Moving counter-cyclically to conventional business wisdom and exhibiting disregard for old boundaries are attributes of enterprising minds, of those daring people who start pursuing an economic opportunity without regard for the current resources at their disposal. In the case of Lebanon in 2020, one could add that these have to be enterprising minds without regard for an absence of resources taken for granted in most countries and without fear of total financial uncertainty.
The Lebanese tech entrepreneurship ecosystem, first built in the 2010s around the mental assets of the country’s entrepreneurs but this year in need of being rebuilt for the 2020s and beyond, appears to be emerging from several months of functional paralysis. Encouraging signals of the system’s positive disruption are converging this summer from the avenues of technology, finance, orientation, new projects, and ecosystem self-organization.
These five confluents are, one by one: On the tech side the rise of the virtual as exemplified by virtual hackathons; on the financial side, the shift to new fundraising structures and sources of finance; in terms of startup orientation, a strengthening of social entrepreneurship with focus on economic sustainability; in terms of meaningful projects, several startups in the ideation and prototyping phases; and, in terms of the overall ecosystem, an impulse of new general vitality and expansion.
Arrival of virtual hackathon culture
Stopping in Lebanon somewhat belatedly when compared with the rapid rise of virtual hackathons in startup ecosystems in Europe, Asia, and the Americas (where virtual hackathons became the rage as soon as the severity of the coronavirus challenge and lockdowns made migration into online worlds the most logical environments for ideation and project-based competitions), the virtual hackathon train first arrived in the local ecosystem at the end of June 2020, in form of the MIT Lebanon Challenge.
Conceived and organized within the space of less than two months and aimed, in the lingo of a post-event press release, at “connecting Lebanese at home and in the diaspora to build creative, responsible bridges toward a more stable Lebanon,” the three-day event was a, by local standards, massive hackathon that according to its organizers digitally brought together 600 participants, 120 mentors, 24 judges, and 51 volunteer organizers.
Followed immediately by an acceleration program, the MIT Lebanon Challenge stood alongside two smaller virtual hackathons that were convened in early July, one seeking to fight disinformation under the title “Hack the fake” that was organized by the American University of Beirut (AUB), Saint Joseph University (USJ), and German foundation Friedrich Naumann Stiftung (FNF), and one seeking to address “Life after corona, a Lebanese take,” which was organized by the ESA Business School and Smart ESA accelerator.
Stakeholders in the tech ecosystem, some of whom represent organizations listed by the MIT Lebanon Challenge as sponsoring organizations and some who were interested observers of the event universally told Executive that they had had received excellent reports about the event from their teams as far as they were involved or had generally heard nothing but good things about it.
The hackathon opened new participation strata for the majority of participants (organizers spoke of 75 percent); even for many participants with previous tech entrepreneurial achievements, it was their first-ever hackathon.
Examples for this novel experience value, as noted by Executive, were tech entrepreneurs Roy Baladi (San Francisco) and Nour Fakhoury (Beirut), who enlisted in the event with their concept of developing a digital platform to help local graduates and career changers to upskill themselves with a view toward improved employability. Called Campus For Lebanon through a brainstorm by the team that was formed during the hackathon, the concept participated in the knowledge economy track of the MIT Lebanon Challenge.
Explaining that it was the first-ever hackathon of any kind for her, Fakhoury emphasizes how the virtual format meant participants were able to work with people across the globe, including Lebanese diaspora from all around the world. “My expectation going into the hackathon was to have no expectation—we expected to build something new from scratch and we had a frame of what we hoped to accomplish,” she says, adding that the collaboration she experienced in an ad-hoc team was productive, enriching, and overall “very inclusive.”
When asked why virtual hackathons in their opinions made late arrivals on the local scene, ecosystem stakeholders Fawzi Rahhal of accelerator Flat 6 Labs and Jihad Bitar of Smart ESA mentioned respectively that a recent exploration of a virtual coronavirus hackathon on regional scale had been discouraging in terms of quantity and quality and that the delay was rooted in the stickiness of regional online cultures that did not facilitate a quick pickup of the new virtual meeting pattern.
