Executive Magazine

Business briefing: 13 Nov 2013

by Executive Staff November 13, 2013

written by Executive Staff

Economics and Policy

Saudi Arabia officially notified the United Nations on Tuesday of its decision to reject a seat on the U.N. Security Council, which U.N. diplomats said clears the way for the likely election of Jordan as a replacement.

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The Arab world’s energy exporting states are not saving enough of their oil windfall and as a group may start running a fiscal deficit in 2016 if current policies do not change, the International Monetary Fund has said.

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The International Monetary Fund remains ready to provide aid to Egypt when Cairo requests it.

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Companies and Business

Lebanon's Rafik Hariri International Airport registered 6 percent growth in the number of passengers this year through the end of October, a government body has announced.

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November 13, 2013 0 comments

Economics & Policy

Entrepreneurship: Finding the finances

by Livia Murray November 12, 2013

written by Livia Murray

There is a lot of money sitting around in Lebanon and in the region that could be invested in startups. But in a landscape that barely existed just six years ago, investors are risk-averse, and the ones that do invest frequently ask for exorbitant amounts of equity. Meanwhile, entrepreneurs often expect investors to relinquish their money for too little of a product. Both sides need to make some concessions for the money to start flowing.
Managing expectations

While plenty of startups and entrepreneurs have sprouted in the past five years, one of the biggest reasons that relatively few are receiving funding is that investors do not always see a worthy caliber. “Not all entrepreneurs or startups deserve to be funded,” says Tarek Sadi, managing director of Endeavor, an NGO that supports entrepreneurs. “I think there was a huge buzz around entrepreneurship which was great because it brought it out there. But a lot of people jumped on the bandwagon and wanted to start businesses,” he says.

Starting a business is no casual undertaking, and just because there is a lot of money out there entrepreneurs should not expect funding to fall into their laps. “There’s lots of complaints that there is not enough funding, but I really think that there is,” says Habib Haddad, CEO of the business startup platform Wamda. “I’ve been an entrepreneur myself, and I recently became an investor [see box for Haddad’s story]. I know that a lot of entrepreneurs expect that if they have a good idea they expect funding. But it takes a lot of hard work, a lot of sweat to convince investors,” he says. “There is enough funding, but [only] for the good [startups],” adds Walid Hanna, managing partner at venture capital firm Middle East Venture Partners. “You’ll see a lot of startups complaining that there aren’t enough venture capitalists [VCs], there aren’t enough angels. These are the second tier startups that nobody really wants.”

But while it’s fair to say many startups are still somewhat immature, investors have a sometimes overblown aversion to risk. Investors will write off early-stage startups in full, despite evidence through several success stories that these can be good investments if done smartly. Many investors even rule out technology startups because of the huge risk associated with them, despite evidence of the scalability of companies from this industry. Besides creating a funding gap that diminishes the deal flow, investors are shooting themselves in the foot by not taking these startups as opportunities. According to Haddad, investors need to dive into the opportunity presented by the still immature entrepreneurial ecosystem. “We take risks. It’s a completely risky game. The best thing of investing, in our opinion, is really identifying [which startups will succeed],” he says.

For the startup scene to get into its stride, entrepreneurs and investors need to close the gap between each other’s expectations. “It’s about entrepreneurs understanding what it really means to raise finance, and where to raise it from, who to raise it from. And for investors to understand what it means to invest in early stage companies, how to support them, and what it takes for them to be successful,” says Endeavor’s Sadi.

Investor Interest

Because of the lack of investments being made, investors have mostly had the upper hand when it comes to bargaining power and often take unusually large shares of equity in new companies. “Sometimes a startup comes and says [they’ve] found [an] angel investor who wants 80 percent of the company,” says Bizri. “Of course, this doesn’t make any sense, but sometimes they don’t have any choice.”

