Real estate

Pushing for reform

by Matt Nash
written by Matt Nash

Despite the malaise affecting Lebanon’s economy, there’s still some life in the real estate sector. Developers are building, and people are buying new apartments – at least in some market segments. Stagnation is the sector’s buzzword, as it has been for the past few years, and market players are resting on demand related to population growth, hoping the boom years will return.

Executive sat down with Massaad Fares, president of the Real Estate Syndicate of Lebanon (REAL), and Namir Cortas, head of the Real Estate Developers Association of Lebanon (REDAL), to talk market conditions and challenges facing the sector. Both Fares and Cortas are also top managers at property development companies, and Fares also heads a brokerage firm. 

E   REAL has been running courses for real estate brokers with an aim to professionalize the sector for the past three years now. Can you tell us more?

Fares: We’ve developed a fundamental course about real estate brokerage. The next session will be in March. We are in the process of developing another course, a more advanced course, that will focus on assessing and determining the best use of land. This is to educate brokers, so if a client wants to build a school, the broker shows a plot appropriate for a school, not just any plot.

E   What do the existing courses

focus on?

Fares: The fundamentals of brokerage: zoning, how to read a title deed and how to understand the notes or encumbrances on a title deed. We brought experts to teach about how to do proper due diligence on a piece of land. We taught marketing and sales techniques because here, we know the unprofessional brokers can tell you anything. So we had sessions on the ethics of sales. You can’t just tell a client anything. This could be his or her life savings or a young couple who have borrowed money from their parents. We also taught them how to deal with developers. It was hard choosing what to teach because the courses are only for six weeks.

E   How many students have taken these courses to date?

Fares: [ A total of] 104.

E   Are you doing anything to institute a licensing process for real estate brokers?

Fares: We are working on two tracks. First, we’re working with the minister of economy to create a registrar at the ministry so anybody who wants to be a real estate agent must register. He’ll have to put a symbolic bank guarantee. And this only needs a ministerial decision, not a law. We’ve prepared it and sent it to the Shoura Council [to review its legality]. After the council, it will have to go to cabinet for final approval – and these days that can take some time. Registering at the ministry will mean that brokers have an identity card, and clients will be able to file complaints against brokers at the ministry. Also, in order to register at the ministry, a broker will need the visto bueno [or unofficial approval] of the syndicate. If we tried to require the official approval of the syndicate to register, we would need a law instead of a ministerial decision. On a second track, we have also drafted a law on real estate brokerage that we’ve presented to the Ministry of Economy. We still need to fine-tune it before it is sent to Parliament. We’re pursuing both tracks because the law will take a long time. The law will also make the syndicate an order, and then brokers will need the official approval of the order to register with the ministry.

And Minister [of Economy and Trade Alain] Hakim sees registration as a way to protect the consumer.

E   How does this protection work?

Fares: We promised the minister that, once the decision is approved, we’d do a campaign focused on: ‘Know[ing] your broker.’ And the minister said he will support us and make a public statement about the importance of using a licensed broker. Why should you buy a home from the concierge? So you don’t pay 2.5 percent? You are paying it, believe me. The broker can get you a better deal and better payment methods.

Cortas: And the concierge charges you too. At least get the service for the charge. 

E   What else is the syndicate doing now?

Fares: We have a recruitment program covering all of Lebanon, but we are waiting for the decision to be approved because if we go to any city outside of Beirut and want to have an open meeting, we want to be able to say they have to register. We need to have that to have a focus for the recruitment.

E   So your members are only from Beirut?

Fares: No, we have members from all over, but we have not done active recruitment. We had our members compile data from all over Lebanon and found there are around 600 real estate brokerage offices in the country. 

E   How many recruits are you aiming for?

Fares: Today, we have 153 individual members representing a bit more than 60 percent of the total sales in Lebanon. We have the most important brokerage companies as members already. All of the big deals are happening through these brokers. Our aim is to have 400 individual members from the 600 existing brokerage offices.

E   How about REDAL; what are you up to?

Cortas: This year we had two workshops on the 18 major taxes developers pay during the lifecycle of a project, which contribute around 30 percent to the cost of a development. Government officials don’t even look at these taxes comprehensively. They view each as an individual transaction so they don’t appreciate the damage it can do [to developers] and the importance of the sector to the economy. With these workshops, we’ve started a dialogue with officials from the Ministry of Finance. We’ve built very good relationships and are holding regular meetings and prioritizing a program. The problem is, most of the items on our wishlist require major legislation. We’re telling them 10 percent of a million is better than 20 [percent] of $100. And, we’re telling them that if the development sector suffers, 70 other occupations and trades suffer too.

E   What else are you working on?

Cortas: We still want to streamline administrative procedures related to actually building a development, but after consulting with different ministries and conferring among ourselves, we’ve reduced our ambition from a one-stop shop for everything to a pilot project for e-permits in Beirut. For this, we held a workshop at the Chamber of Commerce early this summer that was attended by the [governor] of Beirut. We highlighted how this would allow tracking [of permits], improve communication and effectively empower the applicant by letting him or her know exactly what stage the permit is at and exactly what paperwork is needed. We’ve told both the governor and the head of the municipality that developers would be willing to pay a premium to get fast-tracked through the permit process because it currently takes so long.

E   What’s the progress on this?

Cortas: We’re working with the World Bank and the International Finance Corporation (IFC) because they’ve helped implement programs like this in other countries. For the World Bank to help implement this in Lebanon, they will pay part and the government needs to pay part to show commitment. And the whole thing is not a lot of money; it’s around $1.2 million. And half of what the Lebanese government needs to pay is already committed by the Office of the Minister of State for Administrative Reform. But the governor has a problem. The money will come from the municipality, but he needs to sign.

E   Why is he dragging his feet?

Cortas: I don’t know. We need to follow up. We were lobbying on the one hand and the IFC was pursuing this independently. When we discovered that, we began working together. It will get done, but it takes time. For every small step of reform, there is so much rejection in this country. Taxes and bureaucracy are the two biggest challenges facing this sector.

E   Back to the taxes for a second; you said there needs to be a lot of new legislation. Have you drafted any of this legislation?

Cortas: We’re trying to make progress on important matters that do not need legislation or need less legislation. For example, we’re lobbying for a single body for valuation. This does not need a lot of legislation. Today there are too many committees that have the power to do valuation. We’re lobbying to have a role for our members in the valuation process to avoid over-simplification – for example, not every apartment in Solidere is as expensive as Platinum Tower, which has a direct sea view. And values can go down too.

E   Can you elaborate on the need for a single valuation body? How does valuing an apartment work today?

Fares: Let’s say, for example, you buy a unit in Sama Beirut. You buy on the 40th floor and the price is $10,000 per square meter. When you go to register it, you have to pay 6 percent on $10,000. Another customer bought an apartment on the first floor two years ago for $2,000/sqm. They will both register the property at the same time because registration happens not when a unit is bought, but when it is delivered. The real estate registry can tell the person who bought on the first floor that their apartment is worth $10,000/sqm because they saw what the other customer paid. They have the power to do this, imposing a price on someone coming to register. And they have the ability to call people back if they get registrations in the same area for a higher price. We need a price index (see overview page 120).

E   Aside from regularizing the valuation process, what else is REDAL working on to help improve life for developers?

Cortas: We hope to do something about the fact that we pay value added tax without being able to recover it. We’d also like to have first-time buyers exempt from registration taxes. But these last two things need legislation. We’d also like to increase the loan size available from the Public Corporation for Housing (PCH).

Fares: Today it’s $180,000. If we could double that, for example, this would cover a nice portion of the first-time buyers.

E   Last year at this time, the new rent law had just been passed. It has still not been implemented. What are your thoughts on the law?

Cortas: It’s a joke. The truth of the matter is there is no housing component to the economic policy of the government.

Fares: There must be a ministry for housing. Solving the old rent problem is easy. It would take maybe $2 billion to fix this problem and build the old [tenants] new housing. Let them keep paying their old rents in the new developments. Why not solve this completely? And our biggest problem as developers looking at Beirut is the scarcity of land. Solving the old rent problem would release so much property that would be available for redevelopment in areas that are so poor and so ruined. We could re-vamp these areas completely. Officials always want to solve economic problems with laws. If we had a ministry of housing, at least there would be new ideas.

Cortas: And there needs to be a planning component for real estate at the government level. Had the central bank not had the governor, with his understanding of the importance of housing and importance of subsidized loans, no middle-income person would be able to afford a house. This culture needs to come to the Ministry of Finance and the whole cabinet.

E   Given that prices are high today, especially in Beirut, who is buying?

Cortas: The need for housing is enormous. Especially at the lower and middle income level. There’s a mismatch. There isn’t enough property to meet the aspirations of young, educated people who are independent enough and wish to move out and get on the housing ladder. We have a duty as developers not only to create the right product but to create the right awareness. People do not know [enough about this]. We were in a meeting with journalists last year, and they were skeptical about whether they could afford to buy a new apartment. A colleague asked one of them, ‘What kind of car do you drive?’ He said, ‘A BMW.’ My colleague said, ‘If you can afford a BMW, you can afford a house.’

