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In comes the money

Lebanon’s venture capital industry just got interesting

by Livia Murray

As of this year, startups in Lebanon will no longer have to complain over a lack of investors willing to give them cash in exchange for equity stakes. There are several new venture capital (VC) funds on the block, both from existing players and new ones. While this does not guarantee that entrepreneurs will not complain about other fundamental issues that arise from calling on outside investors to capitalize their companies — such as fair valuations and the value of the know how provided by the venture capitalists — these entrepreneurs are, at least in terms of availability of money, rather well served at the end of 2014.

With the diversity of funds and ticket sizes, Lebanese venture capital is approaching a more complex phase — one likely riled by more competition among firms, but also one where funds of different sizes are starting to make up an ecosystem in which each level of funding throughout the lifecycle of a company may be served. While there is still a lack of funds that can provide Series B funding — that is a funding round roughly above $10 million — and beyond, Lebanon is not a bad place to get investment if you are looking for anything from early stage to Series A.

Money, money, money

We can partly attribute these developments to Circular 331, a central bank (BDL) initiative to subsidize 75 percent of commercial banks’ money invested into Lebanese SAL companies in the knowledge economy. This has permitted certain existing players, such as Berytech and Middle East Venture Partners (MEVP) to raise funds much larger than their previous ones, something which might have been more difficult to convince investors to leap onboard for without the subsidy.

When Executive spoke with the MEVP and Berytech in the first quarter of 2014, new funds that were to benefit from Circular 331 were already on the table. But now that they have got BDL approval and received pledges from the banks, they can safely say that they have investor commitments of $60 million and $40 million respectively, according to Walid Hanna, managing partner at MEVP and Paul Chucrallah, adviser of Berytech Fund I and foreseen to be the managing director of Berytech Fund II.

MEVP’s $60 million will be deployed over four years, according to Hanna, invested into ticket sizes ranging from $1 million to $5 million for 10 to 40 percent equity over four years. They have already invested $12.5 million into four companies and are closing an investment in a fifth, according to Hanna. This will take the number up to $15 million, though the bulk of the money invested was through a bridge loan of sorts while they waited for the banks’ pledges to be approved by the central bank — whereby the banks funding the ventures lend the money at a low interest rate, what Hanna calls an “advance on capital call.” They currently have 12 banks as investors in the picture, all taking advantage of the Circular 331 scheme.

[pullquote]Besides the funds that benefit from subsidized investors, a few more funds that have raised their money elsewhere have popped up[/pullquote]

Some of the banks’ commitments for Berytech’s $40 million fund are still waiting for approval, but Chucrallah is quite confident they will get it. They plan to deploy funds over a period of four years with ticket sizes of $2–3 million, though Chucrallah notes that they have also decided to invest in smaller ticket, earlier stage ventures, expecting to invest in a total of around 25. Though they have not yet made investments into any companies, Chucrallah says that they are currently in advanced talks with a number of them.

While Circular 331 has allowed Berytech and MEVP to create larger funds, it has has also brought new players into the Lebanese venture capital industry such as Hala Fadel, Henri Asseily and Herve Cuviliez, who are raising a fund under LEAP Ventures.

LEAP Ventures was still waiting for central bank approval for the fund when Executive spoke with Fadel in early Q4, since they filed it later than the other two Circular 331 beneficiaries. Originally wanting to raise $100 million, Fadel expresses that that would be difficult in Lebanon considering the appetite of the banks. She said that they are rather hoping to raise $50 million at first, but are thinking to raise a follow-on fund of $50 million. They are planning to invest in ticket sizes of $3–7 million, deployed over four years, though Fadel claims they were initially hoping to invest in larger ventures with bigger tickets.

But the good news doesn’t stop at Circular 331. Besides the funds that benefit from subsidized investors, a few more funds that have raised their money elsewhere have popped up. Wamda is launching a new regional fund which could reach $75 million, CEO Habib Haddad announced last December. Wamda was not, however, ready to provide any new information on their highly anticipated fund.

Saned Partners has also launched a regional fund of $5 million that has already made two investments: Jordanian company Kharabeesh and Lebanon’s very own Instabeat. Though they do not have a quota per country, Antoine Boustany, Saned’s investment manager, estimates they will likely invest around 30 percent of the money in Lebanon. Its investor base is comprised of five Lebanese investors working mainly in contracting and development in the Gulf Cooperation Council (GCC), whose desire to invest in Lebanon and the region had a certain altruistic component, according to Boustany. They plan to deploy the fund’s $5 million into early stage companies across sectors whose ticket sizes range from $100,000 to $200,000 for an equity stake between 5 and 15 percent, according to Boustany.