“Even though there aren’t that many entrepreneurs or quality startups, there’s more of them than there are investors. So investors and the ones with the money are the ones wielding the power,” he adds. “As opposed to Silicon Valley, where if you’re a hot startup, everybody is running after you. Here it’s the opposite.”

Even venture capital firms, perhaps the most active institutional investment platform for entrepreneurs, are closely guarding the interests of their investors in fear that failure at an early stage might dissuade them from further investments in the VC space. “Imagine our first fund does not perform well. We lose our investors. They will not come back,” says Hanna, “and they will not invest in VC probably anymore. What good would this have to the entrepreneurship ecosystem? It’s disastrous,” he says.

Over the past year, more investors have come on the scene as they have witnessed success stories among entrepreneurs. Last year, says Hanna, “we were one of the active ones and the lucky ones because we kind of took advantage of the situation and we chose the crème de la crème of the start-ups. And we invested only in the best of the best. But if we had three or four different competitors that are active, the game would have changed completely. We would have competed together and we would have probably been forced to co-invest in the good deals,” he says.

Having more investors has somewhat democratized the market of late. “Some take high [equity], others take low. Some that have been active in the market for a while take more because they are used to being the only player in the ecosystem. But now that there are many investors, the transactional partnerships between the two are stabilizing. It still hasn’t been completely democratized. But something is moving in the right direction,” says Haddad.

Funding gaps

Despite the growing number of investors, there are important gaps in funding for entrepreneurs at the institutional level as growing companies require various rounds of funding throughout their life cycle. “Generally speaking it’s harder to get good investments in the early stages,” says Fadi Bizri, managing director at Bader Lebanon. “Those who get the initial money — it’s anecdotal — but they get it from friends, family, or this rich uncle or this guy.” He adds, “The government or banks or public institutions don’t handle that. Either you raise it through family — the first 50k, or you participate in competitions like the Bader ones or the MIT (Massachusetts Institute of Technology) ones. You get your seed money and you start.” This situation could change in the next couple of years, as various players in the ecosystem say talks are happening about the formation of several angel investor networks.

Venture capital funds in Lebanon, though still small, are an island in a sea of less institutionalized investments, and constitute probably the most active form of institutional investment. However the past year has been dry compared to 2012 since many VCs are growing new funds. VCs in Lebanon typically make investments ranging from a couple of hundred thousand to a million and a half dollars. Startups generally migrate to the VC space once they have a tested product, and are looking for subsequent funding and mentorship to grow. Berytech has a $6 million fund that invests in technology startups, through which they have funded around 15 companies. Middle East Venture Partners runs two funds: Middle East Venture Fund and Building Block Equity Fund, with an average ticket size for the region of around $700,000. Wamda also does early stage start-ups for ticket sizes of a few hundred thousand dollars.

But VC’s relatively active role has also seen them take on the roles of other funding bodies. “In Lebanon, VCs behave a bit like U.S. angels. In the U.S., business angels invest anywhere between 50k to a million dollars. And this is what a VC in Lebanon does. Same ticket,” says Hanna. “We’ve done seed capital, startup capital, series A. Even series B… Do we want to invest just 100k in a seed capital type of startup? Sometimes we pass on it, because it’s very complicated. They need a lot of hand-holding, a lot of time to be spent with the company. But our mandate allows us to do so, [although it] doesn’t mean that we like to do so. But we’ve done it several times,” he says. Filling in the gap in the other direction, Wamda, is trying to raise its ticket size to $1 to $3 million in the next year.

The next level

There is another gap: as a company grows it needs larger investments to expand, to the tune of $3 to $5 million dollars. “That’s where it gets stuck,” says Habib Haddad. “The good [startups] today are having a hard time finding a Series B funding round in Lebanon,” says Walid Hanna, managing partner at venture capital firm Middle East Venture Partners. “Our companies, there are 17, four of them are closing series B rounds, from GCC investors.

Because Lebanese investors do not write a million or $2 million checks,” says Hanna. “You need more venture capitalist money at various levels. So you need the ones that are willing to put in the $1 million investment, the ones who are willing to put in the $3 million investment, the ones who are willing to put in the $5 to $10 million investment,” says Bizri.