E   What do you mean by middle income, in terms of figures, and how do you plan to build for the middle-income buyer when there are no reliable statistics on what salaries people are earning?

Fares: We know [how to identify a target market by income] because we live here. We are used to knowing things, not in a scientific way, but in a gut feeling way. Today, [for an apartment costing] up to $250,000 or $300,000, there is such [high] demand that you cannot meet [it].

E   Can a couple earning a combined monthly salary of $3,000 afford this type of apartment?

Fares: Yes, between the central bank’s subsidies, some family savings and the PCH, they can. This segment of the market is about 25 to 30 thousand units per year, and this is from the normal growth of the population.

Cortas: The total shortage in this segment is around 80,000 units today.

Fares: And given the economic situation today, developers are hesitant to begin new projects but people are still getting married.

Cortas: And the buyer profile is changing [for example].

Fares: I have two single female customers who are buying apartments alone. They want to invest in a house; they don’t want to just rent.

Cortas: Because if you are a salaried person, how else are you going to save? How else are you going to build capital?

Fares: And it is difficult as a company to make money in this segment. I cannot compete with a mom and pop operation. A gentleman with his son who is an architect can park his car next to the development [site] and use it as an office. They don’t have to hire project managers and they can build to lower quality specifications because they don’t have a reputation to worry about. So for professional developers to compete with them, we have to go for large-scale developments – 80 or 100 units – to reach an economy of scale. So you’re buying 500 doors, for example.

E   You’ve spoken about the middle-income segment, but what about the high-income segment? Is there a significant amount of unsold stock?

Fares: I believe there are more than 1,000 units exceeding $2 million unsold on the market: about $3 billion [in total]. But this is not a big amount of money. The average of the sector is $6 or $7 billion per year – not this year – but in an average year. And no one is building these types of units anymore. There’s a window of opportunity here for investors.

Cortas: We were going to launch a campaign titled, ‘Now is the best time to invest in this beautiful country despite all its problems.’ We’ve decided to be sensitive to the ugly scenes and ugly garbage, demonstrations and delays.

E   Will this campaign focus on the local market or abroad?

Cortas: I think it will be [everywhere] once we stop harassing the world with our bad images.

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Entrepreneurship

The science behind the Top 20

by Executive Editors
written by Executive Editors

Innovators, it seems, are about as common as the cars which occupy Lebanese roads, but are far more conscious about the time required to reach their destination. Hot on the heels of our November 2015 entrepreneurship special report, Executive was keen to interview and scrutinise a number of both new and familiar faces in the ecosystem and compile our list of the top 20 entrepreneurs in Lebanon. With 2015 seeing more investment in terms of expertise, time and money, suddenly our cities have become awash with opportunities that favour the entrepreneurial brave – those who overcome the fear of failure and are motivated to join a fiery ecosystem. As Amelia Earhart, the first female aviator to fly solo across the Atlantic, put it: “there are two kinds of stones, as everyone knows, one of which rolls.”             

Dysfunctional government institutions have seen some new lows this year.  This failure to provide for even the most basic needs seems to have inspired entrepreneurs to kick-start ideas that are more human centered. In light of  this, Executive has decided to focus this year on companies that are either directly or indirectly trying to pull Lebanon back from the man-made abyss it seems to be staring into. Although financial revenues and economic performance are never far from mind, many of Lebanon’s most intriguing and innovative startups are still in idea or early stages. These often feature in one of the accelerators that have shot up over the last year. Consequently, yearly turnover and revenue were still in the theoretical and estimation stage for some, while others could disclose full figures and put financial pen to paper. Therefore, Executive – while valuing economic performance – was keen to offer a spotlight to the companies that were offering strong solutions to Lebanese problems, even if their financials were, at time of writing, virtual.

Aside from considering all types of companies, from idea-stage to the fully flourishing, Executive took note of the scalability and business models of the ventures under scrutiny. While innovation is exciting, an idea is unlikely to take form unless it can persuade investors – and consequently Executive – of its stringent commercial viability. Therefore, within this context, growth capabilities and business proposition were also never far from mind when compiling the list of Lebanon’s top 20 entrepreneurs, even though some ventures we examined seemed to answer all Lebanese problems. As Richard Feynman, the Nobel prize winning physicist, once said, “For a successful technology, reality must take precedence over public relations, for nature cannot be fooled.”

 With the above in mind, Executive took into consideration three main criteria when compiling the list of Lebanon’s top 20 entrepreneurs:

1)   Environmental Impact: Inspired by the growing trash piles that decorate our country, the environmental impact of a startup’s venture was awarded strong weight in our methodology. If the company addresses a particular issue which has significant environmental impact, beyond collecting garbage, we examined what and how the venture is tackling it, and whether the idea would gain traction in wider markets. Companies were scored on whether the products they’ve developed, or are developing, – technological or otherwise – could make a measurable difference to the surrounding environment. These differences were examined in light of what improvements startups could make with environmental challenges that have otherwise been neglected.

2)   Social entrepreneurship: Safe to say, 2015 wasn’t the world’s greatest display of humanitarian empathy. Therefore, within our methodology, strong weight was also given to startups and ventures which have developed, or are developing, products which would have a dramatic improvement on people’s lives and take into account strong social and cultural goals. Companies which outline solutions that tackle some of the most pressing social issues in Lebanon, validated by market research, were scored highly.  They were also scrutinized for the viability of their solution or product so as not to fall into a public relations honey trap. The performance and profit was examined in light of how positive a return these ventures would give to society.

3)   Job creation: Startups have been analyzed in terms of what positive benefit they could have for the Lebanese labor market. Companies which have the potential to create, whether directly or indirectly, employment for local talent scored highly in our methodology. This was prioritized in light of one of the key goals of the entire ecosystem, which is to retain high level talent and mitigate the brain drain which Lebanon has suffered from over the last few decades. Within the category also featured the ability to create a job skill set for a user of the product, which could then be implemented when seeking employment.

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Entrepreneurship

The top 20 Lebanese entrepreneurs

by Executive Editors
written by Executive Editors

Lebanon’s ecosystem continues to go from strength to strength. The country’s entrepreneurs are bold and resilient, and they are unafraid of trying. They are tackling many of the country’s mounting issues, despite large obstacles, potential opposition and the entangled state of our current government. When EXECUTIVE chose its list of the top 20 entrepreneurs for 2015, it focused on enviromental impact, social entrepreneurship and both current and future job creation. This year’s top 20 have different strengths across the three categories, but they all reflect the growing success of the ecosystem as a whole.

Fallound is a startup founded by Stefano Fallaha and Emad Yehya, a high school student and a computer science undergraduate at AUB respectively, who identified a gap in the social networking and messaging market. Habib Haddad, the chief executive officer of Wamda, serves as their advisor. Their product is a ‘hands-free voice-based’ app which uses 27 second voice notes to create and deliver a stream of online content that forms the base for a social network. Fallaha conducted extensive research into how podcasts, an episodic series of digital media files, could gain greater traction and success, and from this developed the idea of having a short voice clips platform, hot on the heels of the way many users in Lebanon and the wider region send voice notes through the mobile messaging giant WhatsApp, which still predominantly caters for text chat facilities.

The app works by allowing the user to create a profile and upload voice clips which can be adjusted with ‘audio filters’ such as backing music or voice alteration. These clips are tagged for their content, for example ‘science in Lebanon’, and contribute to a news stream of consecutive clips which can be searched for, selected and played by the listener, akin to a playlist on iTunes with skip and other features included. Yehya is the brain behind the construction of an algorithm which automates and selects which clips from which profiles are fed to the user, and in which order. Fallaha also notes that user popularity metrics will be built into the algorithm’s programming. The content is people generated, and can be controlled using voice commands. Their main marketing feature is that Fallound caters for individuals who are occupied by a task, like driving, and can only operate in a hands-free capacity. The ‘voice’ is a traditional method of communication, and Fallound wishes to re-modernise the usage which they believe has the power to outstrip texting on the basis of its simplicity and speed.

Fallound’s main source of revenue will be through radio advertising, an industry which is worth $34 billion per year worldwide according to PricewaterhouseCoopers’ global and media outlook for 2014-2018, as the app itself will be free to download. The project has thus far been self-funded, with estimates around  $15,000 to date. Fallound has scheduled to launch the Android version of their product at BDL Accelerate on December 10, and their iOS version in January 2016. For seed funding, Fallound will seek investment of $100,000 to $150,000 from angel investors. Their future projections are estimates, but they anticipate heavy usage of the app in the first year, as they have entered discussions with Touch, a mobile operator in Lebanon, for future collaboration projects. They have planned for their marketing campaign to include celebrity endorsement, which Fallaha has also approached, and preliminary testing from 200 beta testers of their most viable product has yielded very positive results according to Fallaha. Fallound’s target market is global, as everyone who uses app-based services is considered a part of it, and their current focus is to create a large user base. Their expansion ideas would also bring more developers onto the team, which would provide many needed job opportunities to encourage Lebanon’s programmers to stay in the country with employment.

