A report by the World Bank’s Economic and Social Council in Beirut report revealed in April that Lebanon would need to create 23,000 new jobs per year over the next decade to absorb the growing number of jobseekers. Lebanon’s already fragile economy is now hinging precariously on regional developments and a Syrian civil war next door which has created both an economic and a humanitarian crisis.
What role can entrepreneurship play in such difficult times? According to Tarek Sadi, managing director of Endeavor Lebanon, a branch of the international support network for entrepreneurs, it could be a key solution for a teetering economy. “You have 20 leading companies in Lebanon that employ people, that do a lot of good. They provide a livelihood to a large amount of people; thousands of people, maybe hundreds of thousands of people,” he says. “Having another 20-40 companies in the next 10-20 years that reach that size and that have that income just doubles the opportunities out there, which will help us keep up with the demographic reality of the country.”
While traditional advice stipulates to wait until better times to launch a business, not all sectors of the economy have been dissuaded from new growth. Although Kafalat loans, designed to give collateral-free loans to startups and small businesses, registered a 17.2 percent drop in 2013, loans extended to some sectors actually increased. (see Kafalat piece page 100). Startups are beginning to pop up in Lebanon, mostly in the technology sector, creating an increasing need for an ecosystem favorable to their development.
Growing Lebanon’s companies requires attention at all levels, from the bottom of the value chain to developing the more established companies. Over the past couple of years new institutions have worked to create a support system that helps entrepreneurs launch and grow their businesses, a huge boon to entrepreneurship. An entrepreneur can now participate in startup competitions such as MIT Enterprise Forum’s Arab Startup Competition or the Grow My Business competition, can be incubated in Berytech, and can access venture capital from Middle East Venture Partners (MEVP) or Wamda, to name a few resources.
Investment, in particular that which is institutionalized, is a decent gauge of how Lebanon’s entrepreneurship ecosystem is developing. The UN Conference on Trade and Development (UNCTAD) reported foreign direct investment (FDI) in Lebanese companies in 2012 to be $3.78 billion, a slight increase from 2011’s $3.5 billion but a decrease from 2010. Retaining stable investor confidence shows that Lebanese entrepreneurial endeavors are still considered solid investments. No matter how resilient, however, no one is holding their breath for 2013 figures considering the current political and security climate. “We are not promising ourselves a raise in 2013 because of the circumstances and the impact of the Syrian conflict on the Lebanese economy as a whole,” says Nabil Itani, chairman and general manager of the Investment Authority of Lebanon (IDAL). “We hope that we will stay [at the same level] as 2012. It is our aim.”
Of course it is near impossible to assess exactly how much money is going to entrepreneurial endeavours because much investment still comes from personal funds, family, and friends. Much of angel investment — investment at earlier stages of the company — is completely unaccounted for. The single angel network in Lebanon, the Lebanese Business Angels, has not been very active over the past year and has not closed any deals.
When it comes to venture capital (VC), growth is clear, in both the region and Lebanon specifically. According to the MENA Private Equity Association’s most recent Venture Capital in the Middle East and North Africa Report, VC increased exponentially in the Middle East between 2010 and 2012. Investments in the MENA region increased from 10 in 2006 to 54 deals worth $308 million in 2012 including in Lebanon.
VC firms active in Lebanon today are just a few years old. Lebanese-based firms such as Wamda, MEVP, and Berytech have, over the past couple of years, deployed their funds into growing Lebanese and regional companies. They focus on early stage, but most of them have done various types of funding — from seed capital to series A. Wamda’s average ticket size is a few hundred thousand dollars. Berytech has a $6 million fund which has invested in 15 technology companies, averaging $400,000 per investment. MEVP has an average ticket size of $700,000, but ranges from $100,000 to $1.5 million. All funds have either been deployed and are fundraising or will soon be fundraising. They hope to build larger funds, with Wamda aiming at a ticket size of $1-3 million and MEVP hoping to raise a fund worth a total of $40-50 million.
