After nearly two years of a state in turmoil, the tide of bad news in Lebanon has reached the point where everything appears broken and almost nothing looks like it would ever function again. And it is true. To a point. Nothing in Lebanon is fully functional today, for example the entrepreneurship ecosystem.
This system, which has for the last decade been hailed as one of Lebanon’s biggest economic options, has been thrown back to where it was before 2013, sighs Nicolas Rouhana, general manager of IM Capital. 2012-13 was the time when the ecosystem was kicked into rapid formation by what Rouhana describes as a shock of half a billion dollars, namely the issuance of Circular 331 by Banque du Liban (BDL), the central bank of Lebanon, which set the stage for practically all investments into the entrepreneurship ecosystem over the following years.
Stripping down the pillars
However, the ecosystem that formed under the curating values of guaranteed funds and rational looking financing risks, was not driven equally well by policy and legal infrastructures as it should have been. This hints at the oddity of the system.
IM Capital, a key player in the financing of promising startups for as long as the ecosystem has existed, remains a pillar of its financial infrastructure because of its broad support mandate and nourishment with hard cash (both courtesy of the United States Agency for International Development, USAID), as well as its integrity and independence from the Lebanese public sector and banking. But it has lately been confronted with gaping holes in what used to be an imperfect but nicely growing landscape of fellow financial players, venture capital (VC) organizations, startup programs, accelerators and incubators, ancillary services providers, etc.
Of those, many noted actors such as the Hult Prize and the Flat6 Labs accelerator have exited the Lebanese stage. Such demises – and the host of incomparably graver national misfortunes which are so well known that repeating them would be an exercise in dullness – have left the remaining entrepreneurship ecosystem entities at times in situations where they feel that parts of the system have been amputated, to the point of it no longer making sense to act “because one cannot clap with one hand,” Rouhana says. He notes for example that startups face immense problems because of disruptions in the administration and the banking sector, creating insurmountable barriers against basic business acts such as registering companies and opening bank accounts.
The disassembly of systemic components in the public and finance sectors was exacerbated by disruptions of funding flows or invested companies and new restraints on the financing of startups. Again, no need to reiterate what the monetary disaster of 2019-21 to date did to the accessible bank balances of those enterprises. This has led IM Capital and other members of Lebanon’s VC Association to last year set up an “SOS Fund” under a paradigm of rapid fundraising. “The SOS Fund has fresh dollars and lollars and we invest directly,” Rouhana explains, meaning that the SOS Fund, capitalized by the participating limited partners, made one-shot investments into the most promising startups in the portfolios of participating VCs.
Deployment issues were, according to Rouhana, also encountered by angel investors, where investment opportunities in advanced startups with larger financing needs were hit by currency restraints of angel funds. In response to this challenge, the angel funds that have been created in collaboration with IM Capital were pivoted into an angel accelerator fund for early startups.
In retrospect analysis, the financial hopes for funds that had been fueled under the regime of the BDL’s Circular 331 could not but vanish with the financial instability phenomena and loss of investor trust in late 2019. “After the crisis. there were reputation issues with 331 funds because they all were based on banks that had blocked depositors’ funds and because capital calls were done in LBP on the 1,500 rate, meaning they could not produce anything useful in terms of real cash,” explains Rouhana.
But reorganization and reform of the financing layer of entrepreneurship was not the only struggle that was cast upon financial stakeholders. The climate in the national economy, and with it the atmospheric pressure in the entrepreneurship ecosystem, has had other repercussions according to ecosystem stalwart Rouhana who more than once in his interview with Executive resorts to terms like “back to square one” and “firefighting.”
Acknowledging that the current period is a hard time for anyone to be active in the entrepreneurship ecosystem and that people just want to escape from the political environment, Rouhana says this makes it even harder for the remaining ecosystem players to operate. “All these support structures disappeared. There are few, us and others, who remain, but you need deal flow and people to do all these things. We are really back to square one,” he says, adding, “Today, what makes a difference, is what you did post October 2019. Everything is recent. We are firefighting and we will see if we can rebuild.”
