Executive Magazine

THE WILL TO PREVAIL

by Yasser Akkaoui December 3, 2015

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 En attendant un president, businesses still painfully survive with an outdated set of laws resonant of the 1960s.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.

December 3, 2015 0 comments

Hospitality & Tourism

Downtown blues

by Nabila Rahhal December 1, 2015

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.

December 1, 2015 1 comment

Entrepreneurship Entrepreneurship in Lebanon Special Report

The fast & the furious

by Executive Editors November 27, 2015

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.

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.

November 27, 2015 0 comments

Entrepreneurship Entrepreneurship in Lebanon Special Report

What’s tech got to do with it?

by Executive Editors November 27, 2015

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

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.

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.

November 27, 2015 0 comments

Entrepreneurship Entrepreneurship in Lebanon Special Report

Putting the system into the startup economy

by Thomas Schellen November 26, 2015

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.

November 26, 2015 0 comments

Business Finance

Pearls of economic wisdom

by Thomas Schellen November 26, 2015

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.

November 26, 2015 0 comments

Hospitality & Tourism

The cluster men

by Nabila Rahhal November 24, 2015

written by Nabila Rahhal

It all began in 2005, when Rabih Saba and Marwan Ayoub, who were at the time employed by multinational companies, decided to make some extra money on the side through freelance consulting work for hospitality companies in Lebanon.

They have since come a long way. Today, they are the managing partners of Venture Group, a hospitality development company which counts Uruguay Street, the only pedestrian pub street in Beirut Central District, as its first development project. Currently, just four years after signing the Uruguay Street contracts, they are in the final phases of construction for two other similar hospitality cluster areas (The Village, Dbayeh, to be launched by early November 2015 and Backyard Hazmieh to follow a few months later).

Executive met with Saba and Ayoub near their Hazmieh project to find out more about how they are growing from a “two man” show to a structured organization with enough prowess to attract a $4.5 million investment participation in Backyard Hazmieh. Executive also discussed Venture Group’s business model of clustering hospitality outlets under one project which relies on the economics of proximity.

The early years

In 2008, Saba and Ayoub, who until then had only been dabbling with hospitality consultation, decided to quit their jobs and become full time consultants for the hospitality sector. “We started doing consulting work in the hospitality sector as a side job to make extra money. When we saw that we were bringing value to our clients, we thought of doing it full time,” explains Saba.

In 2011, recalls Saba, the two partners launched their first cluster development project on Downtown Beirut’s Uruguay Street, named so because the boats arriving to Beirut Port from Uruguay used to dock there. “We always had the idea of a hospitality cluster project in mind but we needed the capital,” recalls Ayoub, explaining how they took a major risk in that investment as they only had enough capital for the first payment which they used to book the street.

Ayoub and Saba recount with a certain twinge of pride how, in their first contract on Uruguay Street, their exposure was for a few million dollars and today they are developing projects with a value of $5 to $10 million each, multiplying their appetite for risk by 20 percent.

The rise and fall of Uruguay Street

What Venture Group, then known as Venture DT, did with Uruguay Street was enter into a master lead contract with Solidere, which owns the former Municipality Building along Uruguay Street. They had a fixed lease for the building’s dozen or so ground floor outlets and then sub-rented them to selected pub operators in return for a percentage on sales and a minimum guarantee.

Saba and Ayoub saw the makings of a sustainable pub area in the location judging by factors such as it being one of the few pedestrian streets in Beirut, it being in a non-residential area with solid infrastructure and the availability of several parking lots in proximity and a valet parking service which they introduced.

The partners explain that they had initially agreed with Solidere on both economic and social targets related to developing the street’s culture and positioning it as a pubs and nightlife destination which included creating desirability and order by selection of tenants, restriction of expansion, competition analysis and so forth.

[pullquote]“We always had the idea of a hospitality cluster project in mind but we needed the capital.”[/pullquote]

However, with the initial success of Uruguay Street, other building owners in the area got inspired to lease their properties to bar operators. Almost two years later, Venture Group were no longer the main players on the block. Numerous new outlets cropped up on the same street, with some spilling onto Argentina Street, perpendicular to Uruguay.

This over saturation of pub offerings, according to Ayoub, created a chaos which decreased the street’s attractiveness for its primary target clientele, the trendy Lebanese and the so-called “in crowd”. This, coupled with the transient nature of Lebanese nightlife whereby people were already abandoning Uruguay Street in favor of new destinations such as Mar Mikhael and Badaro, led to a decrease in footfall for Uruguay Street which began almost six months ago.

