When I was first introduced to Beirut’s start-up ecosystem in 2011, AltCity was refurbishing its first space, the Seeqnce experiment had just launched, MEVP was one of the few venture capital (VC) firms investing in Lebanon, Endeavor was just opening, and Wamda and ArabNet were nascent.
Fast-forward to 2016 and Beirut is a different city for startups. The support infrastructure for entrepreneurs has expanded with several acceleration programs such as the UK Lebanon Tech Hub, AltCity Bootcamp, [email protected], Smart ESA, and more in the pipeline. Beirut Digital District (BDD) has become the hub of the ecosystem, and Banque du Liban (BDL)’s Circular 331 and other donor-backed funding support programs such as World Bank-Kafalat and USAID-IM Capital have resulted in multiple VC and matching funds for Lebanese entrepreneurs.
There is no question that Beirut’s ecosystem has expanded significantly in the last five years. A lot of the credit for this should go to the intermediaries that have been working hard to help startups grow and get funded. Circular 331 built on this organic tissue and turbocharged the ecosystem to where it is today.
The work, however, is not done yet. Beirut’s ecosystem is still maturing and there are signals that there may be a startup bubble. When I see the same startups jumping from support program to support program without graduating into funded and sustainable businesses, and the same founders over and over at every ecosystem event, I cannot help but wonder how much of the growth achieved in the last years is sustainable and how much more the ecosystem can grow.
Local startups may get funding under Lebanon’s own set criteria, but they will not become successful nor be able to create growth and new jobs for the country unless they can compete internationally. This is important because these successful startups are a source of sustainability if they end up contributing back to the ecosystem in sufficient numbers.
How can the ecosystem be reinforced and face the challenges ahead? The following are some of the areas we have identified based on the World Bank’s field work over the last five years (particularly through the supporting activities of the Mobile Internet Ecosystem Project (MIEP), which we started preparing in 2011) and research carried out within the ecosystem, including an on-going survey of startup founders we are conducting in collaboration with Endeavor Lebanon and Berytech. We are still refining our findings and will present the final results in a more detailed study at a later date.
1. Maturity of the support infrastructure
There are a number of accelerator and incubator programs in Beirut. The question is, are they providing the quality training and support needed for startups to graduate and compete internationally? How do the programs of these support infrastructure compare to the leading international ones (such as Y Combinator, Techstars, etc.)?
The first step of an ecosystem is to catalyze accelerator and incubator programs. The next step is to create high quality programs and attract internationally competitive talent to support these programs. World Bank research shows that in most emerging ecosystems, accelerators and incubators create quantity, but not necessarily quality, in startups. This is not bad per se, but if the ecosystem wants to achieve sustainability, it needs to develop a sophisticated support infrastructure. Accelerators and incubators do not necessarily end up producing the startups that will succeed, but they have an important function in training talent for successful startups and other industries developing tech-based products and services. Maturity and sophistication of support infrastructure is key to providing this talent.
2. Home-grown angel investors
Circular 331 and other donor-backed programs have increased the number and size of funds available. While there is still a small number of active angel investors for startups, very few successful startup founders become angel investors who go on to mentor and nurture the new generation of startups. From research in mature ecosystems, such as New York City, we know that this loop of successful startup founders becoming mentors and angel investors for new startups of the ecosystem is critical to achieving sustainability. Moreover, startups that have been mentored by successful startup founders have a three times greater chance of becoming successful themselves and creating more employment.
These self-grown angel investors are also the most likely to invest in more suitable startup projects, since they have unique insights into the market and are investing their own funds. Home-grown angel investors result in what can be characterized as “smart money” – an investment and mentorship relationship with a founder who “made it,” – as opposed to “dumb money,” an investment with no experienced mentorship involved. The ratio of “smart money” to total funding available matters for developing a robust and sustainable ecosystem.
3. Sufficient and diverse talent pipeline
Many of the startup founders we surveyed in Beirut highlighted the lack of talent to support their projects. In more in-depth conversations, founders pinpointed the need to train university students for their businesses. However, many of the students that these startups managed to attract from competing job opportunities abroad left soon after they were trained to become entrepreneurs themselves.
This is not a unique problem to Beirut. Every ecosystem I visit, be it New York, Berlin or Santiago, seems to need more talent than it has available. The question is: What is the size of this talent gap?
Based on the responses to our surveys and interviews, there seems to be a large gap between university education and the practical skills required by the ecosystem. There are initiatives, such as AltCity Bootcamp, which are trying to partly address this gap. However, they do not seem to be enough. Moreover, these initiatives focus on “white-collar” tech talent, people who have the education, skills and willingness to be an entrepreneur. Understandably, these people often want to create their own startup, not work for one. That is the reason why talented workers tend to leave as soon as they gain practical and actionable skills.
There are only a couple of nascent initiatives – most notably SE Factory – that focus on “blue-collar” tech skills. These are coding bootcamps that serve as vocational training for the lower educated/skilled population whose goal is to work for a startup or a larger company. This is a large part of the talent that would stay to support startups as they grow. The current production of graduates from these programs seems to be too small for the ecosystem’s needs.
4. Connection with traditional local industries
Beirut’s ecosystem is mostly insulated from the rest of the economy. Startup founders and intermediaries have barely connected with other sectors of the economy beyond sponsorship or funding relationships. More mature ecosystems tend to create startups that have mutually beneficial relationships with local industries (be it talent previously working in these industries, or formal research and development (R&D) processes of companies, such as open innovation processes). This reinforces the ecosystem by providing talent that is more likely to be successful in a startup venture, with startups that can develop products and services tailored to industry needs. It also opens the possibility of creating mini-ecosystems around these industries (e.g. the London fintech ecosystem around its banking industry).
At the same time, this connection between startups and traditional companies increases the competitiveness of the industrial base of the country, as these companies can absorb new innovation, scale it up and develop new products and services themselves. We can see this virtual cycle at play in places like New York, London or Berlin. However, there seem to be little to no connection or productive relationships between startups and Lebanon’s industries.
The ecosystem would also benefit from expanding its reach beyond Beirut. It is mostly concentrated in the city with little input from, or outreach to, the rest of the country, and as a result misses potential talent, diversity and impact. It could also benefit from addressing social and public challenges by developing social innovation as an area for growth. Interestingly enough, Beirut, and Lebanon as a whole, are not lacking in social and public challenges, but its startup ecosystem is way behind on social innovation when compared to other regions in the world, forfeiting a large area of growth with significant positive network externalities for the country.