Finally, Y Venture Partners, the initiative of the Yafi brothers behind Lebanese based e-commerce site ScoopCity, are looking for a total portfolio of 10 companies in which they will invest ticket sizes ranging from $15,000 to $100,000 for 15 to 20 percent equity stakes. According to Abdallah Yafi and Ghaith Yafi, they have already made three investments in Lebanese e-commerce startups and by the end of the month will have invested in five or six in total. Their current investments include ServeMe, a restaurant booking app with a heavy marketing and analytics component, as well as Onlivery, an online delivery app. After this fund, they are also seeking to raise a larger, $10 million fund, according to the brothers.

Another initiative to bring money to startups, though not a VC fund per se, is Lebanon’s new and highly anticipated accelerator program Speed@BDD, which has launched operations and is looking to take in its first batch of startups in early 2015, according to Speed’s CEO Tim Duggan. The accelerator is looking at a $5 million budget which will go towards funding startups for equity as well as running the day to day operations of the accelerator. Speed is only looking at 20–30 percent of its funding to come from the investment scheme made possible by Circular 331, according to Duggan.

[pullquote]“Homegrown Lebanese companies are not good enough”[/pullquote]

Renewed calls for deal flow

A lot of money is now on the prowl looking for deals. And of course, VCs will be VCs. Not unlike what they expressed last year, some venture capital firms whose funds are Lebanon focused complained of the amount of good quality startups in the country. “Homegrown Lebanese companies are not good enough,” says MEVP’s Hanna. Though they knew this going into the fund, MEVP is looking not only at local companies but at the diaspora as well. “The know-how that the Lebanese diaspora have, they have another type of understanding of the online space. And these are the people we would like to invest in. These are people exposed to global trends and global technology,” explains Hanna.

To be eligible for fund money benefitting from Circular 331, the company has to be registered as a Lebanese SAL, but does not necessarily have to be based in Lebanon. Hanna and his crew are working to convince many diaspora companies to incorporate a branch in Lebanon, where besides getting the money they can benefit from Lebanon’s comparatively cheap skilled workforce.

MEVP even has an ‘ambassador’ — Elie Habib, formerly of Riyada Enterprise Development, who also sits on the Impact Fund’s investment committee — representing them in Silicon Valley working to convince others in the diaspora to work with the fund, according to Hanna. So far two of their new investments, Fuel Powered and Klangoo, have been through Khoury’s recommendation, according to Hanna.

Market segmentation

But luckily for the venture capital industry, the lack of deals will not necessarily result in fighting over startups. Berytech’s Chucrallah explains that different startups will gravitate to different funds, noting that some of the funds already have their own style and focus. “There are sectors that we [Berytech fund] like particularly, and there is some chemistry. This is a personal relationship,” he says, adding that for Berytech the sectors are renewable energy, medical research, design and fashion.

LEAP’s Fadel added a cautionary note, however, that competition could arise if funds step out of their roles — to make sure that seed funds really target the seed stage, Series A funds really target Series A deals, etc. “If everyone starts playing on every bit of the segment, this is where you can have inflation in terms of valuation because you would be competing with one another and I mean, for us, we always set for a late stage because this is where the gap is and this is where our expertise is. We’re not going to start doing seed stage,” she says.

Update: Between the original print publication of this article and its online posting, there were personnel changes at Speed@BDD. Tim Duggan is no longer the CEO.

Correction: A previous version of this article mistakenly identified MEVP’s ‘ambassador’ to Silicon Valley as Elie Khoury of Woopra. In fact, it is Elie Habib, formerly of Riyada Enterprise Development. Apologies.

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Livia Murray

Livia covers business, finance and economic policy for Executive.

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1 comment

Scientia vincere tenebras December 18, 2014 - 2:57 PM

Very interesting article.

As positive this can be for the financial sector and VCFunds, the main reason behind the 400 Million USD is still overlooked; job creation and education of technology development to younger generations.
Lebanon is missing the whole technology phase, and so is the region. The proof ? What successful company has exited succesfully ? Maktoob ? With its sale to one of the worst performing company on earth; Yahoo.

Before looking at the hype of money, one should look at the cycle being ridden. Where are we in the technology cycle and overall startup development eco-system ? Why is it no startup is scaling up ? What is the point of having VC’s if there are no incubators ? And most importantly who are those so-called VC ? What experience do they have in startups ( except for LEAP fund)? The nepotism behind MEVP is inadmissible. How can a startup even scale withouth Seed investment ? There is a huge discrepency in the overall financing of startups, and these so called institutions. If the initial aim and objective of this injection was to create of Lebanon a technology hub and innovation hub ? How to steer and create this ? Why not invite the successful Lebanese who made it abroad – and clearly not here for these exact same reasons-?

Instead of hyping the 400 Million USD injection, one should look more carefully at the typical issues this country is facing such as corruption and nepotism. A jury and/or tecch advisors should be formed, for this cash not go up in the air, as we have seen in the history of our country.

Finally, please note that only 5% of the VC’s in the USA are actually profitable, and these are VC’s with a board of advisers with extended experience in startups. Not just scavenger bankers.

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