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Attracting Capital to Fintech in Lebanon

by Nassif Shalhoub

According to the Pulse of Fintech H2’20, a bi-annual report on global fintech investment trends published by KPMG, overall global fintech funding across mergers and acquisitions (M&A), private equity (PE) and venture capital (VC) was $105 billion across 2,861 deals in 2020. The spending was reduced during the first half of the year but rebounded nicely in the second half, leading to the third largest investment period in Fintech ever.

In Lebanon, however, the story was different. What was once the MENA region’s third most advanced fintech startup ecosystem, hosting 14 percent of the region’s fintech startups, and the fourth most served market by fintech companies, with 27 percent of MENA fintech startups serving the Lebanese market back in 2015 and 2016 as per the Fintech Sector in Lebanon 2018 Factbook by the Investment Development Authority of Lebanon (IDAL), has lost several competitive advantages.

The banking failure and informal capital controls witnessed after October 17, 2019 threatened to put a sector that was heavily relying on payment innovations and banking solutions out of business. Security concerns after the August 4, 2020 Beirut Port explosion, as well as the need to live a normal life without worrying about how to secure basic needs, have also pushed a lot of talent to relocate.

Bridges towards financing

But the picture is not all black. The currency devaluation is an opportunity to invest in a more cost-efficient talent base. The burn rate can be slower in real USD terms for startups that are able to find export markets while keeping a considerable cost structure in Lebanon. If consultants are able to do it, then fintech companies should also be able to, provided that they secure bridge financing to help them alleviate the decrease in sales caused by COVID-19 travel restrictions and transition into new operating models.

Is this bridge financing easy to obtain? From my experience, investors do not shy away from risk, they shy away from non-matching risk/price formulas. Instant gratifications and unicorn dreams should be forgotten for the time being and serious Lebanese fintech players should be more rational and less greedy if they wish to attract capital.

Does less greed mean lower valuations? Adopting the simplest strategy indicates that, but if you position your venture properly from an M&A perspective and you structure the deal properly, then less greed means acknowledging the current situation and lowering the immediate consideration while building a higher future upside within a win-win framework.

The IFRS 13 standard defines fair value as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” The key principle is that fair value is based on the perspective of market participants rather than the entity itself, so fair value is not affected by an entity’s intentions towards the asset, liability or equity item that is being fairly valued. A target requesting funding should be able to distinguish between fair value and a specific price to be achieved during a transaction, and should be aiming for the highest pragmatic price.

The highest pragmatic price can be achieved through:

1-      Preparing well for your pitch and your audience. Not all investors are tech savvy and many find fintech propositions as an alien language;

2-      Choosing a good timing: valuations are time specific, hence you see different prices for listed companies on a daily basis;

3-      Building reasonable projections: no one likes to buy fish in the sea. Your potential is different from your history and different from what you can reasonably achieve while looking forward at each valuation date. You cannot attract investors by making them pay for the benefit they bring to you or the risk they take with you;

4-      Acknowledging and incorporating the risk in your pricing: closing a transaction is mostly about building trust and this cannot happen if investors perceive you as living in denial or unable to realistically assess your situation; and finally

5-      Building an efficient capital raising process: you cannot be in the market for too long and you cannot achieve the best price if you become the talk of the town! Any fund raising should be well structured with a clear process and timeline.

In conclusion, attracting capital to Lebanese fintech players has become difficult because of the macro situation, yet not impossible. Players with the right solutions can still attract funds if they plan and execute the process adequately.

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Nassif Shalhoub

Business advisory, partner at Credly Advisors
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