To combat this effect, Venture Group had planned, in collaboration with Solidere, a series of marketing events and activities aimed for fall and winter 2015 to relaunch Uruguay Street and the surrounding areas while also working, again with Solidere, on returning some structure to the street by controlling the music volume and the number of chairs per outlet. However, with the protests triggered by the waste management crisis which began in late July 2015 taking place mostly on the development’s doorstep, these plans have been postponed. “So for now, [we’re in] survival mode and we need to do everything in our capabilities to make these tenants survive the crisis,” says Ayoub.

Uruguay Street in Downtown Beirut

Uruguay Street’s tenants are currently struggling to pay the rent. A few outlets in the building where the Phoenicia Bank used to be have been forced to close down in the past month alone. Saba explains that, working with Solidere, they were able to help their tenants by giving them a three month grace period from rent, subject to renewal if the situation stays as is. “We had to take part of the hit but we would live with that because we are a group with many other projects and can balance our profits here and there. The main issue is just to keep the project surviving but it all boils down to the macro-political situation,” explains Saba, adding that, on a more positive note, most of their tenants operate several other venues as well and should be able to survive a few months of low footfall.

Lessons learned

Venture Group’s first experience with cluster projects through Uruguay Street has taught them what to replicate and avoid in their upcoming projects in Dbayeh, Hazmieh and Ashrafieh.

According to Ayoub, they learned to diversify the location risk by constructing projects in varied regions rather than relying on Beirut alone. Such regions, explains Saba, have the added advantage of allowing Venture Group to bring known food and beverage (F&B) brands in proximity to residential areas where such brands may not already be within walking distance.

Saba adds that diversification also applies to bringing a variety of tenants, from casual dining and bars to gyms and beauty salons, into the project, depending on the targeted area’s needs which Venture Group identifies with thorough market research.

[pullquote]“So for now [we’re in] survival mode and we need to do everything in our capabilities to make these tenants survive the crisis.”[/pullquote]

“The lessons learned from Uruguay Street are mainly the lessons learned in every destination that grew organically such as Monot, Gemmayzeh or Mar Mikhael. This always brings us back to the main issues affecting the industry, such as licensing, the number of outlets allowed per capita, the infrastructure, flow and organization,” says Ayoub, explaining that since they and their partners are the sole owners of their new developments, they will have full control over the number of outlets and the layout, thus ensuring complementing venues are next to each other and desirability is maintained.

Putting in the money

Venture Group, explain Ayoub and Saba, typically enters into long term property lease contracts with the landowners but emphasize that the cost for leasing the land represents a lesser risk whereas their biggest risk is the cost of development itself. It would take them an average of six years to return their investment.

Should the location fail as a hospitality project, Venture Group would be left with outlets which are only usable as F&B outlets, Saba said. To mitigate this threat, explains Saba, they ask for three years of rental commitments from their tenants, thereby somewhat sharing the risk with them.

Of partners and funds

For each project they develop, Venture Group has different strategic partners who play an active role in the development, working hand in hand with Venture Group, marketing the project and sharing the investment risks, explain Ayoub and Saba.

For example, for their planned hospitality cluster in Ashrafieh on Saint Nicholas Street, their partner is Emile Sabbagha, while Emerging Investment Partners (EIP) invested 51 percent into the Special Purpose Vehicle that is holding Backyard Hazmieh, marking EIP’s first investment in a hospitality project and in Lebanon. Ayoub says they agreed with EIP on a minimum expectation of 20 percent internal return on investment over the nine year lifetime of the project.

[pullquote]“We have learned the power of clustering which could apply to hospitality or any other sector in similar industries.”[/pullquote]

However, Venture Group’s expectations for the partnership are more on the strategic side and not limited to this one project. Ayoub says that “The concept of this partnership goes beyond Backyard Hazmieh. It’s not an exclusive partnership as we each have our separate projects, but now we are confident that we have a strong financial partner at our side when we look at future opportunities.” These opportunities could see Venture and EIP collaborate in projects outside of Lebanon or in an F&B Fund that would seek to invest in promising startup concepts or in “baby brands” which have achieved proof of concept in a small number of locations but lack the financing power to grow into chains.

Raking in the profits

In terms of operating their upcoming clusters, Venture Group runs on a business model of turnover participation with their lessees. Ayoub and Saba enter into agreements with their tenants that call for a 10 to 14 percent share in sales revenue depending on the value of the products the outlets are selling. This means they would take a bigger percentage from a sushi place than they would from a coffee shop, for instance. “We sit with potential tenants and look at their feasibility study together to see what they can pay as a rental price and we manage around these prices,” explains Saba, adding that since their background is in hospitality, they understand how the sector works.