Irrespective of what had held virtual hackathons back from being convened in the first six months of 2020 in the thoroughly shaken Lebanese environment, MIT Lebanon Challenge initiator Jad Ojjeh tells Executive after the event that neither wanting internet connectivity nor absent electricity could depress the minds of the participants.
Describing the three-day experience of the event as a demonstration of participants’ global geographic diversity, joint enthusiasm for Lebanon, their calm and understanding patience at occasional hiccups, and the best personal experience of his still young life, Ojjeh confesses, “In terms of the hackathon, it went smoother than I expected it to go. That would be the biggest surprise if you ask what surprised me the most in the experience.”
The near future can be expected to provide further indications if and how far the hackathon’s winning ideas—six winners were named with flat-sharing, agricultural filtration, agricultural financing, employment energizing, co-manufacturing, and rural tourism proposals, and virtual demo days scheduled for early August—will be able to add viable and specific solutions in Lebanon’s distressed economic environs.
There is no reason to doubt that virtual hackathons will be durable additions to the Lebanese tech entrepreneurship environment, given these virtual events’ broader geographic reach, by comparison to conventional hackathons advantageous cost structure, and adaptive quality for functioning under the expected prolonged coronavirus culture. Supporting this expectation are plans, in various stages of development by local ecosystem players, to align their future hackathons and general operations with the new mandates of entrepreneurship life with the coronavirus.
In one notable such example, the brand new Nucleus Ventures organization, the successor organization and heir to the work of the UK Lebanon Tech Hub (UKLTH) initiative, tells Executive that it will organize virtual hackathons and virtual startup days in the next few months as it is preparing to offer such options in balancing of having to possibly restrict physical access to its new entrepreneurship space in Sin el-Fil. “We are making up for the limited physical facilities by offering full virtual support services as well as virtual events such as startup days and hackathons and the clinics that we run with our experts and mentors,” says Nadim Zaazaa, managing partner in Nucleus Ventures.
New duality in funding patterns
Up until 2019, the financial design of the Lebanese ecosystem incorporated access-to-finance paths that led startups into dual strategies and a sometimes inflationary automatism in looking for funds. The idea for igniting an entrepreneurship ecosystem was that startup financings were provided by venture capital funds in compliance with the stipulations of the Lebanese central bank’s famous Banque du Liban (BDL) Circular 331, authorizing and partly guaranteeing capitals that commercial banks dedicated to knowledge economy investments through a batch of venture capital (VC) organizations.
Given domestically centered usage stipulations attached to these 331 funds, many startups—all those with the natural and logical ambition to establish some overseas operations for better access to target markets outside of the small Lebanese pen—additionally sought funding that was not restricted to local usage or required overly detailed reporting to and permission taking from BDL.
That the ecosystem’s 331-based financing paradigms would need fundamental adjustment was already on the horizon before the general evaporation of confidence had affected the entrepreneurship scene and was fully thrown into jeopardy by the last quarter of 2019. What was not initially clear was what this would mean for existing startups.
By mid-2020, however, a new funding pattern seems to be emerging by the descriptions of several ecosystem stakeholders as both a consequence and partial remedy of the old closed system’s inbuilt tendency to create valuation distortions, competition for viable startups, and conflict of interest potentials among VCs. For Jihad Bitar, chief executive officer of accelerator Smart ESA, the current banking and finance scenarios for entrepreneurship appear not to be burdened with some of the disincentives that held investments back under the previous settings.
“Saying it in a cynical way, investing in a startup in Lebanon today is less risky than keeping your money in a bank,” Bitar puts it. He tells Executive that he had argued already for many months prior to the 2019 liquidity crisis against the banking sector’s high deposit interests on grounds that no one would want to risk their money by giving it to a startup if they could easily obtain north of 10 percent in deposit interest (which was then regarded as very low risk). His expectation that a drop in deposit interest rates would translate into an increase in investments in entrepreneurship has been fulfilled, he adds. “So what we are seeing today is a micro-boom of investment in startups. I am talking about early-stage investments in startups, coming from some angel investors. Yes, the funding from 331-funded VCs has stopped or slowed down a lot. But on the other hand, we are seeing a boom in angel investments.”
