The startup state

Developments, challenges and predictions for the Lebanese entrepreneurship ecosystem

Joseph Kai | Executive

The plans to create a successful startup and entrepreneurial ecosystem are tentatively falling into place in Lebanon. From Circular 331 to the launch of new accelerators, the sector has changed dramatically over the last five, or even three, years. Executive brings you a small overview of some of the latest developments and challenges to the ecosystem, and future development recommendations from leading figures within the sector.

2015 in a startup nutshell

2015 saw advances across several stages of start up. Banque du Liban (BDL), Lebanon’s central bank, hosted the first Lebanese international startup conference at the end of November 2014, which preceded a fast paced year. The 2014 conference certainly produced some home truths about the state of the internet and infrastructure, as well as other gruelling realities of startup success in the Lebanese context, with Venture Partner at Golden Gate Ventures Michael Lints describing how “being in a startup is about as romantic as chewing glass.” There was, nonetheless, a sense of great positivity at the efforts being made by the entrepreneurial community to advance despite local and regional setbacks. The theme for the December 2015 conference, ‘Emerging Startup Ecosystems’, will aim to attract a wide entrepreneurial audience to their event at Forum de Beyrouth on December 10 and 11, with around fifty local and foreign speakers currently listed on BDL’s event profile.

At seed level, AltCity Bootcamp and Speed@BDD, both profiled in our special report, are accelerators aimed at the idea stages of entrepreneurship, while the UK Lebanon Tech Hub launched its own accelerator aimed at growth stage scaleups in Lebanon. Other initiatives such as Startup Megaphone, which markets the Lebanese ecosystem worldwide and organizes events, are also supporting the nascent entrepreneurial ecosystem. Catherina Ballout, Operations Manager of MIT Enterprise Forum Pan Arab based in Beirut, described these efforts to include growth stage funds as critical to Lebanese success stories; “during the past year we have had funds focussing on growth stage; Leap Ventures, Wamda and MEVP funds. This is very important because at a certain stage the entrepreneurs are growing their startup but aren’t able to grow further and think of selling their startup instead of growing it. The role of the growth stage and VC funds is very essential to this.”

Where are we now?

Funds are taking advantage of Circular 331, with Leap Ventures expecting to raise more than $80 million by the end of the year, although the money from BDL is having problems trickling down to the ecosystem. Despite some financial backers’ hesitation, the need for incubators and accelerators is tantamount to developing Lebanon’s entrepreneurial ecosystem. “The role of the accelerator is to prepare the startup to meet investors,” notes Ballout, “and to guide them through the process, identifying the right time for a particular company, scaleup or startup to seek external investment. Knowledge about how to approach investors is very important.” With the ultimate aim of so many accelerators to seek successful exits for the startups within their program, especially if long term sustainability of the accelerator is dependent on participants’ future profitable exits, the knowledge imparted to companies at growth stage about seeking external investment is clearly crucial. Although others have remarked upon the lack of previous accelerators in Lebanon to use as a benchmark for the ecosystem, it is worth noting that of the eight companies which were inaugurated into Seeqnce’s 2012 acceleration program, three (Presella, et3arraf and Med HP – now renamed as eTobb) are still up and running, and continue to seek later stage investment either in Lebanon or abroad. This crudely represents nearly a 40 percent ‘non-failure’ rate, which is a good benchmark in a market so often dwarfed by larger competitors and regional and local problems.

Challenges ahead

So what are the problems facing the Lebanese entrepreneurial ecosystem? “The greatest challenges [are] access to markets and the path to scalability,” says Habib Haddad, founding CEO of Wamda. “Access to markets allows you to sign deals, to break out. The brain drain is definitely a big issue. The education system is not bad but it does not equip you for the real world,” he adds, noting the uniqueness of certain challenges to the Lebanese ecosystem. When asked about the exit assumptions that accelerator funds have used to base their future profitability and sustainability on, namely that roughly one in ten startups will succeed and generate future revenue for current funds, Haddad sees no problem with it in terms of applicability for Lebanon. “That’s the name of the game,” he remarks, though speculates that numbers within the model could be adjusted to lower the probability of “rockstar” success and make it Lebanon-orientated. For others, the challenges overlap with Haddad’s and also vary. Infrastructure is high on many lists, with Hala Fadel, partner of Leap Ventures commenting that “I probably use 20 percent of my time lobbying for the internet because it’s just unacceptable.”