Figurit

Industry: Media and information extraction

Product: Figurit dashboard

Product launch: 2016

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Brand Voice

Bank Of Beirut

by Executive Editors
written by Executive Editors

Banks are fully aware that small and medium-sized enterprises (SMEs) are the backbone of the economy and a key driver for
growth and job creation. Today, SMEs account can account for more than 90% of all enterprises in Lebanon and estimates
reveal that they employ more than 50% of the working population.
Bank of Beirut has a long history of serving SMEs, start-ups and entrepreneurs and plans to have a long future with this
sector. “Not only do we believe that SMEs are key to ensuring economic growth, innovation and job creation, but we also
believe that supporting this sector is vital to help Lebanon overcome its challenges, and help the Lebanese stay in their land
and hold onto their roots” says Georges Aouad, Head of the Retail and Branch Division at Bank of Beirut who confirms that
supporting this sector forms an integral part of the Bank’s social responsibility.
Lebanon has been facing many economic challenges in the last few years, due to the prevailing situation in the
neighbouring countries. Those challenges highlight the important role that SMEs can play in supporting the economic growth
and achieving sustainable development.
Against this backdrop, Bank of Beirut has further developed its SME segment to respond effectively to the needs of this
market. Today, the Bank is instrumental in SME lending and trade finance, where it is consistently ranked as the undisputed
leader among all Lebanese banks.
Facilitating financing, supporting innovation, and allocating services and tools to small businesses are vital elements for
establishing a productive environment for developing SMEs. “No doubt that the success of a business starts with a brilliant idea,
but it is finance that makes the idea take off and networks and expertise that help it soar, and this is exactly what we provide
our customers with”, asserts Aouad. Finance, training and networks are three parts of the winning formula Bank of Beirut
provides to SMEs.
FACILITATING ACCESS TO FINANCE
“Helping the local businesses develop is a major aim of Bank of Beirut”, says the Director, as “SMEs and startups benefit
from a wide array of tailored business packages we have developed for them, including lending options, overdraft facilities,
current accounts, debit and credit Business Cards, in addition to Kafalat subsidized loans”. After having launched Caritas Micro
Credit Loan, offering local craftsmen an up to LBP 10 million funding, and Al Raed loan offering funding ranging between LBP 10
million to 30 million, the Bank has recently added to its existing SME, offering the B-Business Package with funding up to $100,000
for start–ups, self-employed and small businesses. The package offers a bundle of three diversified financing options so that each
SME gets funding the way it is best suited to their business, whether through a term Loan, a current account with an overdraft
facility or a free Business Credit Card.
SKILLED HUMAN CAPITAL
Beyond access to finance, Bank of Beirut also pioneered other practical ways to support the growth of small enterprises.
One of these being a tailored training program developed in collaboration with AMIDEAST. Aiming at providing SMEs with
the tools they need to grow their business, these learning and development solutions are designed to educate the workforce,
increase their productivity, and allow them to acquire new skills that help them create the competitive edge they need on the
market.
Aiming to maintain contact with small entrepreneurs and encourage them to stay in their homeland, Bank of Beirut is also
conducting, monthly roadshows on SME financing in Lebanon’s rural areas. The objective of these discussions is aimed at
facilitating access to finance and stimulating business growth in remote areas, in addition to the urban ones.
IMPROVING ACCESS TO NEW MARKETS
Access to international markets for small businesses can offer a host of business opportunities, such as larger and new
niche markets, lowered costs, increased sales and improved networks.
With this in mind, Bank of Beirut launched Bank of Beirut E-Way, an e-payment portal for corporates and SMEs allowing

them to go global with their business and trade their products and services through the net.
According to Georges Aouad: “Bank of Beirut E-Way sets the necessary foundations for encouraging local businesses”.
Designed to enable Lebanese corporates to expand their businesses online and take advantage of the international sales
opportunities, E-Way allows small and medium business owners to create and maintain online presence and expand their
business frontiers to new markets, reducing their running costs.
The launch of the portal stems also from the Bank’s corporate social responsibility towards Lebanon and the national
economy. This step not only strengthens the partnership between Bank of Beirut and the local businesses and boosts
Lebanese start-ups and entrepreneurs, but it also encourages Lebanese emigrants to stay connected with the enterprises of
their homeland and therefore contribute to the national economy.
WELL-DESERVED SME AWARD
These efforts brought recognition for Bank of Beirut. Awarded earlier this year as the fastest growing bank in Lebanon by
the “Banker Middle East”, the Bank has also received the Banker Middle East’s Award for the “Best SME card in the Levant”
in recognition of its efficient, simple and easy to use cash management solution, the Bank of Beirut Business Credit and
Debit cards. This solution aims to help the local businesses develop and grow by offering them an efficient and convenient
payment solution to better manage their expenditures and allow their employees to make business-related purchases.
Through all these initiatives, Bank of Beirut seeks to be a one stop-shop for SMEs that are on the lookout for a supportive and
reliable bank to help them grow their business.

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Editorial

THE WILL TO PREVAIL

by Yasser Akkaoui
written by Yasser Akkaoui

In 2015, many of the reasons behind Lebanon’s built-in logjam came to the surface. The garbage crisis is the case in point that best illustrates how the whole system is rotten to the core. Beyond our government’s inability to preemptively devise solutions to imminent perils, we watched as priorities were often confused and demands articulated in an incoherent manner. Everyone wants a solution to the garbage problem but no one wants a sanitary landfill anywhere near them. Many believe in private enterprise but dislike the private sector. Our beautiful nation is tired of being unremittingly abused and turned into a vulgar yet frail land for politicians to continue taking advantage of. It’s of little surprise that citizens no longer wish to associate themselves with it.


Meanwhile, 60 kilometers away, the Syrian crisis keeps getting even more complicated as new players continue to join the ‘game’. Discovering water on Mars would be easier than finding Abou Bakr Al-Baghdadi. Western alliances use $1 million Tomahawk missiles paid for by the KSA to target $20,000 Toyota pickup trucks bought with Gulf money, and all the while oil tankers driven by ISIS militiamen pass through Mosul before being targeted by Russian fighter jets on their way to Turkey. We’ll spare you the rest.


Amid all this madness we are reminded again that our sovereignty is pegged to a geopolitical equation that has not yet reached equilibrium. En attendant un president, businesses still painfully survive with an outdated set of laws resonant of the 1960s. Our central bank preserves its independence to defend and keep up the pace, free to issue circulars compliant with new international regulations – an existing luxury that promising new industries, like oil and gas, do not possess.


It is out of this narrow margin of maneuver that Circular 331 was born. Regardless of all its deficiencies, it kick-started the entrepreneurship ecosystem, now flourishing with talent, innovation and creativity. Above all, it gave hope to entrepreneurs and investors alike to make and prosper. Knowledge, coupled with freedom, always prevails in Lebanon. Both are safe from all the brutality surrounding our nation. What keeps us thirsty for more is the eternal renaissance of culture and private enterprise that is always ahead of our inherited political stagnation.

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Hospitality & Tourism

Downtown blues

by Nabila Rahhal
written by Nabila Rahhal

Beirut Central District (BCD) is home to flagship stores of international high end retail brands such as Armani and Hermes; it is also where five star hotels such as The Four Seasons, Le Gray and Phoenicia are located, and where many restaurants and cafés, whether in Minet el-Hosn, Zaitunay Bay or Uruguay Street, can be found.

And yet, most of BCD has been a ghost town for the past five years, save for a few exceptional months. The inactivity has particularly affected the retail and hospitality sectors, the mainstay of the area, with few going to its restaurants, hotels and shops.

Hospitality sector figures

The footfall challenges experienced in BCD are not restricted to the hospitality sector alone, with the retail sector also suffering.

In fact, the entire hospitality sector in Lebanon has witnessed a drastic drop in consumers since 2010, according to Tony Ramy, president of the Syndicate of Owners of Restaurants, Cafes, Night Clubs and Patisseries in Lebanon.

The hospitality sector, a major pillar of the Lebanese economy, with sales reaching a total of $9.8 million in the year 2010, saw that figure drop to barely $4 million so far this year, according to Ramy.

Since 2006, there have been 212 closures of food and beverage (F&B) outlets in Beirut’s downtown area alone. According to Pierre Achkar, head of the Syndicate of Hotel Owners, the majority of Lebanon’s hotels are partially closed, operating at half-capacity only.

Troubling history

When it comes to BCD, the hospitality sector has had its ups and downs, Achkar explains. He goes as far back as a decade, recounting the various security incidents – from the July 2006 War to the 17.5 month long sit-in in Riad El Solh square in 2008 – to explain the factors responsible for the drastically decreased productivity in the sector.

