Before the October 2019 uprising, it was not difficult to list unresolved questions and some outright disappointments with the way that the Lebanese entrepreneurship ecosystem had been shaped in the past six years since Lebanon’s central bank, Banque du Liban (BDL), effectively launched it with publication of its Circular 331. In mid-November, amid the uprising, the Executive roundtable on entrepreneurship (the second in a series of six) witnessed most of the same systemic and operational concerns as had been debated in the ecosystem before, but with two added accents: the money will never be the same, and the discussion has gained honesty and clarity.
In other words, the financial wells to nurture the knowledge economy and the few Lebanese startups with real economic promise need to be re-drilled elsewhere and meet new specifications. And everyone in entrepreneurship acceleration is beyond wasting their time on idle ecosystem diplomacy or polite compliments to the old 331 system.
In years one to three of the entrepreneurship ecosystem there were already warning signs of clientelistic allocations of projects and a lack of competency in some of the ecosystem’s most privileged cogs—its units that had been established with 100 percent BDL-guaranteed funding instead of the 75-percent guarantee of bank investments into tech venture funds and startups.
Ecosystem insiders from early on also lamented about distortions that had crept in, due to money inflows under 331 that had led to inflation in startup valuations and financing pitches of more attractive looking business plans. Observers next noted very critically how the ecosystem’s venture capital (VC) playing field was tilting increasingly away from super-high-risk startups that needed finance the most, in favor of investments with risk profiles tending to the private equity corner.
Tech startups and especially ventures in deep tech are more resilient due to their international migration opportunities.
Throughout the entire six-year period, as they had been before the launch of 331, the existing legal and judicial frameworks remained ill-suited for facilitating an economic activity that needed permission to fail fast and reboot. Before and after 331, some good projects never even got such permission as they were killed by over-cautious investment committees. In times of 331, however, failures of ambitious startup projects happened, but they were often not revealed in ways that would allow the system’s players to learn all they could from them. Transparency, from the ecosystem’s financial top at BDL to its operational bottom layer of VC funds, remained as alien as an interstellar visitor.
In the latter part of the current period, from 2017 to 2019, the questionable wisdom of regulatory rules that limited 331-supported startups to allocations of their funding in Lebanon was put deeper into doubt when the financial reporting requirements for these companies, under instructions from BDL, were tightened to the point of being counterproductive.
Still, despite these flaws and other questions, such as the ability of the small ecosystem to create enough jobs to make more than a tiny dent in the long-standing employment malaise of a country that produces an estimated five to 10 times more college graduates than jobs, Executive’s reporters every year found positive aspects to point out in the ecosystem—although in 2019 less so than in previous years, and warranting far less exuberance than signaled by the foreword of an external report that was published this summer (see box below).
Entrepreneurship in the thawra age
Executive noted that internal and external stakeholders—such as the promotional units attached to the system and international partners with interests in its success—had embarked on several mapping exercises from the third and fourth year after the launch of 331. These exercises, however, tended to be afflicted by the difficulty to obtain data (which was limited due to the system’s very brief existence) and even more so by methodological imperfections or, all too often, special interests.
The outlooks and assessments of the ecosystem stakeholders participating in the Executive roundtable on November 18 were decidedly uncheerful in the short term, to the point of diagnosing the death of financing paradigms that had been in force until now. According to participants, absent visibility on the future of 331, uncertainty on the ability to still tap into any of its hitherto unused funds, and a strong expectation that the funding environment would not be sustained in the coming months were juxtaposed with the understanding that entrepreneurship will be vital for economic development and job creation after the tremors in the political economy recede.
Noting that the ecosystem was nearing a pivotal juncture with need to shift from the 331 funding paradigm to activating private funding already necessary before the uprising, participants concurred that this path forward is now fully in the dark to the point of having to ask how currently operating startups will stay alive until the funding finds firmer ground. Entrepreneurial flight to other markets, meanwhile, is a downside risk of the current situation, with regard to all tech startups, hardware startups, other young companies, and even manufacturers that
have the ability to move out of Lebanon.
Emphasis on the upsides of the past six years entailed the acknowledgement that 331 was responsible for assembling the entrepreneurially high-powered minds that were gathering last month at the Executive roundtable. Participants agreed that the ecosystem’s emergence under the 331 initiative was also successful in creating a new mindset and culture that is compliant with the patterns that made tech entrepreneurship succeed in those countries where it flourished, beginning with a readiness to stand up after a venture’s failure.
There was a divergence of views if the shrinkage of new startups applying for acceleration in recent years was coupled with an increase in the average quality of the applying ventures. Views were also diverging on the funding environment, as some participants noted that private money at the end of 2019 has been exiting the Lebanese ecosystem, while others pointed out that investors with new unwillingness to expose themselves to the banking sector’s deposit schemes have inquired with VCs and accelerators about investing into entrepreneurship (traditionally not a prime conduit for most investors due to the high risks associated with startup investing).