Also for Fawzi Rahhal, the managing director of fund-cum-accelerator Flat 6 Labs Lebanon, the new trend for private investments is tangible. According to him, several funds-seeking companies in the past two months have either received verbal commitments or actually raised money. “Investments came from Lebanese angels that have lollars [dollar-denominated deposits in Lebanese banks that cannot be withdrawn as dollars in cash] and virtual coins in the bank that they want to turn into equity so it does not disappear the next day,” he says. “Or they came from interesting initiatives—[Abu Dhabi-based entrepreneurship] hub71 recently awarded [funding to Lebanese startup Mint Basil Market] under an equity and grant mixture. So there is movement on the fundraising level, [but] some of these things should have happened six or seven months ago.”
Speaking of signs of hope, Rahhal concedes that these are still feeble signs that come after many months of financial paralysis. “It was frustrating, a period of every man on his own,” he says, pointing to his and other VC funds that were waiting for previously agreed capital calls, ineffectiveness of steps by the Lebanese Private Equity Association, and restraints on the ability of accelerators to provide support to startups in their portfolio.
This notwithstanding, he confirms that he and his peers in the ecosystem have been initiating talks with some late-stage funding organizations and that daily talks with angel investors have been ongoing. “On an ad-hoc level and a personal level, we have been doing as much as we can and the quote-unquote network has been doing as much as they can,” he says.
A positive spin on the narrative of ecosystem 2020 also comes from Sami Bou Saab, the chief executive of accelerator [email protected] “This is actually a great time for those [startups who are] fundraising, because local investors are looking to get their money out of the banks and now, the risk of investing in a startup may be comparable or less if it is a good startup—angel investors are excited and saying that it is better to put their money in startups than keeping it at the bank,” he enthuses to Executive about the developments in the local financing scene.
Moreover, there is also increased interest in startup investing internationally, due to reasons that include the impact of the coronavirus crisis, he adds. “On the international scene, investors as well are seeing this as a great time,” he says. “They can invest in startups at discounted value, they think, and get more equity and ownership with less amount invested. In both cases, it is a good time for startups to go fundraising.”
More and clearer purpose
However imperative the need for money might feel in a moment of desperation to a cash-strapped startup, it is a mantra of entrepreneurship thinking that finance is never the biggest hurdle for a worthy venture. The value question in this sense is usually a function of the motivation that drives and the purpose that guides a startup.
What had been in this sense a third and hitherto ephemeral ingredient in the Lebanese entrepreneurship ecosystem’s mixology, figuratively speaking the ginger and lime juice as the healthiest parts in the local startup cocktails, was social entrepreneurship. Albeit proclaimed and promoted at quite a few events (often by stakeholders with an excellent nose for attractive buzzwords), social entrepreneurship was not well understood, has not been supported by clear legal definitions and dedicated incorporation templates, and tended to either transmute into a startup’s conventional commercialism or descend toward becoming the anti-business models of unsustainable and opportunistic non-profit ventures that speculated on exploiting the money spouts of international public sector donors and foreign non-governmental organizations.
Mona Itani, entrepreneurship program coordinator at the American University of Beirut (AUB) and member of the engineering faculty there, has a story to tell about the importance of entrepreneurship for Lebanon and its academic institutions as well as the adoption of social entrepreneurship thinking in the Lebanese ecosystem. “At AUB we have a mandate to keep working and promote entrepreneurial culture among our students, whether they are at the engineering faculty or any faculty across AUB, whether they are undergraduates or graduates,” she says. “We also sometimes open programs for staff and faculty members. This means for us that building this entrepreneurial culture is very important, regardless of what is happening in the country or in the world. Personally speaking, as someone who is fond of social entrepreneurship, I believe that Lebanon, with all its troubles and challenges, is a very good soil for such projects because we need [entrepreneurship] the most.”