[pullquote]“The problem is that typically, in lebanon, you have a bad year followed by a good year…but the situation has not improved for four years now.”[/pullquote]

The reasons behind the turmoil in the sector, according to both Ramy and Achkar, can be summarized succinctly: The significant drop in the number of tourists visiting Lebanon ever since the war in Syria started in 2012 led to the sector’s reliance solely on people already residing in Lebanon. Lebanese citizens and residents, in turn, have themselves suffered from low purchasing power causing them to limit their outings and expenses.

Hard to bounce back

In the past, Ramy argues that the F&B industry would always bounce back as soon as security risks receded. Recent years, however, have not offered the sector any respite: “The problem is that typically, in Lebanon, you have a bad year followed by a good year or so and in that way we could always manage to sustain ourselves. But the situation has not improved for four years now, and we are entering a phase in which we will no longer be able to sustain ourselves,” explains Ramy, speaking for the sector as a whole.

Events of summer 2015

The straw that broke the proverbial camel’s back, or in this case BCD’s hospitality sector, came in the summer of 2015, when garbage began accumulating on the streets of Beirut following the closure of the Naameh landfill on July 17. As Achkar puts it: “It is hard to attract tourists to the country when they have to wade through mounds of garbage while sightseeing.”

The crisis was followed by a string of popular protests in downtown Beirut, demanding a solution to the waste management crisis. This, coupled with the heavy security that accompanies political meetings held recurrently to discuss the crisis, which also took place in BCD, led to significantly decreased footfall to both hotels and F&B outlets in the area. “We had people cancelling their reservations because why would they want to stay in downtown when they can’t get to or leave their hotel with ease?” says Achkar, adding that Markazia Monroe Suites, the downtown hotel that he operates, took the decision to close by the end of the year if the situation does not change for the better.

Meanwhile, Ramy reports that seven out of the 19 venues on Uruguay Street, Downtown’s pedestrian pub area, have had to close down since July 2015, with several other venue owners saying they will follow suite if the situation in the area does not improve.

Ramy and Achkar claim they do not blame the situation on the protesters, insisting they support their cause. They are merely against the chaos caused and damage to private property.

While both say that only long-term political stability and security will restore Lebanon as a tourism destination, they are meanwhile asking for immediate and practical solutions. For instance, they would like to see Parliament Speaker Nabih Berri call for an economic round table made up of the key businesses in the hospitality sector to reach a solution to the sector’s economic woes before it’s too late.

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EntrepreneurshipEntrepreneurship in LebanonSpecial Report

The fast & the furious

by Executive Editors
written by Executive Editors

The acceleration business in Lebanon is moving faster than ever, and as the impact of Circular 331 is felt across the ecosystem, startups and scaleups are being presented with more opportunities to learn from both local and global experts. The acceleration process varies across the different programs; each accelerator has its own pattern in terms of mentorship, equity slices and investment, with some offering companies stints abroad beyond the Middle East. Executive contacted the representatives of four acceleration programs here in Lebanon to discuss their startups’ itineraries, financing, their views on challenges which they feel are the most pressing to the Lebanese entrepreneurial ecosystem and their vision for the future.

Page 1: UK Lebanon Tech Hub

Page 2: AltCity’s Bootcamp

Page 3: Speed@BDD

UK Lebanon Tech Hub

A new accelerator burst onto the scene in 2015, another product of Circular 331 and an international addition to the Lebanese entrepreneurship ecosystem. The UK Lebanon Tech Hub, hosted in the Beirut Digital District (BDD), is an accelerator for scaleups – companies that are beyond the idea creation stage which are looking to expand and gain exposure to markets, revenue and capital investment. CEO Colm Reilly, who has a career in business and economic development, heads the program and is supported by a team of international and Lebanese staff. The edge, they say, that the UK Lebanon Tech Hub has is its unique blend of intense mentorship and instruction in ‘phase 1’, combined with an overseas ‘phase 2’ which allows companies within the program the opportunity to travel and work in London, gaining vital access to markets which they otherwise would struggle to reach.

The program saw 45 companies enter into phase 1, which was reduced in phase 2 to 26 companies. Unlike many other accelerators, the UK Lebanon Tech Hub doesn’t take equity. “We are a 331 funded program for the first two years,” explains Elie Akhrass, program manager at the hub. “The major condition is not to generate revenues out of the program for the first two years. We’re servicing the ecosystem without generating any revenues; this is the reason we don’t take equity.” Although the board members have not decided upon the final figures, and therefore cannot release the volume of funds received from 331, Akhrass stresses they are 100 percent guaranteed by Banque du Liban (BDL), Lebanon’s central bank, for funding, and points to the value of the British-Lebanese partnership, whereby BDL provides the capital and the British provide the experience and the networks through PA Consulting Group, a British consultancy specialising in technology, innovation and management consultancy.

UK TECH4

Lama Zaher (L) and Elie Akhrass

The first four-month phase of the program focussed on a rigorous entrepreneurship education derived from Babson College, a private business school in Massachusetts, renowned for its entrepreneurship education in the United States. Lectures, guidance and mentorship have been conducted under the auspices of a Babson College curriculum, which they felt filled a gap in the knowledge market of accelerators in Lebanon. “We had only one cycle [of previous acceleration] with Seeqnce a few years ago, and it was a one time cycle,” explains Akhrass, “so we don’t really have good practices of acceleration in Beirut to benchmark ourselves to them and use them as a reference. So we brought the international model from Babson,” with adaptations to the local market incorporated during the acceleration program. Mentors are a mix of global and home-grown talent, such as Elias Ghanem, former MD of PayPal MENA now CEO and co-founder of Telr.com. For phase 2, fifteen companies are heading to London this month and eleven companies are staying behind in Beirut to receive similar training and guidance. For those heading to the UK, the emphasis will be on “selling”, explains Akhrass, and exposure to networks and individuals who can assist with the growth, expansion and development of the fifteen companies who are looking to increase their value. The notion of a successful exit for the companies in the program is also high on the agenda for the directors. “We hope that the fifteen in London and eleven in Beirut will get international funding from international funds,” explains Akhrass, “that’s why we’re building these networks with external markets to provide the funds. We hope that after five years at least one or two companies will have an outstanding international exit; that’s the aim of the program. Scale them in a way to make them ready for international funds to provide funds for these companies.”

However, both Akhrass and Lama Zaher, Communications Manager at the UK Lebanon Tech Hub, stress that the entire hub goes beyond a simple accelerator. UK Lebanon Tech Hub’s initiative is its research drive into the market, which includes studies on sectors that it feels Lebanon can excel in. Beyond round tables and contacting Lebanese diaspora members, they have created a comprehensive market study and have benchmarked the technology sector against neighbors. They hope to collate and analyze results gained through the diaspora by the end of the year. More than this, Zaher explains that the accelerator is actually just one of four parallel initiatives designed to aid and assist in developing Lebanon’s entrepreneurship sector; “Our main objective is to support the growth of the knowledge economy in Lebanon in order to increase GDP and economic growth in general, along with the creation of jobs.” To do this, alongside the accelerator program they have incorporated a Capacity Building & Signposting program, an Outreach program, and a Marketing and Communications plan to help showcase Lebanese talent and raise the country’s profile. Both Akhrass and Zaher emphasise that the programs plant the seeds for sustainability, with the Outreach program targeting the schools and universities to promote entrepreneurship and inform them about the synergies between sectors provided by technology. “The purpose of the hub is not to duplicate efforts, but to complement existing ones and fill the gaps in the ecosystem.” The Capacity Building & Signposting program also seeks to provide training and mentoring to individuals and companies inside and outside of the ecosystem; from startups, to small-medium enterprises (SMEs) to venture capital companies and banks wishing to diversify portfolios and invest in technology companies.

This complementary program is one of four that is key to the long-term plan of the UK Lebanon Tech Hub. Akhrass notes the importance of connectivity, and explains that by “building networks for the ecosystem, everyone can benefit from them. We are trying to establish this multiplicity of connections, not to limit ourselves to the UK brand or to San Francisco.” This is evident in the events that the hub helps to organise, which most recently included collaborating on a TechWadi Roadshow in Beirut, an organisation which works to connect Silicon Valley to the Arab world.

While the design has not been finalised yet, Zaher and Akhrass are hopeful about a second round of acceleration in 2016, but are mindful about the long-term sustainability of the entire project. “We are now contemplating a second acceleration cycle for Spring 2016. We are still at the drawing board. We will probably accelerate fewer companies but focus on certain sectors with the highest growth potential, we will see.”

While the UK Lebanon Tech Hub is working to increase the knowledge exchange across seas and industries, it acknowledges the need for a cohesive effort across all the country’s sectors to ensure the survival of a successful entrepreneurship ecosystem. The UK Lebanon Tech Hub acknowledged this in a release sent to Executive, which noted that “Lebanon needs to build its core knowledge and wealth production capabilities. Such an effort requires collaboration between willing public institutions such as BDL, academia, industry and the investors.” If their efforts to educate players both inside and outside the ecosystem prove successful, that cohesion should not be too difficult to obtain.