With cash around, the future could be bright for Lebanon’s startup investment scene. But in order to head down the right path both investors and entrepreneurs need to build trust and start compromising in order to meet both of their desires. As the startup scene grows, competition will push entrepreneurs to mature their business plans, and as more investors test the waters, they will hopefully begin to take a few more risks.

November 12, 2013 0 comments

Comment

Enriching relations

by Gareth Smith November 12, 2013

written by Gareth Smith

Earlier this year, I had long discussions with two former European ambassadors to Iran recalling the 2003-05 negotiations between the European Union and Iran over its nuclear program, the last substantive engagement between the West and the Islamic Republic before a decade-long standoff. Both Paul von Maltzahn, German ambassador from 2003 to 2006, and Sir Richard Dalton, Britain’s ambassador from 2002 to 2006, called the talks a missed opportunity.

“We underrated the tactical capacities of the Iranians and overstated the importance of a zero tolerance [of uranium enrichment],” said von Maltzahn. “With hindsight the inducements [put forward by the Europeans] were too small for the concession of a prolonged period of no enrichment,” said Dalton.

Last month’s talks in Geneva between Iran and the world powers have raised hopes that negotiations can now make the breakthrough that failed to materialize in 2003-05. This is partly because United States policy has changed. In 2003-05, President George W Bush, in the wake of change in Iraq, had ideological zeal for upturning the Middle East, including the Islamic Republic. Hence Washington insisted Tehran should have no uranium enrichment at all and so scuppered the talks.

For Dalton, the background to the 2003-05 talks was “hostility of the United States and particularly Israel to the idea of an accommodation with Iran, partly because of lack of trust and partly because of the lingering hope that by pushing hard they could get not only what they wanted on the nuclear program, but maybe more, including changing the regime.”
Barack Obama has proved pragmatic, coming to office promising “engagement” with Iran while in office extending financial sanctions and working with Europe to introduce new measures that have halved Iranian oil exports in around 18 months. President Obama has seen sanctions not as a means to overthrow the Islamic Republic but to bring it to the table.

Iran, too, has changed with the experience of eight years of Mahmoud Ahmadinejad as president. Pragmatists in Iran were dismayed even as his rhetorical flourish over Israel and social egalitarianism — however popular across the Islamic world — alienated Europe, the US and the Arab establishment without achieving tangible benefits for Iran.

Ahmadinejad’s populist inflationary economic management at home as well as international bravado came at a high price for Iran, both in the near collapse of economic growth and in regional tensions. Hassan Rouhani’s stunning victory in June’s presidential election showed a desire among Iranians for a calmer, more practical approach.

But there is no simple rewind button to return to a deal that might have been made in 2003-05. Things have changed. Firstly, the Iranian nuclear program is far more advanced. Recent reports from the UN watchdog, the International Atomic Energy Agency confirm Iran’s steady, if slow, progress in using the faster IR2M centrifuges for enrichment, and in producing 20 percent-enriched uranium. Both moves bring Iran closer to a break out point when it could in theory quickly produce the 90 percent-enriched material required for a bomb.

Any deal capping Iran’s program — either by the number of centrifuges or by restricting enrichment to the 5 percent level most useful for civil purposes — will surely leave Tehran with a far more substantial program than would have been the case had an agreement been made in 2003-05.

Secondly, the regional situation is very different. It was only slowly becoming apparent in 2003-05 that the US-led invasion of Iraq had consequences way beyond the Iraqi borders, and was indeed creating a geopolitical shift that would eventually lead Saudi Arabia to turn in 2011 against Bashar al-Assad as means to recoup Syria for the Sunnis to make up for the loss of Iraq to the Shia.

The unpredictability of Sunni-Shia tension and the continuing ripples from the Arab Spring should give food for thought to anyone now assuming a US-Iran deal. Shell and Total have shown almost indecent haste in already talking so openly of a return to Iran once sanctions ease.