As Itani narrates it, she was motivated to become a social entrepreneur herself and establish Riyada for Social Innovation, a consulting startup that offers project-based training in social entrepreneurship, by seeing how poorly her Lebanese engineering students rated in terms of connecting to the social issues and real life problems of underprivileged communities and refugee populations.
“Engineers are problem solvers, so what [could positively be done] if they exercise their talents in creating new solutions that solve social problems that exist in our community?” she asks, explaining her approach and emphasizing that the emerging global coronavirus crisis and the current Lebanese crisis, although extremely difficult as environments for starting a socially conscious enterprise, open new windows for entrepreneurial minds. “There is a huge opportunity in this to pitch in, take leadership and initiative in solving a lot of the problems that we are facing right now, for individuals, for startups and for companies and the private sector more generally,” she says.
While Itani concedes that she does not have sufficient visibility yet on the development of social entrepreneurship in Lebanon since the onset of the coronavirus crisis, she emphasizes that in the period before the crisis, awareness of social entrepreneurship “has been increasing dramatically in the ecosystem.”
According to her, awareness was getting better in quality and understanding of social enterprise paradigms. In this regard, she is adamant that a social enterprise should be a sustainable enterprise, ergo be profitable, and be conscientiously passionate about social causes—meaning neither move from one temporarily popular cause to the next nor keep depending on external funding.
This perspective on the role and method of social enterprises as economically sustainable ventures is echoed by several stakeholders in the Lebanese ecosystem who this summer talked with Executive. It is more importantly also mirrored in a cohort of post-coronavirus startup concepts.
Notably, the emphasis on social entrepreneurship virtues as important for Lebanon in the crisis was mentioned by representatives of the accelerators such as Smart ESA’s Bitar. But even more interestingly, whereas it was mainly startups conceived in the period before the 2019 crisis that were mentioned as promising by the accelerators and had adapted their business models to needs for social distancing, the stories of appealing new concepts and startups originated with individual entrepreneurs. These could be participants in the MIT Lebanon Challenges and the recent virtual hackathons and other startup competitions organized with students of universities such as AUB, ESA, and USJ, as well as entrepreneurs who have chosen to pursue ventures independently from the old system.
While it is still very early to discuss the prospects of very recent concepts, interesting ideas by Executive’s impression were quite numerous and indeed seeking to address real micro-problems that exist in Lebanon. To name two anecdotal examples among this larger crop of projects that will be worth watching out for, Executive encountered people who are aspiring to widen the effective scope of entrepreneurship in Lebanon with new projects such as “From the Villages,” a nascent e-commerce venture that is still on the drawing board (see interview) and the “Campus For Lebanon” project that debuted as idea at the MIT Lebanon Challenge.
As co-founder of the latter project, Nour Fakhoury has a positive opinion of the Lebanese ecosystem. In her perception it is capacious despite the country’s extremely difficult situation because it is formed by solid components such as accelerators, incubators, VCs, startups, and so on. This over years established foundation notwithstanding, she agrees that the system has its greatest growth potential in social entrepreneurship. “[This] is one of the most needed fields for adding value to the ecosystem, given the current circumstances, and so I would say that we with the Campus For Lebanon are [working on] an essential addition to the ecosystem for it to still be sustainable,” she says.
The rural-to-urban ecommerce venture “From The Villages,” which is a serendipitous result of the country’s coronavirus lockdown, is an example for a startup initiative that is pursued independently from the existing Lebanese ecosystem. As initiator Ziad Hourani tells Executive, he is pursuing its development with the approach of making it financially sustainable without enrolling in the BDD ecosystem. “It is an e-commerce platform with a social mission but we are fully for-profit,” he explains, adding that seeking profitability from the beginning of operations will enable the venture to secure jobs and pay its stakeholders, which include farmers that he sources products from.
While conveying views that are very similar to Itani’s statements on the unproductive leanings of NGO-centric social enterprise projects, Hourani says he is generally critical of the Lebanese ecosystem, including investors, as he has encountered them when immersing himself in the system at several occasions in the past few years. He is thus preparing to incorporate “From The Villages” as an sal and fundraise, later this year, by seeking value-added strategic investors who understand the story that the project is trying to establish.