Pages: 1 2 3

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EntrepreneurshipEntrepreneurship in LebanonSpecial Report

What’s tech got to do with it?

by Executive Editors
written by Executive Editors

Mark Zuckerberg, CEO and creator of Facebook, has described ‘connectivity’, the status of being online, as a basic human right. The social media mogul outlined his plan in 2014 to get every human on the planet connected, extending the number of internet users from 1.15 billion, as of 2014, to encompassing the entire planet. Whether or not connectivity is a basic human right is one thing, but understanding the implications it has for a productive and viable technology sector is indisputable and can be extended beyond ‘just being online’. Whilst Lebanon’s internet can muster higher bandwidths than required for Facebook Zero, the text only version of the social media site responsible for unlocking the connectivity of much of Africa, entrepreneurs and the ground level technology ecosystem still suffer from poor infrastructure and low speed internet. Several familiar entrepreneurship faces also argue that the lack of high-end talent and gaps in the education system are problems en par with struggling download speeds, and certain initiatives are trying to train workforce-ready coders with intensive coding bootcamps. Connections, of every kind, are needed to ensure the entrepreneurial economy thrives, and only individuals who are technologically literate can facilitate this.

Latest initiatives

Last year Executive focussed on Science and Technology to compile our top 20 entrepreneurs in the ecosystem. One year later, a lot of the macro infrastructure which the companies operate with is unchanged. But the awareness of the wider concept of connectivity, especially through technology, is improving. In parallel with an entrepreneurial ecosystem benefitting from central bank support, other initiatives have come forward to improve the technological knowhow within Lebanon. Hackathons which focus on using technology to solve issues facing the country, have started emerging. At the end of September, International Alert and Chayn Labs, both London-based NGOs, collaborated to host a 48 hour hackathon in the offices of the UK Lebanon Tech Hub, with particular emphasis on using and manipulating technology to become an active citizen. The hackathon was organised as part of International Alert’s global #peacehack movement, incorporating their philosophy of ‘code for good’ in city hackathons across the same weekend. Alan Thomson, co-organiser and senior web developer from International Alert, commented on Beirut’s contribution to the global weekend event, noting that “normally, hackathons attendance shrinks through the weekend. In Beirut, more people turned up on the second day than the first. There seems to be a strong appetite to build tools to make a better Lebanon.” Companies within the Hackathon even addressed the issue of Lebanon’s data dearth, with one team creating an app which allowed citizens to report on law violations or gross infrastructure problems, and map them to an online database, thus enabling a user to produce infographics using this crowdsourced information.

Matchmaking between idea generators and those who have the technological knowhow is a initiative that can see the entrepreneurial sector improve. The notion of technological collaboration is something the UK Lebanon Tech Hub identified during its assessment and feedback analysis at the end of phase one. In a statement released to Executive, it said one of the key lessons learned from the first round of the accelerator was that “Lebanese entrepreneurs should embrace the culture of working collaboratively. The advantages outweigh the disadvantages, by far.”

Problems with recruitment at the top

This ability to ensure a successful ‘matchmaking’ process at all tiers across Lebanon’s technology sector is crucial to its positive development, but several leading entrepreneurial figures across the sector have identified a ‘gap’ in talent, which renders them unable to matchmake. Coders, programmers and web developers often have overlapping skillsets, and the titles can be used interchangeably in some companies, but they are not necessarily always equipped to do the other’s job. A coder may organise the backend development of a website, but a developer can also perform this job and the frontend design; the job description varies frequently and exact definitions can be fluid. At the high-end level, whilst a chief technology officer doesn’t need to be adept at backend computer code development, being technologically literate in the relevant field enables them to make efficient decisions when dealing with technological issues within an organisation. This gap in senior-level human capital is a source of ire when it comes to discussing hurdles in the technology sector; though junior coders can be found, it would appear that sourcing high-level talent is much harder. Hala Fadel, chair of Leap Ventures, has noted that gaps in the sector lie within recruiting high-end talent; “I have a software company and finding a Chief Technology Officer for that software company is just mission impossible” she explains, and expresses concerns that this stagnation in top-end recruitment is slowing down the growth in the country.  The employment gaps high up across the industry could be attributed to the brain drain that Lebanon has suffered from for many years. Fadel’s opinions on the availability of highly skilled and senior level employees, are echoed by Habib Haddad, CEO and founder of entrepreneurship platform Wamda. He believes that junior coders are not benefiting from the experience of senior figures; “a lot of companies would pay a lot of money to find really good developers and they just can’t find them. Its an issue of not enough challenge[s] and seniority around you. Developers like to work with people who are ‘rockstar’ developers – they have to have that feeling around them”. Joseph Khater, technical director of Slash Viral (an upcoming software development startup company) and winner of ArabNet’s 2014 Ideathon prize for his proposed app ‘Lifeline’, noted that there are “a lot of non-experienced developers and a shortage of experienced ones, [and] more talents [are] needed as technology is advancing quickly.” The importance of strong human capital at all levels is not lost on others within the ecosystem also, as Catherina Ballout, Operations Manager of MIT Enterprise Forum Pan Arab, stresses that “forming the right team, and having the right people is very essential because it affects tremendously the decision of funds and angel investors in investing in these startups. [Having] the right human capital, recruiting top people and having the right people on the advisory board is essential.”

The education debate

There are several coding-based initiatives which are helping to educate individuals either wishing to move into, or advance within, specific areas of the technology sector. Fadel outlines how Leap Ventures is currently working on a corporate social responsibility program to train coders, and place them in their companies, although this is an easy solution for non-management talent; “a developer I can spend six months training, but how do I train a chief technology officer?” she explains.  Education at a junior level though is critical, with local and international initiatives addressing potential gaps in the coding system ensuring that there is little confusion when sifting through another developer’s work; or in tech speak, mitigating the occurrence of ‘spaghetti code’. These efforts are warranted, claims Jane Youssef, a User Experience designer with Minefield Digital, an “information technology firm that specializes in the design and implementation of customized business automation” as quoted on their website. She argues that there is an artificial hurdle to technological learning in Lebanon despite the best efforts of individuals “there’s a gap in the education; it is limited in a field that has no real boundaries.” With statistics on remuneration packages, graduate employment and talent retention all but untraceable, it becomes hard to understand exactly why this gap should exist, but Youssef argues that there is a lack of variety in highly specialist degrees at master’s and PhD level in Lebanon, and experience should be prioritised along with theory at undergraduate level “I learned four programming languages at university and I don’t use any of them. I learned c# [another programming language] on my own for Unity, [a cross-platform game engine for developing video games]. Even though I took Unity in class it wasn’t close to being enough to start a career from; I needed [more] time to discover advanced material.”

JavaScript code syntax on a computer screen
JavaScript code syntax on a computer screen

Though Youssef’s experience may not be found in every undergraduate classroom across the country, for some this is clearly an issue. Like Leap Ventures, other entities have moved into the programming sector to facilitate the educational access to coding. Le Wagon, the French coding school for entrepreneurs which trains individuals in an intensive 9-week bootcamp program for 25 developers per cycle, at $4,500 per place, started running in Beirut on September 14. Malik El Khoury, Chief Wagon Officer, and Reem Younes, project manager at the initiative, discussed the lack of developers within the country and the problems with a heavily-theoretical education. “When people graduate they are not ready for the market at all, they have barely enough knowledge but it’s not enough” claims El Khoury, who purchased the licence to Le Wagon in response to finding few developers on the ground when trying to launch his own startup in 2013. He also argues that companies cannot afford to allocate their senior developers to train inexperienced graduates, which subsequently results in two scenarios; “a lot of companies in Lebanon outsource their developers from abroad, or [resort to] what is available – people who teach themselves. [The latter] are able to produce a website that looks nice for a customer, but when you see the backend of the code, it’s spaghetti. It’s impossible to understand and it’s impossible to scale.” This produces a woefully inefficient workflow, and Le Wagon seek to rectify poor coding habits by teaching best practices to those who wish to excel in the web development field. “It’s not difficult, it’s not easy, but [the bootcamp] needs a lot of commitment. What we give in one day of the course in bootcamp is the equivalent of what they see in three or four months in a course in university” adds El Khoury, who further notes that motivation is absolutely key for successful developers. “Anyone can learn to code, but not everyone can become a coder” he stresses, “to become a coder requires patience, commitment and research. We give them the basics, and we give them the mindset.” The developers end with a demonstration day for their products, and the registration for the second cycle is open on their website. Both El Khoury and Younes acknowledge the importance that advanced coding skills have on the wider sector; “Entrepreneurship is booming in Lebanon. For a team to be accepted on some accelerator programs, they need a tech founder. For an entrepreneur that tries to launch a startup and tries to [outsource] a person to do their development, it’s impossible.”