Pains tend to add to each other while one pleasure distracts from another; likewise, destructive factors feed off each other. The more advanced state of Iran’s nuclear program helps opponents of rapprochement — exiled Iranian groups, conservatives within Iran, the US right, Israel and the Saudis — to talk up Tehran’s strength and so undermine the process. And the unstable regional situation offers plenty of volatile material for anyone wishing to strike sparks.

Gareth Smyth has reported from around the Middle East for nearly two decades and is the former Financial Times correspondent in Tehran

November 12, 2013 0 comments

Business

Success in diversity

by Thomas Schellen November 12, 2013

written by Thomas Schellen

It takes some effort to fathom the narrative of Beirut-based Johnny R. Saade (JRS) Holding. The family conglomerate, owned and managed by brothers Karim and Sandro Saade, entails four diverse ventures worthy of exploration and business analysis, while the geographic aspects of the “Syrian-Lebanese family with Greek Orthodox origins” and their history adds a further dimension of intrigue.

Taking one’s cue from the largest and oldest venture in the conglomerate, travel agency Wild Discovery, the natural assumption about the holding’s risk orientation and corporate philosophy might be a nomadic and adventure-seeking approach. That, however, is less than half of the story. The holding entails two other enterprises that incorporate the opposite of a nomadic spirit. Greenstone is a real estate developer of select properties that has so far been focused on metropolitan Beirut. Even more rooted to the soil is the holding’s third area of productivity which comprises two vineyards — Château Marsyas in the Bekaa and Domaine de Bargylus in the hills above the Syrian port city Latakia.

The other interests of JRS Holding are an investment arm that is focused on financial stakeholdings in international real estate and also participates in corporate equities, and JRS Foundation, the family’s non-profit organization dedicated to charity, cultural, environmental and educational sponsorship.

Commitment to quality

The string that ties all the activities into a coherent whole is emphasis on quality, Sandro says. “The common denominator in all our products and activities is quality. We are always choosing the quality path because we know it pays off.” Focus on quality makes the business more resilient to crises and is a family principle, he adds. “That is in a nutshell how we have constructed the businesses and how our father wants the businesses to be run.”
With $40 million in operational turnover in 2012 and business growth of eight percent in the current year to date, Wild Discovery accounts for a significant share — the brothers declined to state the net wealth or revenues of JRS Holding — in the Saade portfolio. When it was established in 1997, Wild Discovery set new accents in tourism retail by selling travel packages which the Lebanese market at the time was not accustomed to.

Over the years, the company’s approach of offering qualified advice in attractive retail showrooms set it apart from the under enticing office-with-desk ambiance that still predominates in the overcrowded travel agency landscape. With a network of eight retail agencies in Lebanon and presence in Syria and Dubai, the opening of Wild Discovery’s latest outlet in Achrafieh was imminent at the time of this writing. A further three outlets are on the domestic agenda for opening in 2014, plus entry into another new Arab market is planned for the end of next year.

JRS Holding is not in need of taking dividends from the operating units and under the holding’s strong growth orientation, returns achieved at Wild Discovery are poured into expansion, Sandro says. “We are reinvesting all profits year-on-year.”

Although the increase in turnover in 2013 is not fully up to the company’s expectations, Wild Discovery improved its profits by implementing cost savings and by utilizing economies of scale. A contributing factor to 2013 turnover growth was a shift in airline billings from Syria.

JRS Holding’s foray into property development around eight years ago was inspired by the holding’s investment activity in real estate, with the purchase of what has become the urban project L’Armonial in Achrafieh, which has garnered a lot of attention by integrating an existing 20th century apartment building into the high-end project, whose main bulk consists of a 20-story residential tower. Although not its first completed building — that was an upscale four-story in the Beirut suburb of Yarzeh delivered a few months ago — it is L’Armonial that has set the developer’s brand trajectory.