Comparing his local exposure with his experience in the US and UK tech ecosystems, he elaborates: “My opinion about the ecosystem [here is that] the ecosystem is against the entrepreneurs. If you are an entrepreneur today and want to start some business in Lebanon, I don’t see anything supporting the entrepreneur other than Circular 331, which is the money. But at the end of the day, in these kinds of ecosystems, the money is usually not the issue.”
He includes in this criticism the state of the infrastructure that is a hurdle to the growth of startups, mentors that are seeking mainly their own glory instead of being passionate for the sake of startups, and investors, including angel and early-stage investors, who behave abusively to entrepreneurs by evidence of, for startups, unfavorable term sheets and equity deals. “For the early stage startups, you need a pro-entrepreneur ecosystem, and we actually don’t have this in Lebanon,” he says.
Keeping the eyes on the pre- and post-corona context
In considering the role that the Lebanese tech entrepreneurship ecosystem might need to play in coming years, it serves to remember that this system is not old. Even by the standards of the digital entrepreneurship world, where you mature and advance through the enterprise-related lifecycle in months and years, not the industrial and pre-industrial ages’ decades and centuries.
The local system’s first building blocks—in forms of private visions and rudimentary semi-private initiatives with minor-league support from local banks—had been tossed around in the 1990s when every tech corridor and their hillside cousins wanted to become the next Silicon Valley. Things got a bit more concrete in the 2000s, with notable trial-and-error attempts of tech enterprise funds at importing investment and financial disciplines and combining such funding structures with the less-formally-inclined local business culture.
The small funding bang that appeared big for Lebanon came with the launch of Circular 331 and the following—relative to Lebanon’s size remarkable—proliferation of venture capital firms, funds inflows, real estate designations (the Beirut Digital District), hyped-up international events (BDL Accelerate), etcetera.
This ecosystem development cycle, vacillating its way through several stages and producing a visible if not at all perfect ecosystem, was fundamentally and in the first instance negatively disrupted toward the end of 2019 and subsequently was exposed with the entire economy to the over-reported and more-than-sufficiently described following spiral of triple doom of finance, economy, and society.
As a new phase of the ecosystem is thus emerging by necessity, the final element of note in this apparent early process of adaptation to the needs of the next digital knowledge scenario in Lebanon are adjustments and expansions of structural components in the entrepreneurship ecosystem. Perhaps the most noteworthy of these changes is the adaptation of the UK Lebanon Tech Hub.
“We are launching as of [July 23] a new seed program that is called The Nucleus and was actually run by UK Lebanon Tech Hub since 2015. We ran four versions and are now running version five. What has changed is that we are now backed by private investors and our team is now running under a company called Nucleus Ventures,” says Nadim Zaazaa, previously the CEO of UKLTH and now managing partner of Nucleus Ventures.
Woven into the BDD ecosystem since the UK’s then-ambassador Tom Fletcher invested his charisma into knitting UKLTH (an initiative of the UK government, acting through its Beirut embassy, and BDL) as the base fabric for further tech entrepreneurship ties between the two countries, the role and structure of the eponymous entity has now been transformed, Zaazaa explains. Instead of providing a series of acceleration programs organized under a scheme that was situated at the core of the BDD (with a significant workspace in the Berytech Digital Park, one of the first buildings integrated into the BDD cluster) and that took winners of each year’s cohort for training in the UK, the team of UKLTH has become the team of Nucleus Ventures, a Lebanese seed program and seed fund.
According to Zaazaa, Nucleus Ventures is locally backed by private investors and also backed by the Lebanon Enterprise and Employment Program (LEEP), which is funded by the UK government’s department for international development and which fortifies small and medium enterprises in Lebanon with funding and development services. Sporting the equivalent of an enticing PR jingle—“We offer our startups cash, customers, and community,” Zaazaa repeats a couple of times—Nucleus Ventures aims at building a portfolio of startups and SMEs that are either part of the knowledge economy or seeking to leverage knowledge technology to scale up traditional business activities and develop their exports.