However, Wassim El Hajj, Associate Professor and Chair of the computer science department in AUB disagrees with the sentiment that graduate students are ill-equipped for the workplace in Lebanon, especially when presented with the argument that courses are too theoretical without incorporating enough on-the-ground experience. “Many people forget that Computer Science is a science and ultimately has a core knowledge that must be delivered to students,” argues El Hajj, in a statement to Executive, and states that this knowledge is “more theoretical than practical and this makes sense since students will be able to build on this core knowledge throughout their careers” and that the major offered at AUB includes options within an elective to gain experience in an industrial placement. Though an employer may prioritize practical skills over critical-thinking skills, El Hajj believes that this is the wrong way to approach educational development; “what [the] local industry needs to understand it that they should recruit smart students who are problem solvers, not students who are knowledgeable in a certain [programming] language or technology and ready to produce from day one. The first type of recruits is the one that lasts longer and is more rewarding in the long run. This type is hired by top companies such as Google and Facebook.” El Hajj does however acknowledge gaps within certain areas of the educational system and argues that the responsibility to rectify such a problem lies with both the academic and industrial sectors, especially when discussing the problems recruiting high-end talent, which he explains with poor remuneration opportunities. “Senior developers are not appreciated enough in Lebanon,” reasons El Hajj, “the good ones hop from one company to the other gaining some extra money in every hop. Give them good salaries and I guarantee their loyalty.”

Teaching at a seed stage

Arguably, it is easier to stamp out poor coding habits (if and where found) at a younger age. Teens Who Code, is the brainchild of co-founder and president Nour Atrissi, who has launched classes and courses which specifically target young individuals. The initiative, which has been operating for almost a year, offers courses and private sessions in a variety of languages for both mobile and web development. “I saw that in the UK it has become mandatory for children to learn how to code at school until the age of 16; there are lots of international movements for teaching kids [to code]. We decided that this was the best thing to do in order to have the biggest impact [in Lebanon], if we teach [coding] to kids it might change their lives.” Her next step, along with co-founder and chief coder Ziad Alameh, is to approach and target schools to advertise their courses and eyes expansion across the entire Arab world as an ultimate goal. “Right now we’re focussing on bootcamps [as a structure] as it is what is most suitable for the market and they work,” says Atrissi, who has case samples of teenage students being given opportunities of internships and jobs straight out of her program. For their bootcamp in October, they charged $75 per child for two full days, and an iOS course, which is two hours a week (with a flexible time schedule) for two months, which Atrissi states costs $250. The UK Lebanon Tech Hub has also spied a new opportunity for more education in the school system. As part of their Outreach program, which runs parallel to their scaleup accelerator, they have launched a Raspberry Pi Competition in October to run in all private and public schools in Lebanon. The Raspberry Pi is a low-cost credit card sized computer which was developed by the Raspberry Pi Foundation in the UK, the first model of which was released in 2012. The foundation wished to advance global connectivity and facilitate the access to technology at an affordable price for the wider world. The computer enables users to program in the Scratch and Python languages, and perform other basic computer functions. The winners of the UK Lebanon Tech Hub competition will be taken to London to meet the winners of the UK competition, and benefit from a study tour in the country. 

A studio close-up shot of a Raspberry Pi circuit board.
A studio close-up shot of a Raspberry Pi circuit board.

Infrastructure woes

Whilst the technological sector has witnessed positive initiatives in 2015, there are still mountains to climb, and tackling coding-related issues is but one part of that mountain range. Many of the initiatives interviewed argue there is a gap in the education, but the debate exists over why this is the case, and where the responsibility lies. This is not necessarily reflective of the entire debate across all institutions either, as the selling of bootcamp products relies on a lack of, and therefore demand, experienced coders, whereas present programmers will insist that job prospects within this country pale in comparison to abroad. However, for a flourishing ecosystem that operates under the tech umbrella, strong technological skills are essential, and data and statistics are also needed to back any policy recommendations made to improve the sector. At an infrastructure level, Executive has discussed the internet at length, but seven months after our extensive analysis of why the internet is so slow, nothing has been done to improve it. We are still missing our brand new fiber optic network, which still is not being fully utilized despite continual promises. As discussed in the overview (see page 26) whilst poor infrastructure can be circumnavigated by businesses equipped with enough capital, it has an impact on the psyche of the average citizen who has to exist within a societal structure which has crumbling foundations.

As El Khoury and others suggest, a strong technological sector is vital to support a booming entrepreneurial ecosystem. But without the infrastructure to support such technological development, the entrepreneurial ecosystem will stagnate and will never evolve beyond ‘playing house’ in comparison to other countries. Lebanon’s internet has poor connection speeds, and several things must be done for the tech sector to thrive without man-made constraints. Even registering a domain name, for example www.showmefastinternet.com.lb, is a headache. Trademarks, which detail who or what owns the rights to a particular name, must be proved with a trademark certificate issued by the Lebanese Ministry of Economy and Trade. The required paperwork therefore to register a domain name makes it a hassle that those who register simple .com domains don’t suffer. Tech savvy individuals are also wary of purchasing anything through third party websites which offer speedy access to a .com.lb sitename – if another individual owns the trademark, they own the rights to the website, and the rights can be nullified if the Lebanese Supreme Court of Commerce rules the domain name is allocated to another party. If initiatives are coming together to address the gaps in education in the technology sector, this should be complemented with intensive lobbying of the government to improve the infrastructure, lest the money poured into coding initiatives should fail. Connectivity, be it through fast internet, competent and accessible infrastructure, or levels of education which sees Lebanon compete on a global technological stage, may not be a ‘human right’ which sits parallel to that of clean water. But you can be sure that it is definitely an entrepreneurial right, and one which needs addressing on every front.

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EntrepreneurshipEntrepreneurship in LebanonSpecial Report

Putting the system into the startup economy

by Thomas Schellen
written by Thomas Schellen

The startup has to be the oldest form of business by virtue of the inane but compelling realization that one can’t have a business without starting one. And in the knowledge that every beginning is in some ways chaotic, Executive has observed and documented in the past three years how creative disorder and an environment of adversity have been conducive to the formation of a startup economy in Lebanon.

Within a few years, the country morphed from a regional startup backyard to a showroom of tech entrepreneurship, with numbers to boast about. From accounting for less than 10 percent of venture capital deals in the Middle East and North Africa between 2006 and 2011, Lebanon leapt to a 27 percent share of Venture Capital (VC) transactions in 2014 according to reports by the MENA Private Equity Association. People who experienced this evolution from the inside as managers of incubators, accelerators and venture capital funds agree that the explosive growth of the startup economy defied every prediction.

But whereas the conception of the startup economy may have been impossible to plan, it was not just a matter of coincidence. The creation of the Beirut Digital District (BDD) as a real estate base for the community and the financial institution of Circular 331 were two fortuitous events in the process that Executive has witnessed unfolding since the start of 2013. Now has come the time to look further into the future and ask when and how to put a real system into the startup economy.    

A real system in the sense of entrepreneurship is paradoxical in that it must not be one that boxes innovative companies into narrow, prefabricated frames, but rather has to enable entrepreneurs to employ the best and strongest business frameworks and put them to new uses. In this sense, it can be predicted today that the financing, mentoring, skill building and market access conditions of Lebanon will have to transform and advance in a further leap within two to three or at most about five years. Otherwise the factors that facilitated Lebanon’s emergence as a startup hub in the past three to four years will run a high risk of turning into barriers for further growth.

Taking finance further, but how?

One key area where needs will grow is finance. Paving new financing avenues for later-stage funding is a necessity even under the assumption that commercial banks will continue to deliver a sufficient money flow via venture funds and private equity firms or, ideally, through their yet-to-be-developed own capabilities and appetites, to feed the seed and early-stage needs after the seven-year time frame of Circular 331.

The intuitive answer to the funding gap would be democratization of investment structures, meaning the crowd. By the indications of its exponential growth in the past half decade, crowdfunding appeals naturally to denizens of the digital sphere on both social and economic terms. From covering medical needs and family emergencies, to financing movie projects and selling innovative tech gadgets all the way to peer-to-peer lending, crowdfunding has established itself as a tool whose future role in our global society can only be guessed.

But at least for the near future, crowd equity funding – the crowd funding variety that could channel investments into entrepreneurial companies during various critical stages of growth – does not appear quite as powerful. A Dubai-based crowd equity funding platform, Eureeca, approached the regional market over two years ago and set up a small branch office in BDD, but the evidence of its acceptance is slight.

According to a story in Bloomberg Business Week from last June, the platform accounted for a fundraising tally of $2.5 million since start of operations; the Eureeca website, which does not show incomplete deals where funding goals were not reached, last month showed 13 completed projects with achieved funding amounts ranging between $86,500 and $243,000, for a total of around $1.8 million over two years of operations. All these projects were located in either the United Arab Emirates or Jordan and a quick query of Operations Executive Wafic Sultani at the Beirut office yields no news of local equity raising projects being added to Eureeca’s pipeline.

