StartechEUS to provide funds and mentorship

New Fintech hub open at BDD

Photo by: Greg Demarque | Executive

Fintech—financial technology— is a buzzword in the entrepreneurship sphere and a fast-growing segment of the financial services industry globally and in the MENA region. In 2018, the fintech sector saw $36.6 billion invested worldwide, a 329 percent increase over a five-year period, according to UK-based non-profit Innovative Finance. Lebanon is no exception—in 2015 the country hosted 14 percent of the region’s fintech startups and was the fourth most-served market by fintech companies, according to the Investment Development Authority of Lebanon (IDAL). Despite this, Lebanon’s nurturing of local fintechs still seems to lag behind the global trend. Those Executive spoke with noted that with a highly skilled local labor force there is potential for launching successful fintech startups here, but entrepreneurs still face challenges, primarily in the form of regulatory hurdles.

StartechEUS, a new fintech hub, opened its doors on May 1 in Beirut Digital District (BDD) and hopes to help startups navigate these obstacles by serving as a one-stop-shop for budding fintech entrepreneurs. Founded by Alexandre Harkous, who is also StartechEUS’ managing partner, the new hub aims to provide funding, mentorship, and physical space to primarily late-seed phase fintech startups. Harkous is an experienced player in financial services, having previously founded BI-SAM Technologies S.A., a company that offers analytics software, client reporting, and data management solutions to the investment management industry. The hub is expected to occupy a 800 square meters space in BDD, though at the time of writing, this space was not yet confirmed. Like Agrytech, an accelerator that focuses on startups in the agri-food vertical, StartechEUS is a vertical-specific endeavor targeting a niche market. 

Stephanie Abi Abdullah, BDD’s program director argues that StartechEUS will be a significant contribution to BDD. “It’s good to have them close to the startups, leveraging their expertise, and building relationships with them,” she says. “Having the first fintech hub at BDD is just natural for us.” She notes that the Lebanese Economic Vision (LEV) produced by international consulting firm McKinsey positions fintech as one of the key pillars of the Lebanese startup industry, with a high potential for success. The financial services section of the LEV sets the target for the number of fintechs in Lebanon serving the global market as rising from 15 today to 45 by 2025. 

Few boots on the ground

Executive spoke with Nizar Ajeeb and Giovanni Khalil, chief technology officer and chief marketing officer at StartechEUS respectively, to discuss how StartechEUS plans to contribute to the ecosystem. They explain that the organization is comprised of three pillars: the “Finnovation Fund,” a hybrid fund of private partner funding and funding via Circular 331; the “FinHub,” which is the accelerator arm, and the “Technology Academy,” which will provide partnering entrepreneurs with training sessions and access to physical space and technology. “The main difference here is that we aren’t a silo,” Ajeeb says. “We’re not only an incubator or an accelerator, we’re all of these together.”

Khalil tells Executive in a follow up email that they expect the Circular 331 portion of the hybrid fund to equal $25 million. When asked about the size of funding raised from the private sector thus far, the duo declined to comment. They say, however, that chosen partnering startups will be eligible to receive between $50,000 and $2 million in funding, depending on which stage they are at in their life cycle. 

Asked how many startups StartechEUS would be able to support at any given time, the duo declined to give a number, but did say that each startup would be in the program between five and seven years until exit into global EU and US markets. The focus on these markets is driven by the idea of job creation for Lebanese graduates as well as increasing the foothold of international companies in Lebanon, says Karl Naïm, chief investment officer and partner at StartechEUS. Currently, StartechEUS lists one company in its portfolio, OneWealthPlace, also founded by Harkous. Ajeeb says they are conducting due diligence on two potential companies now, which, if successful, would be announced via their website. 

With just two potential companies in the pipeline and only one in their portfolio, the question remains if there are currently enough fintech startups in Lebanon—or enough in the development pipeline—to justify an endeavor of this scale. Especially considering that StartechEUS plans to focus solely on fintech companies started by Lebanese or members of the Lebanese diaspora, limiting their potential market.

Executive posed this question to Fawzi Rahal, managing director of Flat6Labs, a regional accelerator program, and his reply was blunt: “No.” Despite a growing number of fintech pitches, Rahal says that only five of Flat6Lab’s 26 startups are fintech. While this constitutes 19 percent of their portfolio—not an unimpressive portion—he says there are not enough fintechs in the rest of the country that would be suitable for StartechEUS to invest in. Most of the fintech startups that apply to Flat6Labs cannot, or should not, be validated in Lebanon, Rahal says, because either the idea is not suitable for Lebanon, or the infrastructure is not available to test and develop an idea.