Broad agreement among roundtable participants showed in their emphasizing the importance of overcoming Lebanon’s financial liquidity problems and preserving banking sector sustenance, given that the ability to transact with local and international counterparties is just as vital for entrepreneurial ventures as for all companies. At the same time, participants noted that tech startups and especially ventures in deep tech (focus on hard-to-copy innovations in technology and science, e.g. artificial intelligence) are more resilient due to their international migration opportunities when compared with non-tech or e-commerce entrepreneurship ventures that rely strongly on non-tradable expertise such as local market knowledge.
Experiences of the past few years cleared out some hopes of Lebanon-focuses in tech entrepreneurship, first of all expectations of fintech successes in the local market where negotiations between startups and a small group of banks as potential clients, partners, or acquirers had, in the past 18 months, come to naught. This in the opinion of one accelerator program has ruled out entire verticals as being viable for pursuit in Lebanon, most notably fintech, but also has shown that ventures targeting small local e-commerce and e-services niches have very poor chances of success in the Lebanese entrepreneurship ecosystem.
It was important for several of the stakeholders at the roundtable to highlight that systemic limitations translate into better chances for startups whose team profiles reflect considerable expertise in the targeted field, emphasizing that entrepreneurship is not a cure-all for career and employment obstacles encountered by university graduates. Entrepreneurship is also not the answer to business cycles, demographic mismatches, or the dearth of employment opportunities in labor markets in the Gulf that have previously attracted Lebanese graduates. Moreover, while age is not a barrier, young success stories are exceptions, and the value of being trained in entrepreneurialism in tertiary or secondary education lies mainly in students’ improved ability to satisfy international employer demand for entrepreneurial thinking, it was said.
Further limitations in the system seems to be based on blind spots on the side of its agents and proponents, and distrust and lack of information on the side of entrepreneurs. According to this view, many local entrepreneurs and hopefuls are invisible to the ecosystem and prefer to stay away from it because of their perceptions that the ecosystem is corrupted, the game rigged, and money not accessible to them.
Some at the table suggested that startups should avoid—at all costs—local banks and the 331 framework as hindrances on their development paths, adding that the ecosystem needs to tap into funding sources that offer invested startups the right conditions. Further reiterated were emphases on linkages to universities and boosts of research and development as well as industries and suitable exit platforms.
Economic vision
To save the entrepreneurship ecosystem from its operational dysfunctionalities that have been building under the financial reign of Circular 331, capital guaranteed funding needs to be redirected to only the companies that need it, said one strong recommendation. The entrepreneurship and knowledge economy ecosystem needs to be rooted in a shared and clear vision of the type of economy that Lebanon wants to have, the recommendation also noted. Entrepreneurship needs a purpose, and mindsets need to mature. Instead of pursuing a startup as the hoped-for ticket out of Lebanon, the mindset of the civil revolution should be expressed in “national entrepreneurship” commitments, while at the same time advocating for reforms of the regulatory and legal frameworks.
According to participants, options for moving forward exist also in further activation of the business angel networks created over recent years and link them to diaspora investors who want to engage with cogent entrepreneurship ideas in Lebanon. International advisory councils can also still be cultivated on the strengths of alumni networks at universities like AUB, on condition that the ecosystem is managed trustworthily.
It was noted at the table that immediate remedial action for the preservation of companies in portfolios began during the Q3 financial crunch. This action included efforts of accelerators and funds to consolidate operational costs and reduce burn rates of their hosted companies, improve coordination between startups and mentors, and create clustering benefits by bringing portfolio companies together that operate in the same industries.
Some at the table suggested that startups should avoid at all costs local banks and the 331 framework as hindrances on their development paths.
Internationally connected funds and accelerator programs according to managers at the Executive roundtable can further help startups that are faced with bottlenecks in their transactions by helping them to establish bank accounts and corporate partnerships outside of Lebanon, find “soft landing spots,” incorporate in startup-friendly jurisdictions (e.g. Delaware), and navigate legal requirements that, under conditions of global crises, can turn into economically deadly cash flow chokers.
In their concluding remarks, participants reiterated that the initiative of Circular 331 was the beginning of an experiment that can bring many benefits to the Lebanese economy, but that further development of this entrepreneurial process requires improvements of governance structures in this country. Discussants agreed that entrepreneurial spirit is a mindset of problem solving and pointed out that all entrepreneurial ventures launched in Lebanon since the early 2000s had found themselves confronted with one or other tough period soon after their launch. The need for an entrepreneurial spirit and belief in what one is doing was undisputed around the table, as was the need to reign in uncertainty
and have a functional government.