Crowd equity funding also has inherent conceptual shortcomings, maintains Habib Haddad, founder and CEO of entrepreneurship platform Wamda. “I am not a believer in crowd equity funding in the region or globally. Crowdsourcing is a better avenue in the way that your product has customers but when it comes to crowd equity funding, what you want from your investor is support, connections, brains, value etc., and it is very hard to crowd source that,” explains Haddad who is also a member of the World Economic Forum’s Global Agenda Council on entrepreneurship.

Nothing, however, could imply that crowd equity funding is a dead-end idea. In the US, the startup arena that still drives developments globally, the concept appears to be maturing, albeit ever so slowly. The Securities and Exchange Commission (SEC) released partial crowdfunding rules for investors in March of this year as directed by the 2012 Jumpstart Our Business Startups (JOBS) Act legislation in support of small business creation in the United States.

Given the SEC’s outsized weight in the international regulatory landscape for securities trading and equity markets, the agency’s regulatory action is expected to fuel a boom of activity on crowd equity funding platforms around the world despite the fact that an important part of the SEC rules on the JOBS Act – namely the part allowing funding portals to act as gateways for crowd equity funding – has not been published by the time of this writing and could not go into effect before 2016 even if it were announced by end of October 2015.

While politics and control issues between the federal and state authorities are in play in American debates over crowd equity funding, it would be an error to see the relative slowness in the formulation of regulations as empty obstructionism. It is more likely to help in mitigating the risks of rapid expansion in the equity corner of investment democratization. As Haddad says, “the US hesitated to regulate crowd equity funding for a reason, namely to protect the investors. Investors have to invest into 20 startups to make money from one, so it is risky.”

A new exchange formula

The other big avenue for price discovery and mobilization of equity for startups and entrepreneurial companies could be the electronic stock market for small and medium enterprises (SMEs) that has been announced repeatedly by Riad Salameh, governor of Banque du Liban (BDL), Lebanon’s central bank, during entrepreneurship conferences and meetings.

The electronic exchange’s primary aim would be to provide liquidity to SMEs, Salameh has been quoted as saying time and again in the past twelve months. As a secondary market that serves the needs of entrepreneurial companies and their investors, the electronic exchange could be a valid proposition to help fill the funding gap for the startup ecosystem, agrees Samer Karam, CEO of Startup Megaphone and a very active stakeholder in it. “I think the way in which [BDL] implemented Circular 331 [qualifies] the implementation of this program as a unique structure worldwide. If [BDL] can be as creative and innovative with their secondary market, it might have a chance to bridge the growth stage financing gap that will become apparent in two to three years,” he says.

However, powering up the electronic exchange does in no way look as if it will be easy. One organizational requirement in the original plan for such an exchange is the privatization of the Beirut Stock Exchange as purported owner of the new market. That alone looks so improbable a project for the near or even mid term that it is not worth asking about it. There are also presently no indications available about the listing requirements and operating rules of the electronic exchange as the Capital Markets Authority has not divulged its thinking on those matters. Further obscurity relates to the market’s preparedness and readiness of crucial stakeholders. Will venture capital and private equity players be ready to use the new market place? Will entrepreneurial companies come with prepared minds?

When Executive contacted VC firms and inquired about their views on the electronic exchange project during the past three months, many responses were generally favorable but unspecific. It became clear that funds managers and Private Equity (PE) experts had had neither reason nor opportunity to contemplate exit strategies that might involve a public offering on Lebanese turf. Investment banks likewise would not have entertained the idea of taking companies to the proposed electronic exchange. He had not done so, “not even as a mental exercise, because the companies are not ready,” says Khaled Zeidan, the executive general manager of Medsecurities, the investment banking unit of Bank Med.

Zeidan points to an important further missing link in the creation of a secondary market for entrepreneurial companies. “A small cap exchange will not work unless there is liquidity and liquidity will not happen unless there are rules for market making, transparent laws and proper governance in that respect. These have to go hand in hand and I don’t know if the conditions are right for that today,” he explains.   

For Startup Megaphone’s Karam, there is also not much in terms of precedents in the attractiveness that a small cap exchange could provide to startups and young tech companies. A market such as the London Stock Exchange’s Alternative Investment Market (AIM) was by his experience not on the radar of the startup community. “I know a lot of startups in London but I don’t know a single one that is involved in AIM. I also don’t know a single [startup] ecosystem that uses small cap exchanges – what countries like Singapore are doing is seeking to attract large growth-stage VCs to their countries. I have been sitting with the head of the Singaporean company in charge of the ecosystem there and I can tell you that nobody is looking at secondary markets for their ecosystems. I don’t hear about it,” he shares.

The absence of clear plans for the Lebanese electronic exchange makes it practically impossible to assess the viability of the concept and a lot of water has run down the Hudson since the days when the NASDAQ was launched as a small cap exchange as noted by Zeidan. However, while stock markets traditionally have sought to appeal to companies after they have advanced beyond the entrepreneurial stages of business, there have a number of exchanges targeting younger and tech driven companies since the first boom of the digital economy in the late 1990s.

New Policies and a pot of luck

Some of these new markets failed completely and others never achieved the momentum of a NASDAQ but the recent past has seen new investments in exchanges that aim their services at young tech companies. One such step was undertaken only last month by NASDAQ itself, which invested into the proposition of pumping equity into private companies by buying SecondMarket, a platform that was developed with a focus on private tender offers.

The Financial Times called the move, whose value was not disclosed, an “aggressive attempt to build up a little-developed area of market infrastructure” (Oct 22). The context is that tech companies in the US have become slower in jumping into initial public offerings; the new infrastructure will allow NASDAQ to facilitate private tender offers in which employees or VC shareholders in fast growing companies can sell their shares independently from an eventual initial public offering.

Crowdfunder, a stakeholder in the American digital economy, commented gleefully that the investment points to a rising competition among US exchanges for attracting SMEs, saying that the revised NASDAQ Private Market is fishing in the same waters as the, also fairly recent, OTCQB venture marketplace of exchange operator OTC Markets.    

The concept of venture marketplaces, which is a term to describe exchanges targeting entrepreneurial and young companies, has also recently gained political currency in the US. Last summer, a legislative initiative was circulated in the House of Representatives’ Financial Services Committee calling “to allow for the creation of venture exchanges to promote liquidity of venture securities, and for other purposes.” Venture securities, under the proposal, are securities issued by early-stage, growth companies – meaning companies with less than $2 billion in consolidated assets which also meet the requirement of having not made any initial public offering.   

“The new proposed venture exchange laws are aimed at increasing access to liquidity for early stage investors in private startups and small businesses,” said Chance Barnett, CEO of Crowdfunder, in an opinion contribution to Forbes.

Yet a different example for the new potency of venture exchanges comes from Canada where the Canadian Securities Exchange (CSE) touts its horn as “the exchange for entrepreneurs” and claims to be the fastest growing exchange in the country. In 2014, their portfolio rose 34 percent to 244 companies and reached 291 traded stocks by end July 2015. The peculiar thing about the CSE is that its growth momentum of offering a combination of low cost and high standard services to companies listing their securities on the exchange is additionally boosted by unconventional business focuses from a good number of companies which have recently floated their shares on the CSE.

Of four new listings last month, two were miners, one a tech, and one a life sciences company. Tech and mining are the top sectors but it is in life sciences where the buzz can be sought. The new company in this sector is called Golden Leaf Holding, and their business is cannabis, looking at both the medical and recreational potentials. Over 10 percent of the CSE-listed equities are in the life sciences bracket and the majority of these firms have business plans that are related to making legal hash money.

Moreover, the CSE’s top companies in terms of trade volumes and traded values this year have affinity with the flowering herb. A notable political boost for the CSE thus came from the Liberal Party’s election win last month, as the party aims (for the third time) to legalize pot and officially trumpets that it “will design a new system of strict marijuana sales and distribution, with appropriate federal and provincial excise taxes applied.”

The unknown spice

The potential for secondary markets that tie in with entrepreneurs and tech startup ecosystems certainly looks to be related to local specificities in the underlying economies and project for a market activation in Lebanon certainly would have to overcome many obstacles, from the comatose state of stock trading and the underdeveloped capital markets structure to the lack of an experienced and dynamic market operator. But the risk of doing something that no one has done successfully before has a double appeal of an entrepreneurial adventure – that spirit that the Lebanese startup miracle is fundamentally based on – and of the chance of first-mover advantage. From the global experience with junior exchanges, having a private venture market that is not a subsidiary of a main market might in this context actually be a plus for the project. 

Numerous governance bridges will have to be crossed for an electronic market for startups, entrepreneurial companies and innovative SMEs to be viable. Firstly of course, operating standards and policies of highest caliber will have to govern the exchange itself. But another debate that is hardly even in its beginning stage is needed: how much governance is needed in making a startup ecosystem future proof? This is a matter where the majority of the ecosystem’s current stakeholders have little to no experience or perspective.