Other stakeholders at the ecosystem’s backbone share the pain of working, in a political economy context that takes the concepts of uncertainty and unreliability of everything (and of political promises specially) to heights never seen before, with an entrepreneurship development line that has been degraded from a sophisticated ecosystem into a disjointed assemblage of stuttering bits and pieces. But like Rouhana, they also display a sort of contrarian determination to keep going, for the hope of rebuilding and the sake of the many stakeholders that rely on them.
Thus exerting herculean efforts in nurture of endangered green shoots in finance, startup acceleration and the likes, these ecosystem stakeholders all the while also exude peculiar emotional or spiritual vibes. One such notion is that confidence – an overused and empty term in many mouths today – is today still a tiny bud with a long and difficult journey of recovery still to come; another that a professed and fake resilience – meaning a malpractice of adapting to keep operational in the face of ever more political evil – has to pivot to true resilience of demanding economic and social rights for one and all.
For Nadim Zaazaa, managing partner in entrepreneurship-themed multi-tasking enterprise Nucleus Ventures, the pain is undeniable. “I think the short term prospects are very dark – we are minimizing losses and have a huge talent drain. More importantly, we have what you call the stay-drain, the fact that a lot of talent that remains in the country, is working remotely for foreign employers. There is income in the country but the value creation is taking place outside,” he tells Executive.
In Zaazaa’s view, the single remaining advantage of Lebanese entrepreneurship is the improved competitiveness in terms of labor pricing. Even then, he sees scant light at the end of the financing tunnel or in terms of existing good entrepreneurship initiatives. “I think rebuilding an investment landscape in Lebanon requires a reset of the regulatory environment and getting investor confidence back, which we are lacking. We don’t have the banking sector and the basic infrastructure for [winning investor confidence back], so realistically speaking I think the investment landscape has been rubbled. There are deals but they are not concerted and it will take time to rebuild that landscape. And a lot of painful changes,” he says.
Although he asserts that human capital who remain in Lebanon under these circumstances are not necessarily contributing greatly to value creation in the country, he still sees a narrow path of opportunities. “There are three to four universities who are going to be Noah’s arch for entrepreneurs – they will be what remains [of the ecosystem] and what can be nurtured. This Noah’s arch will in my opinion be the only viable reset of Lebanon’s economy,” he says, adding that this assessment has motivated Nucleus Ventures to shift from being governmentally funded to partnering with university innovation systems.
New acceleration prototypes
The perhaps second-most prominent layer of ecosystem components, after the financing players with their eternal lure of presumedly (but never really) easy money, were the incubators and accelerators. The impact on these engines of entrepreneurial contents was no less severe than the impact on the financing pillar. However, the withdrawal and retrenching of some well-known entities was juxtaposed with the entry of players of a different type.
“There is a change in the ecosystem in terms of accelerators and startups. You have new accelerators popping up,” says Jihad Bitar, CEO of academically aligned acceleration program Smart ESA, which in 2017 (late in comparison to other accelerators in the old ecosystem) was established in association with the École Supérieure des Affieres (ESA) business school and has since grown notably in terms of both facilities and programs.
Yet instead of funding that was enticed into the ecosystem under Circular 331, the new accelerators are equipped with monies by international development agencies and donors, and operate with a model of grants. “Donors are seeing that entrepreneurship is one way to help Lebanon rebuild. Big organizations want to go beyond humanitarian help to Lebanon into rebuilding an economy and see entrepreneurship as part of this,” Bitar explains.
Munir Nabti, co-working veteran and long-time advocate of social enterprises, is one of the exponents of the new type of acceleration that has come to the Lebanese (and regional, see interview page XXXX) ecosystem. More than a mere executive at the helm of new accelerator Bloom, he is his ever-optimistic self. Asked about his evaluation on the ecosystem today, he aims at putting the latest troubles into some perspective by telling Executive that the system’s stakeholders have seen cycles of ups and downs, including the establishment and closures of systemic entities over the past 13, 14 years.
