It was a long time coming. When Al-Mawarid Bank and local startup Presella jointly announced the bank’s equity participation in the company yesterday, it had been almost a year since Banque du Liban (BDL) created the funding mechanism that would support this type of deal. Mawarid’s investment in Presella was the first to be approved by the central bank under this system, whereby the company will be receiving $200,000 from the bank for an equity stake of just under 21 percent. This suggests the shareholders value the company at around $1 million.
The key element behind the deal is Circular 331, which was passed by the central bank in August of last year. Under this circular, the central bank subsidizes 75 percent of an equity investment by commercial banks into a startup company under an arrangement that allows commercial banks to buy treasury bills and sell them back to the central bank at a discounted rate.
Presella is an online ticketing platform that seeks to help event organizers reduce the financial risk of throwing events. The company offers normal services such as selling tickets, but also has a crowdfunding option whereby anyone organizing an event can set the minimum number of tickets that need to be sold for the event to take place. In about one and a half years, the startup has sold over $650,000 worth of tickets between hundreds of small and medium sized events, primarily in Beirut, followed by rollouts in Dubai and events in Cyprus and Turkey.
Start from the bottom
The company has certainly grown since its 2012 debut. Presella was one of the eight startups that graduated from former acceleration program Seeqnce, which provided its first round of funding of $76,500, split between cash and in-kind services such as office space and an internet connection.
It was through a pitching session held by Seeqnce in 2013 that Presella first caught the eye of Marwan Kheireddine, chair and general manager of Mawarid, major shareholder in Virgin Megastore in Lebanon and Saudi Arabia, and a former minister in the 2011–2014 government of Najib Mikati. Kheireddine had been invited to the pitching event as an angel investor. Earmarking them for investment, Kheireddine pushed forward when Circular 331 was promulgated.
Mawarid’s investment is part of Presella’s $300,000 second round of funding. In addition to the bank’s $200,000, the startup will receive $100,000 from a handful of Lebanese angel investors. The company plans on using the money to expand in the Emirati, Qatari and Saudi markets. “We are aiming to be a success story, to inspire entrepreneurs in Lebanon,” says cofounder Walid Singer.
The current shareholders include cofounders Singer and Louay Kadri, as well as a group shareholding that originated in the Seeqnce accelerator program. After the second funding round, Presella’s shareholders will include six new members, says Singer.
And Mawarid is letting them drive. The bank will take a board seat, but they will not engage with them as advisors, according to Kheireddine. “Being a bank on their board gives them credibility wherever they go, so we can open doors for them,” he says. “It is a relatively well structured board. Had we gone into another investment that was really brand new, right off the drawing board, the chances are we would position ourselves to play a bigger role in that company.”
According to Kheireddine, Mawarid is planning on exiting the company in five years, although the circular gives them up to seven years.
Blazing the trail
When Circular 331 was passed, it generated a lot of hype over the maximum of approximately $400 million that could be injected into the startup economy. But while the rate of investment has not been promising thus far, such deals may see an uptick now that the first bank has taken the plunge.
The central bank is currently looking through the documents of a total of five startups, but is aware of approximately 25–30 more in the process of applying, according to Marianne Hoayek, head of the Executive Office at BDL.
A handful of banks are actively looking for deals to invest in. For his part, Kheireddine plans to have Mawarid invest in at least 30 companies. The bank is in the process of looking at three other investments, one of which it has already applied to the central bank for, according to Kheireddine.
As far as diversification goes, Mawarid can invest up to $3 million into startup companies, according to the terms of the circular which limit the amount of investment a bank can make into startup companies to 3 percent of a bank’s tier 1 capital. In Mawarid’s case, this capital stands at around $100 million, according to the chair. It is also limited to investments of $300,000 or less, since the circular defines that a bank can only invest a tenth of the 3 percent into any one company.
While it is difficult to project how many startups will see investment over the next couple of years, Kheireddine was adamant that conservative banks in Lebanon need to change their culture in terms of how they perceive startups and begin to understand how to invest in them (see Q&A with Marwan Kheireddine).
Mawarid’s investment certainly creates a stronger potential for other banks to follow suit, now that a precedent is set. “We knew that Circular 331 had to be ironed out,” says Kheireddine. “There were a lot of things that needed clarification internally within the central bank and within each bank. So we went through that first investment with the intention of paving the way for other investments to come.”
To apply for central bank funding, the startup and the commercial bank have to sign a term sheet, which is sent to the central bank along with other documentation such as the business plan. The central bank makes sure that the company is compliant with Circular 331, and then advances 75 percent of the funds through the treasury bill mechanism while the bank comes up with the other 25 percent.
If the investment is profitable, the commercial bank has to split gains from dividends or the sale of the shares 50–50 with the central bank.
“Success will come; the question is whether it’s going to be huge or small,” says Kheireddine. “I think that we will end up investing in at least a few hundred companies, utilizing a few million dollars of the $400 million, and making some money on some of the companies. But that’s the least that I would like to see.”