Negative perceptions

Ajeeb says StartechEUS will look for graduated startups from the likes of Flat6Labs to feed into their program, and on this front Rahal seems optimistic. “For us, we see [StartechEUS] as a healthy advancement of the pipeline,” Rahal says. “Because when startups do graduate from Flat6Labs, right now the only other option for fintechs is Phoenician Funds.” Focusing on seed and early stage companies, Phoenician Funds does offer support to fintech, but it is not the VC’s sole focus. 

As far as the diaspora is concerned, attracting investment from abroad is challenging. The 2018 Arabnet report on the Lebanese Innovation Economy notes that while the diaspora is large, it has proven challenging to motivate them to invest in Lebanon. Most investors do not want to invest in such a risky environment and opt for other, less volatile markets. There is also a perception problem with Lebanese products; if there is a cheap Lebanon-based solution, it is perceived as being of lesser quality, according to Rahal. This, he says, is a perception the startup ecosystem needs to overturn by continuing to launch quality products. 

Naïm says that startups StartechEUS invests in will have Lebanese talent and presence, but will not necessarily have a Lebanese holding, meaning that IP and holding companies may be located abroad. He says this should help combat negative perceptions and will facilitate smoother international adoption and expansion, and alleviate risk that may be associated with a company in Lebanon.

Rahal also says that for a Lebanese national in the country, going through the pipeline here is a lot easier than elsewhere in the region or abroad, as there is funding available and the overhead costs are not as high. However, for non-Lebanese, he argues there is little incentive to set up shop in Lebanon because of the difficulties faced in navigating the regulatory framework—cited by 64 percent of tech startups as a main impediment in the Arabnet report. 

Currently Lebanon lacks any sort of regulatory sandbox, a testing environment used to ensure regulatory compliance and security checks for financial operations. Places like Bahrain, the UAE, Saudi Arabia, and Egypt have all introduced sandboxes linked to their central banks to encourage development in the sector, but Lebanon is still lagging.

Creating a fintech-friendly environment would require serious regulatory change from Banque du Liban (BDL), Lebanon’s central bank. Without measures from BDL, along with improvements to digital infrastructure, there is little incentive for those abroad to launch their companies here. 

To expand in the region or further a field?

Ajeeb says he is hopeful the hub will be a positive contribution to the ecosystem by providing Lebanese talent the opportunity to launch their companies here, while attracting the knowledge and expertise of the global Lebanese diaspora who may have started their companies in Europe or the US. StartechEUS has partnered with Lebanese International Finance Executives (LIFE), a worldwide membership organization of diaspora-based Lebanese financiers that has over 250 finance executives, to help gain access to this talent pool,  Khalil says. 

Attracting investors knowledgeable of EU and US markets would be an advantage for StartechEUS, which promises to provide access to these markets abroad and regulatory compliance training, such as training on the General Data Protection Regulation that exists in the EU, to their partners. 

Rahal says that Flat6Labs has taken a different approach. “We believe the first step needs to be the GCC and the MENA,” he says. It is difficult for a startup developed in Beirut to be taken to Europe, because most of the validation that must happen is easier done within the region, he says, arguing that it is easier to scale and grow a startup regionally than suddenly competing against extremely well-versed founders in Europe or in the US.

Naïm said in an email that there are successful Lebanese fintech startups abroad, like Murex that was founded in Paris. “There are no reasons why a Lebanese startup with the right idea, execution, contacts and partners, couldn’t compete globally, and StartechEUS is here to facilitate this,” Naïm says.

There are a lot of challenges that fintechs must navigate in Lebanon, especially those that seek to export their product abroad. Where perception problems and a lack of a regulatory framework will be hurdles any fintech startup StartechEUS partners with will have to leap over, Naïm seems confident that his team is prepared to help them do so. He acknowledges that the startup ecosystem in Lebanon is still in its infancy, and he agrees that as of today there are not enough fintech players in Lebanon, but says that StartechEUS’s role will be to help nurture and accelerate the vertical’s maturity through their VC funding, mentorship, and targeting of the diaspora, and added that with the backing of BDL and the banking ecosystem, pushing this initiative forward is feasible. 

Lauren Holtmeier

Lauren Holtmeier holds a masters of International Affairs from the Bush School of Government and Public Service at Texas A&M and has worked on refugee issues at the American University of Beirut.

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