The middle of 2020 is seeing three virtual hackathons—the first that are being staged in Lebanon in the space of just two weeks, from June 27 until July 10. Organized by the MIT Lebanon challenge, the American University of Beirut, and the Smart ESA accelerator at the Ecole Superieure des Affaires, all three separate hackathons are dedicated to solutions for Lebanon. According to the organizers of the third event, the Smart ESA hackathon will be a relatively small event with 10 pre-formed teams and dedicated to ‘a take on Lebanon’ after coronavirus. Executive talked to Jihad Bitar, director of Smart ESA, who shares not only about this event but also about the new batch of startups at the accelerator, plans for fintech and a coding school, and wider plans for an institutional angel fund, ESA Invest.
Will you first confirm for us that a virtual hackathon is coming up at Smart ESA?
Yes, we have a hackathon on solutions for the country. It is mostly going to be a small thing for students, not a core event. But let me say that we are working and never really stopped. We [admitted] a new batch of startups during the corona confinement. We figured that when everybody was stopped it was important to continue and send a signal that things have to go on. So we launched this batch of nine startups.
How strong was demand for the acceleration program in this situation?
In a normal batch, we used to get around 300 applicants when we opened the application process. In this batch, we came to close to 100 applicants.
Compared to the overall circumstance, this sounds quite good.
The good thing and positive side to all this is that the crisis is vetting the ecosystem a bit. I am not saying that all 100 [applicants] were good, probably not—[but I mean that] we have now a smaller number but much more serious commitments and an older average age.
How much older?
In this batch, the average age is above 30, probably 32 or 33. We are getting more experienced applicants.
Is there a specific area of business or tech where you saw a concentration of startup focuses in the current batch?
We, for the first time, did not just take tech startups but also physical brands, brands that can scale and export. So of the nine startups we have two that are pure brands with products. We also have some e-commerce but a lot of the startups are actually projects that ride the wave of the economic crisis in Lebanon. For three or four, the timing in this sense is perfect in that they would actually work very well during a crisis.
Do you see a stronger hunger for social entrepreneurship type of activities when compared to previous years?
We did not look for social entrepreneurs as part of the [application] criteria but we definitely feel that the entrepreneurs who we got have a better consciousness of their social responsibility.
Entrepreneurship means that startups are fated to chase investment money. How is the funding situation going to be for your new cohort of startups when they have graduated from this program?
I have been saying at several conferences in early 2019 that the high interest rates in banks in Lebanon was the enemy of entrepreneurship. Nobody was going to invest in startups when you could have 12, 13 or 15 percent return from [a deposit in] a bank. What we are seeing today is a micro-boom of investment in startups. I am talking [about] early-stage investments in startups from some angel investors. Saying it in a cynical way, investing in a startup in Lebanon today is less risky than keeping your money in a bank.
Or at least perceived as less risky than leaving your money in the bank, where it seems to be stuck.
If you want to make your money work, you can invest in certain startups in a portfolio mix. We are seeing that a lot of startups are getting funding today. The problem lies in the fact that the local money is not useful for startups that need to grow outside of Lebanon. It is very difficult for them to use that money to grow outside of Lebanon. Thus what we are seeing is more of a double fundraising where [startups] raise local money to pay salaries and try to raise some fresh money to grow outside.
Can you quantify how this micro-boom of angel investing is dimensioned, for example by size of invested amounts in the last three months?
It is very difficult to have numbers and I do not have a statistically relevant number but I can tell you anecdotal numbers. I know startups that have been looking for money for more than a year, which were too small for VCs and which were finding it difficult to find angel investments. Now they are all in very advanced negotiations to raise the money. This is anecdotal because it is a small batch that I saw waiting as they were trying to [raise funds]. Another anecdotal evidence is that today there hardly passes a day without me getting at least one phone call from somebody that asks me if I knew any startup that would be worth investing in.
Can you compare this rate of one call per day to how many such phone inquiries you got a year ago?
From individual investors who were seeking to invest with their own money, we used to get one call per week. Now we have one call per day from such angel investors.
Did you see any flow of Circular 331 money in recent months?
I think there has been a little bit of investment going on. I know that some funds still have a little bit of money. The problem is that the crisis happened at the same time when the funds were supposed to give back the money to their investors and the banks. 331 investments had really slowed down already in 2018; at the end of 2018 and beginning of 2019 there were very few 331 investments. Also, for the last two or three years, 331 investments were not or very rarely going to early-stage startups because [the VCs] were giving the money to later stage, series A [ventures].
So before, there was a lot of money for investment [tickets] above one million dollars but very little for investments below that, and almost no money for investments under $300,000. Today this has inversed. Because angel investors are putting [up] money, you can today find money for tickets of under $500,000 from angel investors but it is difficult to find money for startups that need to grow with $5 or 10 million dollars of investment.
However, I am seeing also another trend. Institutions in other Arab countries that have fully understood what is happening in Lebanon, are contacting certain Lebanese startups directly and tell them to come and set up in Jordan, Abu Dhabi, and other countries. This is important because it is a way out for many startups.
It does not sound like this is a way out for the Lebanese ecosystem, however.
