also be over the top, such as the new mandate to report net asset value at the end of each quarter. “We have 20 days max after the end of the quarter to submit a report. If the quarter ended September 30, how do you expect to get a [profit-and-loss] or balance sheet in five days?” asks Zeina Rouphael, a senior analyst with the Azure fund.
At the same time, the ecosystem is impaired by design flaws and the inherent limitations of the Lebanese market and its human-capital pipeline. Companies and their investors feel the need to market their products outside the country, which is difficult because central bank regulations restrict the use of funds to expenditures in Lebanon. It is not easy to market to the EU or the US from Lebanon without at least having an office—and preferably direct human presence—in the target market. And while the human-capital pipeline in Lebanon is remarkably strong, it is strong by the standards of a small country, and when compared to the talent pool in a small place. In order to grow, the human capital available locally may have to be augmented, but it is very difficult to import top talent into a small local company because of various labor market restrictions and bottlenecks.
In the past, questions of strategy were placed at the feet of the industry’s sugar daddy, the central bank, which not only guaranteed 75 percent of funds for approved startups, but also fed some companies with 100 percent guarantees, contributing to the formation of what some people called an “ego-system” within the new ecosystem.
Moreover, BDL put its name in bright lights as organizer of the annual event designed to make the Lebanese tech ecosystem internationally visible. However, the vanishing act which BDL Accelerate pulled off in 2017 begs questions on whether the event’s postponement or cancellation was done for strategic reasons, and what BDL plans to do next. A press-relations representative for BDL said only, “It’s just a personal reason. Nothing to do with economy or elsewise,” to explain why Accelerate will not transpire in 2017. The jungle is not rumbling because of this year’s cancellation, however, and individual strategies are of the “keep on keepin’ on” variety.
Several sources interviewed for this article said the ecosystem needs some big success stories, as well as the follow-on funding to grow startups into such stories in the next few years. A few admitted they do not see any unicorns—startups with a $1 billion valuation—in the Lebanese stable at this point. Walid Hanna, a founder of Middle East Venture Partners, said “the largest company [I expect to see] is $300,000 to $400,000, which is not bad in the three to four years” following the publication of Circular 331. Henri Asseily, a partner with Leap Ventures, however, sees one potential unicorn in Leap’s portfolio: a software logistics company called Keeward, which received an earlier investment from MEVP and is currently subject of a legal dispute between MEVP and Keeward’s founders. Leap invested $10 million in the company and is hoping for a $50 million round to be raised abroad in the coming months.
As the Keeward example illustrates, growing young companies into unicorns will require follow-on funding for those that recently raised or are raising capital. Bassel Aoun, the project manager of the iSME program at the state-backed loan guarantee corporation Kafalat, notes that funding rounds tend to grow by multiples of three to five, meaning serious money will be needed to sustain the ecosystem moving forward. Circular 331 freed up $650 million for investing in tech startups—approximately half of which has been committed but not fully deployed—but that money, while mostly guaranteed, comes from local commercial banks that everyone in the ecosystem suspects are losing their appetite for this asset class. If the banks no longer want to bite, and private money does not fill the gap, desertification overtaking the ecosystem would not be far behind.