Work in progress on Backyard Hazmieh

They also charge a minimum guarantee which approximately represents 70 to 80 percent of the projected rent they expect to have, explain the two partners. “This way, when the economic cycle in the country is down, we will not lose our tenants and at the same time when the market is high, someone will have to pay back and we will have a good margin,” says Saba. According to Ayoub, the company’s rewards include the value of the infrastructure they contribute to each cluster as well as financial benefits from increases in traffic which Venture Group can influence because they are in charge of marketing each destination.

What Venture Group offers

The value that the model provides to tenants is anchored in giving them developed infrastructure at a lower cost than a tenant would incur by having to set it up themselves which they would be forced to do in other projects or in standalone operations.

Secondly, Venture Group brings to its tenants a solution that mitigates the inflation in land rental costs. Years ago, hospitality operators would buy land in non-central regions for a low price, Ayoub explains, and the cost would be low enough that they could construct one restaurant on it and still have ample space for parking, children’s playground and landscaping.

[pullquote]Venture Group currently retains 90 F&B tenants across their three projects, making it one of the largest portfolios for a hospitality cluster developer in Lebanon[/pullquote]

However, with the high inflation of land rental prices starting 2010, it became more economically feasible for these operators to rent an outlet instead of leasing a piece of land for any single restaurant projects. “We used economy of scale and cluster cost effectiveness in our business model where we would rent land big enough to host several outlets and would then divide the cost of the land among these outlets. We also handle the buildup and construction so the restaurant operator would end up renting a place with full infrastructure and full landscaping at a fraction of the cost he would have paid for the land itself,” says Ayoub explaining that through their landscaping, they somehow address the need for public green spaces among Lebanese which is an added value of their projects.

“We are into leisure business by the base of our business culture and so the angle on which we approached the project is different from real estate developers as we approached it with leisure in mind,” says Saba.

Company growth and future plans

Acquiring the partnership of an investment fund such as EIP and also the growth that Venture Group experienced over the last four years necessitated that the company goes through the process of structuring their business model, explains Ayoub.

“Being a young company, we have been doing things right in that we have good lawyers and auditors and everything is done with a high level of transparency because our partners in other companies are reputable and structured. However, due to the fact that it’s a fund which is regulated, we went that extra step with governance which has upgraded our way of doing things. We are happy with the way things are going and are becoming more of an organization,” says Saba.

Today, Venture Group has ten employees in their main office with a complete and separate team for each project ranging from engineers and designers to the cleaning crew and on the ground facilities management.

Venture Group currently retains 90 F&B tenants across their three projects, making it one of the largest portfolios for a hospitality cluster developer in Lebanon.

In term of hospitality cluster projects, the company is still looking at areas outside of Beirut with a year-round seasonality, such as Byblos, which will appeal to their target clientele. They are also hoping to diversify their scope of operations by starting a fund, in partnership with EIP, which would financially back startup F&B operators looking to launch a brand or those with two or three branches in their name wanting to further expand but lacking the capital.

“We have learned the power of clustering which could apply to hospitality or any other sector in similar industries, and we would like to look into opportunities to use our expertise in developing clusters in different industries,” concludes Ayoub.

November 24, 2015 0 comments

Entrepreneurship Entrepreneurship in Lebanon Special Report

The startup state

by Executive Editors November 18, 2015

written by Executive Editors

The plans to create a successful startup and entrepreneurial ecosystem are tentatively falling into place in Lebanon. From Circular 331 to the launch of new accelerators, the sector has changed dramatically over the last five, or even three, years. Executive brings you a small overview of some of the latest developments and challenges to the ecosystem, and future development recommendations from leading figures within the sector.

2015 in a startup nutshell

2015 saw advances across several stages of start up. Banque du Liban (BDL), Lebanon’s central bank, hosted the first Lebanese international startup conference at the end of November 2014, which preceded a fast paced year. The 2014 conference certainly produced some home truths about the state of the internet and infrastructure, as well as other gruelling realities of startup success in the Lebanese context, with Venture Partner at Golden Gate Ventures Michael Lints describing how “being in a startup is about as romantic as chewing glass.” There was, nonetheless, a sense of great positivity at the efforts being made by the entrepreneurial community to advance despite local and regional setbacks. The theme for the December 2015 conference, ‘Emerging Startup Ecosystems’, will aim to attract a wide entrepreneurial audience to their event at Forum de Beyrouth on December 10 and 11, with around fifty local and foreign speakers currently listed on BDL’s event profile.