While he agrees that there are plenty of new barriers and challenges to work through, he emphasizes that he sees new efforts for growth and collaboration in terms of accelerators, and elsewhere. “We are working on fostering the collaboration of accelerators and had several sessions that we want to keep expanding and have more ecosystem discussions. So I think there is definitely opportunity to build a really thriving ecosystem that not just helps keep people here and supports enterprises but that also helps to launch enterprises and attract enterprises from abroad to Lebanon,” Nabti enthuses.
Building block by bock
Ralph Khairallah, the chief growth officer of the Beirut Digital District (BDD) – the central real estate cluster and community hub that provides tech enterprises and ecosystem stakeholders with many increasingly scarce services – sees Lebanon’s entrepreneurship environment in transition from ecosystem 1.0 to 2.0.
In his opinion, the ecosystem 1.0 was in many regards a trial version, or trial experience, from which operators as well as startups could learn. “Everybody was learning. We as startups were learning and even the investors and mentors were learning along with the first batches of startups. Eventually everyone has matured and we now know better how to place our bets,” says Khairallah, who before joining BDD had gained experience as co-founder of a startup.
Instead of the previous system that had bubble aspects and might have attracted minds into entrepreneurial gambles, operators under ecosystem 2.0 are fated to build on solid grounds and manifest as profitable industry for bringing fresh investments from abroad. “Innovation and digitization is the future. This was not a wrong bet for BDD, and today is the time to get the most out of this bet,” he adds.
According to Khairallah the performances of successful investors, startups, SMEs and even NGOs in Lebanon during the crisis reflect globally very favorable economics for the digital sector, an impact that is visible in the high demand for co-working spaces in Lebanon that has improved in 2021 to date.
Interacting with ecosystem stakeholders in this summer of 2021, Executive actually found the number of viable appearing startup companies and exorbitantly dynamic founders (which are not by default the same things) to be surprisingly large.
From manufacturing startups and an online media startup to regrettably nontransparent and communication-averse e-commerce mall operators (too many of which declined Executive’s requests for information and interviews to allow for writing of a viable story), new social enterprises and some very intriguing edutech startups (see story page XXXX), the magazine’s team found more, and more diverse, reasons for profiling of startups – and editorial excitement in doing so – than in several preceding investigations of the respective years’ latest entrepreneurship novelties.
Viable old recipes, spun anew
This impression actually jibes with what Smart ESA’s Bitar observed when he describes a trend among applicants for acceleration programs and startup competitions. “Fewer entrepreneurs are left but those that remain are more serious. The average age is higher, many being experienced people who lost their jobs or quit their jobs and see this as the right time to create something. This brings a bunch of experienced people to the market,” Bitar notes, audibly glowing about the good assessments that Lebanese startups received in June at the awards ceremony of a startup competition by name of Prix Entrepreneur ESA-HEC Paris, on which Smart ESA worked in the first half of 2021 in collaboration with French business school HEC Paris.
Judging from remarks that Bitar made in earlier interviews with Executive, the experience of seeing improved commitments and better drives in overall shrinking numbers of startups, and ergo a gradual increase of quality in ecosystem beneficiaries, seems to be a trend that has begun already before the crises of 2019 and the following years struck Lebanon’s entrepreneurship aspirants.
The insight that longer-term trends in the Lebanese entrepreneurship annals have not actually been totally altered but at most further accentuated over the past two years of serial crises, however, should not astound. Other trends that have been highlighted in the recent past, have similarly been in existence before the crisis. Particularly the idea that Lebanese startups are well advised to maintain their “kitchen,” development, and back office activities in the country of their origin but cannot sustain an optimal trajectory of growth by focusing on the local market and therefore should from inception prepare and seek access to capacious and stable markets in the region or elsewhere, is not really new.
Still, it is indubitable that Lebanese startups – with some very specific and rare exceptions – today have not only every incentive but almost an obligation to start their market journeys by immediately going abroad and hopefully generate income that will flow back to Lebanon. Owing to the entrepreneurial ingenuity and adaptability of locally incepted startups that are not afraid to jump abroad, maker and manufacturing startups thus represent good hopes even if any wishes must be abandoned to see such companies serve firstly the Lebanese market or be listed on an electronic financial market in Beirut.