Despite some financial backers’  hesitation, the need for incubators and accelerators is tantamount to developing lebanon’s entrepreneurial ecosystem.

Whilst businesses can afford to pay for faster internet, with Wamda paying $200 per month for 18 Gb/s download speed, poor infrastructure often has a greater impact on the psyche of an individual in question. “When you [leave work] and go back home to your family, the infrastructure [on the streets] impacts what you see as a potential future for the country. [It makes] you decide you want to go somewhere else,” stresses Haddad, who notes that for future innovators to move into a space it needs to be as accessible as possible – something which Lebanon’s lacking infrastructure does not often help with. There is also a lack of talent within certain higher tiers, and importing individuals from outside the company is difficult with such poor infrastructure. For Fadel, recruiting senior level individuals to her companies is proving difficult, as “attracting talent to a place that is called Beirut” is problematic she claims, which is only compounded with growing political instability and governmental paralysis.

Although one barrier to capital has all but been removed by BDL, a current lack of an electronic trading platform for SMEs, the launch of which has stagnated and entrepreneurs remain none the wiser about its launch date, presents more capital hurdles. The fact that heads of funds also stress that startups cannot afford to focus on Lebanon as their sole market (as with most small countries) also facilitates exiting the country – a global vision promotes the idea of a better life outside of Lebanon. At policy level, the taxation levied on new companies also serves to dissuade budding entrepreneurs. “This is a burden and a long process,” comments Ballout, who notes that “they don’t have access to funds at an early stage so entrepreneurs end up paying [heavy fees] from their own pockets or their family’s pocket to register a company.” Those wishing to register as a Limited Liability company, for example, must pay upfront a capital of 5 million LBP, equivalent to $3,323, which can severely dent the finances of a young startup.

What is the future?

Amongst the accelerators themselves, not all need to survive to produce a flourishing ecosystem. Fadel likens Circular 331 to seed funding for an entire ecosystem, attempting to build the credibility of an asset class; “this whole startup that is the Lebanese ecosystem will either make it or break it. After two to three years things will settle down with the long term players staying here, and then in seven to eight years we’ll see the returns on these funds.” Fadel notes that the private sector will only follow up with investment if the ecosystem builds a credible asset class, but “if we fail the private sector will not follow and there will not be another 331.”

The top financial heads of the country clearly pin a major part of the the country’s economy on the entrepreneurship sector. “We believe that this is one of the sectors upon which Lebanon’s [economic] future will depend, along with the financial sector and the oil and gas sector,” stressed BDL head Riad Salameh when speaking at the launch of phase 2 of the UK Lebanon Tech Hub. He also noted that the money from Circular 331 would “attract back all Lebanese talents, or most of them, in order to form companies in Lebanon, to create jobs for the Lebanese and to help this sector startup itself”.

It is clear that the entrepreneurship industry has the ability to contribute to Lebanon’s economy, although the valuation of such a contribution can hardly be measured without accurate data or a country-suitable economic model to describe the contribution from entrepreneurship, the tech sector or companies nurtured by startup acceleration programs. “I hope there is more of a collective effort in building the ecosystem,” comments Ballout. “There are a lot of partners working together, but there are a lot of partners that could have been working together [from before] and having more of an impact, and this is not the case.” By partners, Ballout clarifies that she means institutions or individuals at any stage of the ecosystem, and not just those controlling the funds. The operational system on the ground needs a few years to play out before benefits are truly realized; “you find a lot of reports and plans from here until 2020 [detailing] what the plan is, but on the ground it is still unclear,” comments Ballout, who adds that “Circular [331] is great, a lot of initiatives are great, but let’s wait and see.”

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