At seed level, AltCity Bootcamp and Speed@BDD, both profiled in our special report, are accelerators aimed at the idea stages of entrepreneurship, while the UK Lebanon Tech Hub launched its own accelerator aimed at growth stage scaleups in Lebanon. Other initiatives such as Startup Megaphone, which markets the Lebanese ecosystem worldwide and organizes events, are also supporting the nascent entrepreneurial ecosystem. Catherina Ballout, Operations Manager of MIT Enterprise Forum Pan Arab based in Beirut, described these efforts to include growth stage funds as critical to Lebanese success stories; “during the past year we have had funds focussing on growth stage; Leap Ventures, Wamda and MEVP funds. This is very important because at a certain stage the entrepreneurs are growing their startup but aren’t able to grow further and think of selling their startup instead of growing it. The role of the growth stage and VC funds is very essential to this.”

Where are we now?

Funds are taking advantage of Circular 331, with Leap Ventures expecting to raise more than $80 million by the end of the year, although the money from BDL is having problems trickling down to the ecosystem. Despite some financial backers’ hesitation, the need for incubators and accelerators is tantamount to developing Lebanon’s entrepreneurial ecosystem. “The role of the accelerator is to prepare the startup to meet investors,” notes Ballout, “and to guide them through the process, identifying the right time for a particular company, scaleup or startup to seek external investment. Knowledge about how to approach investors is very important.” With the ultimate aim of so many accelerators to seek successful exits for the startups within their program, especially if long term sustainability of the accelerator is dependent on participants’ future profitable exits, the knowledge imparted to companies at growth stage about seeking external investment is clearly crucial. Although others have remarked upon the lack of previous accelerators in Lebanon to use as a benchmark for the ecosystem, it is worth noting that of the eight companies which were inaugurated into Seeqnce’s 2012 acceleration program, three (Presella, et3arraf and Med HP – now renamed as eTobb) are still up and running, and continue to seek later stage investment either in Lebanon or abroad. This crudely represents nearly a 40 percent ‘non-failure’ rate, which is a good benchmark in a market so often dwarfed by larger competitors and regional and local problems.

Challenges ahead

So what are the problems facing the Lebanese entrepreneurial ecosystem? “The greatest challenges [are] access to markets and the path to scalability,” says Habib Haddad, founding CEO of Wamda. “Access to markets allows you to sign deals, to break out. The brain drain is definitely a big issue. The education system is not bad but it does not equip you for the real world,” he adds, noting the uniqueness of certain challenges to the Lebanese ecosystem. When asked about the exit assumptions that accelerator funds have used to base their future profitability and sustainability on, namely that roughly one in ten startups will succeed and generate future revenue for current funds, Haddad sees no problem with it in terms of applicability for Lebanon. “That’s the name of the game,” he remarks, though speculates that numbers within the model could be adjusted to lower the probability of “rockstar” success and make it Lebanon-orientated. For others, the challenges overlap with Haddad’s and also vary. Infrastructure is high on many lists, with Hala Fadel, partner of Leap Ventures commenting that “I probably use 20 percent of my time lobbying for the internet because it’s just unacceptable.”

[pullquote]Despite some financial backers’ hesitation, the need for incubators and accelerators is tantamount to developing lebanon’s entrepreneurial ecosystem.[/pullquote]

Whilst businesses can afford to pay for faster internet, with Wamda paying $200 per month for 18 Gb/s download speed, poor infrastructure often has a greater impact on the psyche of an individual in question. “When you [leave work] and go back home to your family, the infrastructure [on the streets] impacts what you see as a potential future for the country. [It makes] you decide you want to go somewhere else,” stresses Haddad, who notes that for future innovators to move into a space it needs to be as accessible as possible – something which Lebanon’s lacking infrastructure does not often help with. There is also a lack of talent within certain higher tiers, and importing individuals from outside the company is difficult with such poor infrastructure. For Fadel, recruiting senior level individuals to her companies is proving difficult, as “attracting talent to a place that is called Beirut” is problematic she claims, which is only compounded with growing political instability and governmental paralysis.

Although one barrier to capital has all but been removed by BDL, a current lack of an electronic trading platform for SMEs, the launch of which has stagnated and entrepreneurs remain none the wiser about its launch date, presents more capital hurdles. The fact that heads of funds also stress that startups cannot afford to focus on Lebanon as their sole market (as with most small countries) also facilitates exiting the country – a global vision promotes the idea of a better life outside of Lebanon. At policy level, the taxation levied on new companies also serves to dissuade budding entrepreneurs. “This is a burden and a long process,” comments Ballout, who notes that “they don’t have access to funds at an early stage so entrepreneurs end up paying [heavy fees] from their own pockets or their family’s pocket to register a company.” Those wishing to register as a Limited Liability company, for example, must pay upfront a capital of 5 million LBP, equivalent to $3,323, which can severely dent the finances of a young startup.