But it is good. As long as these startups keep a back office in Lebanon, and this is what we are asking them all to do and what a lot of them are doing, it is fine.
Keeping a back office in Lebanon as long as you have your funds flowing sounds like a very valuable proposition, because of reduced salary and overhead costs in this country.
How many hackathons do you do each year at Smart ESA?
We do around three.
And this is the first virtual one?
Earlier during the corona crisis, there were many virtual hackathons related to the pandemic and solutions for its problems organized in Europe, the United States, and elsewhere in the world but nothing was happening here. Do you have a view why Lebanon was relatively late in terms of bringing on virtual hackathons?
I think honestly that very few people were used to doing things virtually here. It was not in our culture. We are more into direct contact and being physically present. So I think there was a reckoning moment and a cultural change moment where people got used to do zoom meetings and all this … There was a lack of knowledge to be honest.
So one could say that this learning curve was somewhat delayed in Lebanon?
According to the advance information about the upcoming hackathon, ten teams would be in this event and they were all to be pre-formed, not assembled on the spot. Is this correct?
Out of how many applications did you select the ten teams?
I am not following this personally and do not have the numbers as this is followed by my team but I can tell you that there were not many applicants.
To confirm the topics of the upcoming hackathon: Is it correct that there are three tracks, one on education and online education, one on the challenge of SMEs that are facing problems due to the coronavirus situation, and one on empowering solutions that involve social distancing?
Yes, it is about how to make businesses thinking of useful solutions to keep social distancing and the best of social distancing. How do you transform a problem like social distancing into a business opportunity?
And it is right that there is no track dedicated to fintech?
No. We will do another hackathon later in the year specifically on fintech.
I saw that ESA started to promote online basic courses on fintech. Do you think that fintech still has a future in Lebanon?
We think that fintech is definitely a solution. The problem with fintech is obviously the regulation. I don’t know if you know this but we were planning on launching a fintech accelerator in June of this year. It was a bit delayed and stopped but we are still working on it—a pure, dedicated fintech accelerator.
We do believe that fintech has a future. It is obviously very difficult, because regulation is extremely complex and Lebanon is very late vis-à-vis our Egyptian and Jordanian competitors that are much more advanced in fintech than we are. But we believe that the economic problems in Lebanon will call for very smart fintech solutions. We truly believe that out of extreme crises like this can come very interesting solutions.
Is the financial future secure, as far as ESA and Smart ESA?
I cannot speak on behalf of the university but I think the university is overall okay, although it is obviously challenging times. ESA until now enables students to pay their tuition at the official LL1,500 [lira to the dollar] rate and certain programs are actually getting many more applicants because ESA has a very good quality education and is still very affordable when compared to some other universities.
Concerning Smart ESA, we have until now been financed entirely by ESA itself, so the university has been covering our costs. We have a few corporate partners but the bulk is still financed by the university. This is obviously a challenge in the long run and we need to find new sources of funding, which we are working on. In parallel, we are also trying to grow and are working on many programs, and this is difficult. We will launch a coding school very soon; we believe one of the major problems in Lebanon is not just money but the lack of technical talents. Hopefully it will be launched by the end of year and will be funded by the French government to create jobs in Lebanon.
What makes the upcoming hackathon most special? Is it that it addresses life after corona from a Lebanese take, as the title says, or is it that it comes at the most desperate moment of existential challenge in Lebanese memory?
No, [the hackathon] is not tackling existential challenges—on this point, I think [our approach is shown in] the fact that we have continued as accelerator and started during confinement to have nine startups, that we are continuing, and that we are even creating something called ESA Invest, which is a small angel fund where we will invest money at ESA directly into certain startups.
As you know our programs are not just for ESA students, anyone can apply. Startups don’t pay for our programs, and our programs are open for everyone, so we do everything for free and in parallel we are creating a fund to invest in selected startups. We are very dynamic, doing all this in the middle of a crisis because we still believe that there are very good opportunities here. This is what we are doing in terms of the existential crisis.
To answer your question in terms of the hackathon, we really want to tap people into thinking: What is the next step after corona? How to use corona as an opportunity and transform this [problem]. Entrepreneurship is always about finding solutions to challenges and what bigger challenge can you have than the corona crisis and economic crisis?
You said the program as Smart ESA is for free, but as you are creating ESA Invest, does this mean that the accelerator will be taking equity?
No, they don’t pay anything and we don’t take equity. Joining the program is independent from the fact that we are creating ESA Invest, with an independent investment committee. It has nothing to do with the actual program.
So the investment committee of ESA Invest will then pursue the usual activities of monitoring the startup, having board presence, and assuming equity?
Exactly. The idea behind ESA Invest is that ESA has a huge network of business people. A lot of [these] people around our university are CEOs and a lot of them want to invest in startups as they want to use their cash in a smart way. But a lot of them are not trained to invest and do this the first time. They have been telling us for a while that they are ready to join in, if ESA invests saying ‘if you as ESA go in, we are ready to follow after you.’ We will put very small tickets [as ESA Invest] but these can open up much bigger tickets from other angel investors.