AVOIDING A HIT
By virtue of being new, venture capital firms in Lebanon are still exceedingly cautious when it comes to managing their investments in early-stage companies. Startups are undeniably risky investments, with a chance of failure pegged between 80 and 90 percent. In addition to this, investors who have experience in more traditional sectors have little understanding of technology-based businesses and are therefore skeptical about having their money deployed into them. The beauty of VC funds is that they are designed to mitigate this risk by deploying investor money into many startups, but even the managers of these funds prefer to play it safe.
The firms are very cautious that the companies they invest in are likely to make successful exits, garnering returns on the investments and gaining the trust of the investors to re-invest in subsequent fund. “Imagine our first fund does not perform well. We lose our investors, they will not come back,” says MEVP managing partner Walid Hanna. “The VC system is hit badly.” These cautious VCs have done a lot of co-investment with other venture capital funds. This measure mitigates risk, but it also forces them to share the benefits.
Companies that grow require millions in later-stage funding. While VC funds and angel investors will cover amounts in the hundreds of thousands — for VCs investment could go up to a couple of million — there is still a huge gap in subsequent funding in Lebanon as companies grow throughout their life cycle and want to keep expanding. “That’s where it gets stuck,” says Habib Haddad, CEO of Wamda. The funding gap provides a further reason for investors to be cautious in investing in Lebanon; investors ask themselves why they should invest in an early-stage company that will not succeed to get follow-on funding.
But given the youth of the sector, there is hope that as more companies mature and create a greater demand for later-stage funding, investors will begin to see Lebanon as a destination for investment. Despite the cautiousness of investors, the nascence of the entrepreneurship ecosystem, not to mention the regional and domestic security situation, the increase in deals year after year is good evidence that Lebanese entrepreneurs are beginning to be worth their mettle.
PUBLIC VS PRIVATE
From an infrastructure and regulatory perspective, the business climate in Lebanon is not ideal. High electricity and telecommunications costs weigh on businesses’ balance sheets, while outdated laws remain impervious to change as the parliament remains frozen, and slow to change when it is active. Moreover, government policies rarely cater to the private sector’s needs. Both private sector leaders and the government have voiced the need for closer collaboration so that an environment conducive to entrepreneurship can flourish.
At an end-of-the-year roundtable for the Association of the Lebanese Software Industry (ALSI) in which both the public and private sector were represented, Leila Sawaya, project manager for the UNDP project at IDAL, voiced the need for private sector pressure groups to address their concerns to the public sector.
Calls for collaboration are nothing new. Fares Kobeissi, president of ALSI and chairman and CEO of credit automation company Bluering bemoans efforts to set up an advisory board of public and private sector members years ago. “Everybody in Lebanon is working on their own,” he says.
Many in the private sector have all but given up. “I lost hope of expecting more than should be expected,” says new media agency Born Interactive’s founder and CEO Fadi Sabbagha. “Just don’t surprise me with extra legislation.”
Public sector activists are very aware that their role is limited, but government initiatives, while they can facilitate entrepreneurship, can only take it so far. Many Lebanese entrepreneurs who have made it have done so despite a business climate that was not on their side, and even before a startup ecosystem in Lebanon was anything to speak of. Many of Executive magazine’s top 20 entrepreneurs for 2013 established successful companies in the face of significant barriers.
Much of the change needed comes from developments unrelated to the government (though a few favourable pieces of legislation wouldn’t hurt). “There’s a certain culture related to entrepreneurship that should be present,” says Salam Yamout, national ICT strategy coordinator at the Council of Ministers. The ability to take risks, the desire to compete globally, to be more than just a government employee, these are all characteristics that need to be engrained in entrepreneurs. This requires a change in the educational system, away from the rote learning system and toward training students to think outside the box.
Initiatives from the private sector are also paramount. “There is a big responsibility on the shoulders of entrepreneurs that have made it — business people, who can mentor a startup,” says Fadi Ghandour, founder of Aramex and chairman of Wamda. Established private sector companies have a stake in supporting budding entrepreneurs through finance and mentoring. This is, after all, the best way for emerging entrepreneurs to learn.
The Lebanese entrepreneurship ecosystem will take time to fully mature, but it has come a long way in the past three years. In the current economic downturn, entrepreneurship for Lebanon is a small beacon of hope.