What is the future?

Amongst the accelerators themselves, not all need to survive to produce a flourishing ecosystem. Fadel likens Circular 331 to seed funding for an entire ecosystem, attempting to build the credibility of an asset class; “this whole startup that is the Lebanese ecosystem will either make it or break it. After two to three years things will settle down with the long term players staying here, and then in seven to eight years we’ll see the returns on these funds.” Fadel notes that the private sector will only follow up with investment if the ecosystem builds a credible asset class, but “if we fail the private sector will not follow and there will not be another 331.”

The top financial heads of the country clearly pin a major part of the the country’s economy on the entrepreneurship sector. “We believe that this is one of the sectors upon which Lebanon’s [economic] future will depend, along with the financial sector and the oil and gas sector,” stressed BDL head Riad Salameh when speaking at the launch of phase 2 of the UK Lebanon Tech Hub. He also noted that the money from Circular 331 would “attract back all Lebanese talents, or most of them, in order to form companies in Lebanon, to create jobs for the Lebanese and to help this sector startup itself”.

It is clear that the entrepreneurship industry has the ability to contribute to Lebanon’s economy, although the valuation of such a contribution can hardly be measured without accurate data or a country-suitable economic model to describe the contribution from entrepreneurship, the tech sector or companies nurtured by startup acceleration programs. “I hope there is more of a collective effort in building the ecosystem,” comments Ballout. “There are a lot of partners working together, but there are a lot of partners that could have been working together [from before] and having more of an impact, and this is not the case.” By partners, Ballout clarifies that she means institutions or individuals at any stage of the ecosystem, and not just those controlling the funds. The operational system on the ground needs a few years to play out before benefits are truly realized; “you find a lot of reports and plans from here until 2020 [detailing] what the plan is, but on the ground it is still unclear,” comments Ballout, who adds that “Circular [331] is great, a lot of initiatives are great, but let’s wait and see.”

November 18, 2015 0 comments

Entrepreneurship Entrepreneurship in Lebanon Special Report

Startup Megaphone

by Thomas Schellen November 17, 2015

written by Thomas Schellen

When Samer Karam talks about his new job it sounds as fantastic as if Sinatra had just sat down next to Peggy Lee to intone the Gershwin classic, ‘Nice Work If You Can Get It’. Karam, who ran the accelerator program of ecosystem company Seeqnce, in March of this year began promoting the Lebanese startup economy through a new company he formed with funding support from Banque du Liban (BDL), Lebanon’s central bank. He says the venture, called Startup Megaphone, “was created to market the country as a destination for startups and investors from around the world.”

In the first seven months of its operations, the company conducted what Karam calls “two activations” outside of Lebanon and has been producing research and promotional materials in preparation for the BDL-organized Accelerate 2015 event next month. The events that Startup Megaphone organized abroad were a 300-person conference in New York City and a three-day retreat in Singapore, coinciding with the city-state’s Formula One race in September.

“It was extraordinary,” Karam says about the latter event. “We were able to bring the best of Lebanon [together] with the best of the [venture capital] world and some key startups and a lot of magic happened. We can’t announce much of it but one of the attendees, Vinli, a startup based out of Dallas but with a Lebanese founder, came with us to Singapore and ended up signing a [business] partnership less than 24 hours after the retreat and is in the process of closing another two.”

Although the Singapore outing was clearly a success for Vinli, it remains to be seen what direct benefits a lucrative business deal for this thriving US-based startup with a Lebanese chief executive would contribute to “enriching the Lebanese national wealth” via the “economic and social growth, and job creation in the Lebanese market,” which BDL’s Circular 331 stipulates as an objective in the institution’s support for the startup economy. There are clear hopes that such success can be repeated for companies where the benefits to the Lebanese ecosystem will be more obvious and tangible.

Startup Megaphone warrants attention because it is more than just a 15-employee strong marketing outfit for the Lebanese startup ecosystem. The company, whose shareholders as per the commercial registry include Karam family-owned Seeqnce, was funded by BLC Invest Bank but the investment is backed to 100 percent by BDL, Karam says.

This advantageous funding position is because Startup Megaphone is a pillar in the ecosystem’s infrastructure alongside Speed@BDD, UK Lebanon Tech Hub and AltCity’s Startup BootCamp. “All three are designed as for-profit institutions with ad-initiation investment from a bank in collaboration with BDL with generally two to three years runway to break even. The idea is that these companies were not designed to make profit [for investors] but designed for sustainability by putting profits back into the cycle,” he explains.