The seed program and fund will be providing support that is customized to recipients’ needs and they will be “evergreen,” meaning accessible year-round. The funding formula is described as flexible and extending from ticket sizes of $5,000 for ventures that can be still in their ideation phase all the way up to $100,000 or $120,000 for those that are on stages of validation and execution, up to an annual revenue of $2 million. Notably, prospective fundings are likely to include investments in lollars but have two additional sweeteners—which, according to Zaazaa, are potentials for being matched by the likes of Kafalat’s ISME, IM Capital, or other funds in the Lebanese ecosystem and for being matched with up to $35,000 in hard currency grants by LEEP.
Moreover, Nucleus Ventures will leverage its experience as operator of programs and expert on emerging market startup ecosystems regionally, where it already has entered agreements to run the Fouad Makhzoumi Innovation Center at the Lebanese American University and a scale-up program for the World Bank in Jordan, Zaazaa says. Nucleus Ventures’ Lebanon activity hub—likely to be part physical and part digital—is being phased in in August and September of 2020.
Completing the bouquet of activities from later this year, will be regional, meaning Mashreq and Gulf countries, operations of a program called Go Global, a UK-sponsored enterprise development program that includes focal components such as “tech for social good.” UKLTH at time of this report was not part of a public list of similar hubs on the website of the UK government’s department for digital culture, media and sports (DCMS) but Go Global Middle East is going to be operated by the Nucleus Ventures-run UKLTH, which in turn supposedly is part of this international tech hubs network under the DCMS umbrella.
Synergizing the disruptions
Looking at the five components of the Lebanese tech entrepreneurship ecosystem then creates by comparison with the past eight years a more comprehensive picture, whereby the overall system’s enterprise and product focuses could well range from the expected post-coronavirus winners healthtech and edutech or digital media to newly tech-enabled productive SMEs and even include a revived fintech concentration (Smart ESA and others are harboring plans for fintech hackathons, and researchers at the IMF recently confirmed that, “During the COVID-19 pandemic, technology has created new opportunities for digital financial services to accelerate and enhance financial inclusion”).
Corporate and academic stakeholders with entrepreneurship expertise could sustain themselves by spearheading and spreading entrepreneurship cultures in the Arab region (as shown by the case of Nucleus Ventures but also emphasized by AUB’s Itani as engine for sustainable revenues under the university’s entrepreneurship expertise).
The small entrepreneurship system in Beirut could in coming years benefit from further expanding its network and aggregate social capital through intensification of bonds with European partner countries such as the UK and France as well as new virtual employment-generating interactions with Lebanese expatriate communities and collaborations with fresh Lebanese graduates of top international business schools, as demonstrated by the MIT Lebanon Challenge.
The system’s purpose and scope of entrepreneurship could henceforth be better tuned to the needs of Lebanese society through genuine and profitable social enterprise developments and its access to finance could be improved and expanded through interactions with new private investment sources on local and institutional sources on international level.
But what makes all of these—individually speculative—components meaningful and endows the observer with an ignited fuse of hope for resurgence of the Lebanese knowledge entrepreneurship ecosystem is that the synergies of all these development streams could create a more productive and more natural tech entrepreneurship ecosystem that can prove itself as the profound building block of a productive knowledge economy that it has hitherto not functioned as.
The common thread in the entrepreneurial minds that Executive interacted with in this summer of 2020 was the thread of “doing something that is beneficial for Lebanon” (The MIT Challenge’s Ojjeh), of realizing that “we need social entrepreneurship more than ever” (AUB’s Itani) and that “Lebanon has hit rock bottom and we really need to reinvent the economy” (Nucleus Ventures’ Zaazaa). Or, to say it with hopeful Campus For Lebanon entrepreneur Fakhoury, “The minds and hearts of the Lebanese people are in the right place, and I cannot stress on this enough. People are eager to learn. They just need the proper guidance.”