Among the other bits and pieces that are momentarily working and being developed in the entrepreneurship ecosystem, those deserving most attention appear once again to be based in the financial realm. On the investability level, the comparative advantage of having discounted valuations in terms of talent-power intensive startups for example in edutech has the ability – nicely demonstrated by the acquisition of tutoring marketplace Synkers – of reeling in foreign strategic investors to viable Lebanese companies.
On the access-to-finance level, the paradigms of impact investing and development investing, with all the inherent self-interests that such paradigms entail, offer what ecosystem stakeholders Nabti and Rouhana perceive as unused potentials. Nabti suggests that by working together, highly reputed funds and impact-themed operators in the ecosystem, could mobilize “substantially more funding than what has already come to Beirut” from potent investor groups, including diaspora groups.
“I think a lot of funding doesn’t come to Lebanon because there aren’t enough groups that can easily deploy money. If we can figure out a model of having 10 accelerators work together with aligned basics, methods of approaches, we [as unified stakeholders] can go to a donor and say: Hey, we want to support 1,000 companies over the coming five years, 1,000 startups in Lebanon, and have proper accounting and proper mechanisms for collaboration, etc.,” Nabti proposes as method which could tap into funding levels from donors and impact investors that are not in the thousands and hundred thousands of dollars but in the hundreds and thousands of millions.
Such pathways of thinking audaciously and big might seem theoretical to some who have lost every ounce of trust that the future can hold good news for this country but in fact, there are funding activities already underway in the ecosystem and plans for more funds. IM Capital’s Rouhana discloses that his team, which has been very busy with implementing the SOS Fund and angel accelerator fund, is preparing the launch of a new fund towards the end of this year. This fund is expected to have a life cycle of five to six years and include a share of fresh dollars, aiming for fast delivery and total size similar to that of the (not yet fully revealed) $12 million SOS Fund. “We will look at companies and their investment readiness. Investment criteria will be export potential and growth potential of SMEs,” Rouhana says.
Funding sage Rouhana, having been able with IM Capital to convince USAID of the need for a new fresh-dollar fund of $20 million, a big step up from a previous first funding of $15 million in the context of the previous ecosystem, concurs that a new and much larger series of positive financial shocks might be in order. “What is needed is perhaps $40 or 100 million per year in order to make a difference and shake the system and bring back what was lost in terms of confidence,” he says.
But any assessment of the entrepreneurship ecosystem’s realistic new investment paradigms and need for a systemic pivot, while an obvious necessity for more reasons than one wants to count, also today highlights again that the ecosystem’s first incarnation had aspects of a prefab structure that came into being in one concerted rush under the impetus of the central bank’s Circular 331.
Any ecosystem fully deserves this name only if is something organic. Also, it will be more resilient, the more organic it is. In one of Executive’s many musings on the entrepreneurship ecosystem during the past eight years, our then colleague Matt Nash, in an article published five years ago, argued that most natural ecosystem disruptions are fast and furious but that the impact of Circular 331 by contrast was more comparable to climate change.
The BDL-approving metaphor may raise some eyebrows today, on several fronts. One, the ecosystem’s disruption over the past two years, and the role of the Lebanese financial sector in it, was anything if not fast, furious, and debilitatingly painful. The second protest note might say that reliance on one-sided and distortive intervention at the start, however well-meaning, brings immense risk at the next inflection point where it then can occur and become, as Rouhana stresses, more of a curse than an asset.
But the country’s entrepreneurship ecosystem also shows the truth that the creation of the ecosystem by push from the central bank was at the time one of the best things that could happen in the Lebanese economy and that what is dysfunctional or disassembled today is not in all cases completely dysfunctional, or broken beyond repair and systemic redemption.
Both realities – the dismal situation of everything economic and the remnants of preserved functionality – apply to the entrepreneurship ecosystem. This piece of jewelry of the Lebanese economy, quasi its diadem of innovation, is partly broken, partly disassembled, and in many respects dysfunctional. It cannot escape from being part of this country. But at the same time, the entrepreneurship ecosystem in this dismal summer of ‘21 retains key characteristics of what it was from 2013 to ‘18 and early 19: a system of more – more hope and vigor than some other segments of the economy – and a system of new beginnings.