According to Karam, the formula of 100 percent guaranteed funding means that any bank involved in a pillar carries zero risk in the venture. “When [the project] is 100 percent guaranteed, the decision comes from BDL. We submitted the term sheet to BDL and [it] decided that it would be BLC,” he says and claims there was no specific reason why BLC Invest became the largest investor in Startup Megaphone, which he characterized as following the same investment philosophy as the other three infrastructure pillar ventures. “You can say it is a social enterprise. We have specific guidelines, a business plan and a term sheet. And hopefully we will hit our targets. We will reach our breakeven point in three years.”

How exactly Startup Megaphone would reach breakeven point in three years’ time and generate profits allowing for sustainable reinvestments is not entirely conventional. The website does not promote products or services that a foreign investor or internationally active fund could contract; for startups it offers a hotline for “entrepreneurial emergencies” but without hinting at monetization of such a service. Judging from the activities to date – the aforementioned conference in New York and the retreat in Singapore – an event-organizer business model with participant fees and sponsorships would appear the likeliest road to revenues. However, Karam did not elaborate on the issue and told Executive that, “we have set the plan and we will reach it.”

It is clear is that Karam is a passionate promoter. From the eagererness of his discussion on the startup economy, Lebanon appears as an el Dorado of entrepreneurial openness. “If you want to start a company in Lebanon, you are eligible. You don’t need an iqama [residence permit] to create a societe anonyme libanaise [joint stock company],” Karam enthuses broadly and advises: “If you want to launch a company in Lebanon, as an international startup either as entrepreneur or as investor, there are dozens of lawyers who are more than capable of facilitating that for you and they are very accessible. Offshore, onshore, sal or sarl, there are no limitations as long as you speak to the right lawyer.”

However Karam faces the difficult task of overcoming several hurdles, which even strong promotion cannot sidestep. In 2015 Lebanon was ranked 119 out of 189 for starting a business in the World Bank’s annual Doing Business report even when leaving aside the clear location and domestic market focus requirements of Circular 331, many entrepreneurs who have repatriated to the country with the intention to locate their companies here have enountered problems, like poor infrastructure, which are not as prevalent elsewhere in the world.

As a marketer of the whole ecosystem though, Karam is keen to adopt an all-inclusive approach, even at the risk of going slightly overboard. For example, he tells Executive that Circular 331 is a “$500 million sovereign fund targeted at VCs” and says that any Lebanese passport holder anywhere and any non-Lebanese who is residing in the country are part of the Circular 331 initiative.

The task of “managing Lebanon’s international image”, which is the uppermost tag line in Startup Megaphone’s online self description is arguably fraught with many interesting challenges. But Karam hits a homerun with his advice on how our startup ecosystem can rise to global prominence: “We need to have very high standards because this is the only way people will take us seriously.”

November 17, 2015 2 comments

Entrepreneurship Entrepreneurship in Lebanon Special Report

The 411 on 331

by Matt Nash November 16, 2015

written by Matt Nash

The torrent of “free” money that Banque du Liban (BDL) Circular 331 was expected to release is still but a trickle. Approved by Lebanon’s central bank in August 2013, the circular allows banks to invest up to three percent of their tier 1 capital in startup companies contributing to the so-called “knowledge economy” or venture capital funds focusing on these types of companies. BDL is guaranteeing 75 percent of these notoriously high-risk investments, and – if every bank in the country participates to the maximum limit – the circular would pump around $400 million into the local entrepreneurship ecosystem. From an economic perspective, the rationale is simple: create jobs and build up a value-creating new sector. In a best-case scenario, some even hope Lebanon will become a techy, entrepreneurship hub for the region. At this early stage, however, the building blocks for this new sector are only now being put into place.

Marianne Hoayek, one of several BDL officials responsible for monitoring 331’s implementation, tells Executive that the bank has approved $280 million for investment to date. Publicly disclosed transactions – namely 9 venture capital fund investments and one direct bank investment – however, total around $20 million, or roughly 7 percent of the approved $280 million. Fund managers tell Executive they will close more deals by the end of the year, and even if 331 has not massively increased deal flow, it is certainly helping the ecosystem evolve.

Passing the buck

While BDL Vice Governor Saad Andary told Wamda in 2013 that 331 might push banks to create in-house “specialized units familiar with startups” to follow-up on direct investments with entrepreneurs, the vast majority of 331 money will flow through venture capital funds. “The needed experience [for a bank] to be able to follow-up [on an investment in a startup] is huge. These are not existing companies,” says Fadi Osseiran, general manager of BlomInvest Bank, which has invested with three existing VC funds and is sponsoring another currently awaiting BDL approval to launch. “These are entrepreneurs. It’s a whole new area. Banks are lenders. So to become investors already is a major move. To go from investing in an established company to investing in a startup is even harder. There is no way we can do it.”