Governance is no fun, asserts Medsecurities’ Zeidan, but dismissing it for aspiring entrepreneurs would be counterproductive. “You need to add governance but not to the point that people flee your business,” he says. “Governance should obviously be in place from the beginning but at the same time you cannot kill the entrepreneurial spirit of a small entity and have them waste all of their time on reporting and not developing anything. There is an ongoing struggle but governance should clearly be part of the DNA of a company as early as possible.” This discussion is just beginning.

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Pearls of economic wisdom

by Thomas Schellen
written by Thomas Schellen

In good times and in bad ones, leading wealth management institutions and Lebanese families and individuals are connected via a bond of mutual interests in profits and wealth preservation. Among the torchbearers of this bond are the top-rated economists of Swiss banks who come to visit Lebanon with clockwork regularity. Usually, they bear at least some glad tidings. But instead of incense and myrrh, they carry presents of economic insight and advice. So it was also this year.

Executive shared the benefit of enjoying, from three floors above a Downtown street still strewn with debris from the previous night’s protest, elaborations on the state of the global economy by Paul Donovan, UBS’s Managing Director, Global Economics. 

Among the topics he discusses is China, which Donovan sees as still a good distance away from being integrated into the East Asian economy and whose slowing performance he believes is less of a factor than it would be in circumstances of greater integration. He also talks about the Federal Reserve, whose indecisions since the summer have been providing endless fodder for debate among analysts and investors. While his big-picture view of the global economy is that “it is not doing too badly,” with the eurozone improving after two terrible years and the United States continuing to be alright, Donovan concedes that there are enough potentials for trouble, including Brazil and Turkey, where he sees “significantly increased risks” not only because of the political situation but also with regards to the economy. “The central bank has run a complicated policy and Turkey remains relatively dependent on international capital flows to support its economy. That is not an ideal combination,” the UBS economist says.

But as the conversation progresses, more complex issues are being discussed and the real answers to today’s economic challenges seem to grow more elusive. These include questions such as whether it is possible to reach a needed, broad democratization of the Chinese economy by achieving gains in the standards of living that exceed the overall growth rate of the economy; or the question of how to stem an increase in counterproductive, prejudice-driven discrimination against refugees and migrants who have been arriving to Western Europe and are needed to vitalize the continent’s aging countries. While such migration should be positive from an economic perspective, Donovan confesses his skepticism that defeating the growing scapegoat economics and irrational prejudices is possible. This is all the more unfortunate because irrational discrimination is indeed a detriment to economic performance, he says. “In my view, and this should probably be the next book that I should be writing, one of the biggest threats to an economy today is prejudice in the treatment of people and the treatment of a labor force, because we are in an environment where what economists call human capital is the greatest asset that a country has.”

In conversation with Paul Donovan

E   Mr. Donovan, if you would, consider the following scenario: Three top European economists meet in a bar on Uruguay Street, right around the corner from where we are sitting. One is the chief economist of a large private bank, the second is the chief economist of a central bank, and the third is the chief economist of a large manufacturing conglomerate. They start talking and each share their worst experience in 2015 to date. What will each say?

For the bank economist it would be that the Fed is not behaving itself, in two ways. One, by delaying rate hikes which is troubling but not serious. Two, by signaling that markets had impacts on rates. I don’t think that this is actually true but the impression is damaging, because the last thing we want is markets dictating things to economists.

I think the biggest problem for the central bank [economist] is the unreliability of economic data. The data is to be revised and there is so much structural change that the data is very limited in telling us what is actually happening. That creates a situation where one can take a positive or a negative view on one and the same number, depending on your mood.

If the manufacturer is an exporter, I would say the [third economist’s] biggest headache is currency volatility. Currencies have been relatively volatile, in a relatively unpredictable manner. This obviously creates unpredictability around profit margins and around resource allocation.

E   Looking into 2016, would there be a shared biggest nightmare for our three economists or would there be different scenarios for each?

I think there is a related theme, which is that volatile data lead to volatile markets and volatile policy. We have uncertainty about how genuine the data is and how things are performing in real time. For the policy maker, this creates the risk of policy error, for the company the risk of a volatile operating environment and for the investment bank uncertainty in the sense of Keynes’ famous saying, ‘the market can [remain irrational] for longer than you can remain solvent.’

E   Do you have a specific message that you bring on your visit this time, not necessarily just to investment clients of UBS but to the market here in Lebanon?

My role is of course to try and explain where we think the world economy is going. Broadly speaking, I think the world economy is not doing too badly; growth in the United States and Europe will in my opinion continue to perform relatively well. The Chinese economy has slowed a little but China doesn’t matter as much as China thinks it does. I think we are in an environment of moderate economic activity. I hope that this is going to lead to a period of stability in issues like commodity prices, and when we look at the Gulf region that is very important. This will also be important for Lebanon via remittances from workers in the Gulf.

[pullquote]“If there is a very simple message to communicate it is that the world is changing – challenge everything you think you know.”[/pullquote]

I think the main story that is worth reminding clients and others of is that the global economy has undergone a great deal of change in the last 15 years, and this is not just since the crisis. Before the crisis, significant change had taken place and this makes understanding economic relationships more difficult. The challenges of understanding the economy and the challenges of investing in the economy have increased because of the structural changes. In particular, trade is today very different to what it was 20 years ago. We have difference in labor markets, people work for longer, female participation rates have risen, labor markets are not the labor markets of 20 years ago. If there is a very simple message to communicate it is that the world is changing – challenge everything you think you know.

E   What is your view on the Middle East economy – is it the most volatile of them all?

It is perhaps the most focused of them all. It comes down to oil in the GCC and if you don’t have oil, it still comes down to oil. Dubai depends in large part on oil revenues flowing through its financial center or on tourism revenue from regional visitors who have oil-related incomes. Lebanon is perhaps a little different but the remittances from oil revenues to Lebanon are very important. This is a tricky situation where you have to focus on a single commodity whose price is as volatile as the price of oil is. Economic diversification of the region has still remained limited. Dubai is the exception but even the domestic industry of Dubai is still very dependent on oil money flowing through. 

E   Do you have an outlook for the Lebanese economy in 2016?

We don’t have a formal forecast for Lebanon but it is clear that the challenges in the region are fairly significant. The influx of refugees, the weaker tourism numbers – the lower oil price is a help but the lower remittances to Lebanon effectively cancel that out.

E   If we talk about capital flows, is quality or quantity more important?

Quality or quantity is more important, depending on the circumstances. We have a general problem: global capital flow has shrunk and now is roughly a third of what it was at its peak in relation to GDP. Depending on how you measure it, global capital flow in 2007 was between 15 and 20 percent of GDP; today it is about six percent of global GDP. For a country like Lebanon, [inflows of] capital for infrastructure development and regeneration are very important. Today everybody — in emerging markets and in developed economies — wants to [see investments into] infrastructure and regeneration, but there is now less capital, so we have suggested that we are witnessing the start of a war for capital.

E   Is there anything from your vantage point that Lebanon could do to increase the efficacy of capital flow and also be more attractive to foreign capital?

Again, Lebanon has a problem of circumstances. The situation in Syria is always going to present a challenge and I am not for a moment suggesting that Lebanon is in a position to do anything about this. I think that investors tend to appreciate relatively stable political environments – political stability gives them confidence if they invest something with a 20-year view and continuity of law is helpful. The current discussions over the political structures here are perhaps a challenge to attracting capital.

[pullquote]“[The lebanese economy] is an economy [UBS] work[S] with very closely.”[/pullquote]

E   Perhaps?

Perhaps. Ideally of course, governments do not just exist to attract foreign capital but for many reasons. This is a hurdle to overcome. Clearly this is not stopping capital from coming in, not stopping regeneration here in Beirut. The question is if it could do better and I think at the moment the answer is, yes, it could do better.

E   How about our imperfect Lebanese capital markets structure? A detriment from your perspective?

To the long term, yes, I think there are issues. In the near term where we are talking about attracting [Foreign Direct Investment], you look for an investor who wants to come in and commit to Lebanon for a 15 or 20 year program. The capital market in Lebanon is not necessarily important if they are investors from the GCC or Europe; they have their own sources of capital. In the longer term, if Lebanon is seeking more indigenous or domestic capital and seeking to smoothen the way of taking domestic savings and investing them in an efficient way, capital markets are better than most of the alternatives. An efficient domestic capital markets structure is constructive and a positive development – it is not perhaps an urgent requirement. In the near term, I think Lebanon could improve its economic output without a highly efficient capital market structures. However, I am a free market economist working for a bank, so over time I am of course going to favor capital market structures.

E   If we were drawn into a war over capital, would UBS be inclined to come to the aid of Lebanon?

UBS is of course very committed to Lebanon. We have an office here and I am here twice a year. It is an economy we work with very closely. It is a situation where certainly a bank like UBS is very happy to offer the advice and expertise that they can to Lebanon as a country and I think that is something that Switzerland in general is very happy to try and do. That advice and expertise will hopefully help Lebanon find a path in a more difficult global environment.

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