[pullquote]Some even hope Lebanon will become a techy, entrepreneurship hub for the region[/pullquote]

Experience is only one barrier keeping banks from rushing to invest in and nurture entrepreneurial enterprises. Cost is another, explains Marwan Kheireddine, chairman and general manager of Al-Mawarid Bank and a former minister of state who pushed for the creation of 331 while in office. “Managing any investment that is less than, let’s say, $500,000 would prove too costly. You need resources to be able to follow-up on those investments. In some cases, we put people on the board. We assist companies in building their corporate culture to ensure they are adopting best practices in terms of corporate governance. And all of these things cost money. Imagine if we have to do that, as an investor, in a company where we invested $25,000 or $100,000. It becomes economically not viable. You’d be putting in resources that are costing you by far more than the actual investment itself.” That said, Al-Mawarid has made direct investments. In fact, it made the first 331-compliant investment of $200,000 in Presella, an online ticketing platform, in June 2014. Kheireddine admits he’s overworking his staff to keep an eye on the bank’s bets.

Al-Mawarid is not alone as a direct investor, but information on the practice is scant. BDL’s Hoayek says, “now what we’re seeing is that many banks are investing directly in startups.” Asked how many banks have directly invested, she answers “more than 20.” She adds that the bank is considering a public database of direct deals so “everyone knows the names, the numbers and the money allocated, but we’re seeing with the governor how to do it.”

Meet the money managers

So far, there are three VC funds operating with 331-backed investments from Lebanese banks. Berytech and Middle East Venture Partners – existing market players – are each running a fund while a third is under the auspices of a new entrant – Leap Ventures.

Berytech Fund II has raised $51.5 million but has approval for $70 million and expects to close between nine and 11 deals soon, says managing director Paul Chucrallah. The fund has not invested yet and is eyeing deals with ticket sizes between $1 and $3 million, although Chucrallah notes “we can go up to $5 [million], even $7.5 [million]. We do not, however, forbid ourselves from going below that. We like people who have brilliant ideas, even if it’s a very small idea. So we have more than a couple of investments that will be below $1 million. And one or two of those will be significantly below $1 million.” He cautions that seed funding is out of the picture unless Berytech is really floored by an idea. The fund charges a 2.5 percent management fee.

Middle East Venture Partners (MEVP) Impact Fund has been the most active with eight investments to date and two more in the pipeline says Walid Mansour, an MEVP managing partner. Impact is focused on ticket sizes between $2 and $4 million and charges a 2 percent management fee.

Leap Ventures’ first fund stands at $71 million with plans to close a second round of fundraising in November 2015 with a goal of reaching “north of $80 million,” explains Hala Fadel, a partner at Leap. In August, its first investment of $3 million went to Energy24, which builds a new type of energy storing device to help residents and businesses endure long power cuts. Fadel says two more investments should be made by the end of the year. She says the fund’s management fee is “capped at $2 million, so 2 percent, effectively.”

The fund representatives Executive interviewed agreed they’ve cast their nets quite wide to find good deals and have to fight to defend them in front of internal fund investment committees. MEVP says they met with 215 companies. Leap saw 91 entrepreneurs, and Berytech spoke with 250.

New players should be entering the market soon. The BDL’s Hoayek says three additional VC funds have received BDL approval but are currently raising money before officially launching. She adds two more VC funds are in the approval process. As noted above, BlomInvest’s Osseiran says his bank is sponsoring a new fund, and Khaled Zeidan, executive general manager of MedSecurities Investment, tells Executive his bank is also sponsoring a fund dubbed Azure which will invest in “fashion and design and technology,” he says, admitting it’s a “niche play.” He explains three banks are committed to invest in the fund, but that it will be a “smaller fund” reaching “$30 million at most.”

A moving target

An underreported element of 331 is that it also allows both banks and VC funds to invest in infrastructure components needed for a healthy startup ecosystem, such as accelerators. At the earliest stages, an entrepreneur often only has an idea, with no knowledge or experience in writing business plans or running a company. Training and mentorship are arguably as important as access to capital in helping startups survive and grow. And BDL is actually going a step further than 331 to help make sure these infrastructure elements are built. Hoayek explains that, on a case-by-case basis, BDL is actually backing 100 percent of bank investments into ecosystem components. For example, the bank offered this guarantee to two investments made by Al-Mawarid Bank: $7.5 million into the UK Lebanon Tech Hub, an accelerator and training program, and around $2 million into Bootcamp, an idea-stage training program run out of AltCity, the co-working space in Hamra, Beirut, according to Kheireddine. Hoayek confirms the guarantee and that the investment is not counted against Al-Mawarid’s access to 331 funds. Hoayek says BLC Bank also made a 100 percent guaranteed investment into Startup Megaphone, an international roadshow vehicle for local entrepreneurs. BDL is also backing investments into a coding-focused training program called Torch and part of the financing for Speed at Beirut Digital District. “[BDL] wanted to go even further [than 331] because we thought that this pipeline should be sustained, sustaining startups and deal flow. So we went beyond the 75 percent and said that [BDL] will guarantee 100 percent [of investments into] accelerators, bootcamps and training centers that will create this deal flow that will keep the ecosystem moving.”

Hoayek says that two soon-to-be-announced funds will also focus specifically on small-ticket-size, seed investments, something the market is currently lacking.

Risky business

Berytech’s Chucrallah sums up one of the pitfalls bankers and fund managers need to avoid when investing 331 money. “The onus is on us not to get drunk with valuations,” he says. While everyone Executive spoke with for this article expressed a similar sentiment, only Mansour with MEVP said he had yet seen a problem with valuations. “We had a case, one case, where we were discussing a valuation with a company, and we got overbid by one of the competing funds who paid double the valuation we offered. We obviously didn’t pursue the discussion.” Zeidan, from MedSecurities, disagrees that valuations are becoming inflated and adds that the funds are investing in a way that won’t allow for inflated valuations in the future. “My biggest concern, previously, was to make sure that we don’t have arbitrage opportunities starting to arise among the different funds. We’re invested in all three. I sit on the board of [MEVP’s] Impact [Fund] and have a very close relationship with everyone else. The bottom line is you have three separate investment committees that are, in my opinion, very independent and quality ICs. There is no way that one fund could sell its assets to another fund. We will not allow secondary placements. It’s only primary money. It’s only cash injections into a company. You cannot exit from one fund to another. That way you destroy any sort of potential collusion among the different funds. One cannot sell to another, otherwise they would just do that and we’d all get screwed. They don’t have any interest in creating a little clique.”

That said, Mansour argues that the risk of inflated valuations will increase as more first-time funds come to market with pressure to build portfolios quickly. “Anyone who doesn’t have a portfolio will start acquiring it at a very expensive price, just to show that they have a portfolio. Which means that the returns on these first-time funds will be screwed.”

[pullquote]An underreported element of 331 is that it also allows both banks and VC funds to invest in infrastructure components…such as accelerators[/pullquote]

Of course, not everyone shares this view. Leap’s Fadel argues that new entrants will be good for the whole ecosystem, especially the entrepreneurs. “Especially for early stage [investments,] there were basically only two funds – Berytech and MEVP – and it was almost a monopoly situation. They could impose terms on entrepreneurs and now that you have, in that stage of funding, another two or three funds [coming to market], there [will be] more competition. I think this is very good for the entrepreneur, and the competition is really not on valuation. I feel it’s more on the terms. And I have to say that, at the stage we’re at, we welcome more entrepreneur-friendly terms because some of the deals that would have been obvious deals for us that had been funded by other venture capital firms before us are almost un-fundable because of the terms that came with.”

On the subject of terms, Mansour argues almost the opposite. “Many entrepreneurs are now becoming too focused on what valuation and terms they can get upfront as opposed to worrying about building a healthy business.”

No one Executive spoke with encountered the problem of too few deals to pursue.

Attempted monkey business

However, fund managers and bankers Executive queried said some of the companies seeking funding did not meet 331 criteria, either because the company was not actually based in Lebanon or because it did not contribute to the knowledge economy. Al-Mawarid Bank’s Kheireddine says a local bakery approached him to ask for 331 money. That said, Zeidan from MedSecurities explains that getting his Azure fund – which focuses on fashion, design and technology – approved by BDL was no easy feat as its relationship to the knowledge economy is arguably tenuous. “It took me a year and a half of back and forth and lobbying to convince [Central Bank Governor Riad Salameh] to expand the mandate of 331 to allow me to do this,” he says.

Looking for big wins

Zeidan says that with 331, banks and VC funds need to hit “a homerun” by putting Lebanon on the global startup ecosystem map. Berytech’s Chucrallah is more blunt. “First, we have to make sure we don’t mess up and lose everyone’s money.” For him, big wins down the road would be vastly helped by serious infrastructure investments as well. Financing, he says, is only one of the barriers facing startups. “Infrastructure is a massive battleground,” he says. “There’s no way you can fuel the growth of this economy without 24-7 electricity and good internet. There’s no way.”

November 16, 2015 1 comment