The hard cost of developing this property was $30 to $35 million, with the consolidation of the existing building contributing around $1 million in extra costs, and eight to ten months in extra time, according to Sandro. The project pioneered the market in terms of combining integration of heritage with a modern structure built to the highest specifications, he says. “We wanted our first project to be an immediate showcase of what we are willing to do and want to do in real estate.”

Wild Discovery is perhaps the most famous part of JRS' empire

Other projects that have taken a cue from the practice and municipal authorities appear to have adopted the concept of asking developers to retain components of heritage, adds Karim. “There are many ways to preserve heritage and this is one of them. We are happy to know that we have found a way to preserve heritage and people have this impulse to do it,” he says.

While he refuses to provide information on the turnover or profits of Greenstone he gives an indication by saying that the soon-finished L’Armonial project will represent a market value of close to $90 million upon completion. Greenstone is currently preparing two new projects which together represent around $10 million in equity investment but the company has larger plans to start developing on behalf of clients and substantially increase its range of activities in this way.

Passion for wine

Winemaking is the most passionate activity in the JRS portfolio. It grew from the desire to purchase a Bordeaux vineyard in 1996 into the decision to invest what amounted to $5 million in developing Syria’s first professional application of viticulture in the modern era. From the idea to the first bottle the Bargylus project involved a lengthy process of buying land, finding and training staff, building facilities and planting grapevines, importing all equipment, testing and developing the product and marketing it.

Domaine de Bargylus was created in 2003 and production started in 2006 but return on investment is not something to be talked of for a few more years. “It is a quality project and we are very proud of what we have achieved already, but with the situation now this investment will not be profitable before many years. Ultimately we have to make money but it is a lot about passion,” Sandro says.

The passion that went into the venture was crucial to conquer expected and unforeseen obstacles but anyone working on passion alone would have gotten out years ago, he adds. “It would not have been possible to continue the venture in the current situation if there weren’t a powerful holding backing it every day.”

The biggest issue they have faced since starting up has been the gap between the perception and the potential of Syrian wine. Although the eastern Mediterranean has ancient traditions of grape cultivation and the Mediterranean climate offers great conditions for winemaking, Syria is not perceived as part of the Old World oeno-sphere in which giant producers France, Italy and Spain stand alongside smaller but important wine makers from Portugal to Greece and Cyprus.

Managing through war

Syria’s civil war is of course part of the problem. It complicates operations and adds both uncertainty and cost factors. According to Sandro, a main driver of higher costs is the devaluation of the Syrian currency. It affects payroll expenses because the Saades, who invested years into training the Bargylus workforce from scratch, decided to increase the salaries of their workers paid in Syrian pounds to maintain equivalency to the dollar exchange rate as it stood before 2012.

Purchasing is not affected greatly because supplies are mainly imported from France at stable costs. And while weaknesses of the currency at the place of production are usually not without advantages to exporters, a second cost booster is external storage, because inventories had to be moved to warehouses outside the country.

A third factor concerning cost implications is the need for contingency planning for possible disruptions to supply and product flows. “We have enough bottles now for the next year’s production,” explains Karim, so that the wines could at least be bottled if next year sees new and wider disruptions of shipping. So far, Domaine de Bargylus has been able to rely on the port of Latakia with only one disruption during a rebel offensive in Alawite territory in August.

That period was also the one time when Karim and Sandro were most nervously milling about in their Beirut offices, because fighting encroached up to 200 meters from the vineyard. Sandro retells, “For two hours, the workers were not in the vineyard and we were afraid that anybody could get in and steal anything. But this was the optimistic scenario. The pessimistic one was that the rebels would get in and would destroy the wines, the equipment and most importantly, the vineyards.”

The destruction did not come to pass and the Syrian military secured the area soon after, but the uncertainty remains. “Thankfully we are not in the combat area, but you never know,” sighs Karim.

There is an upside to the situation, however, as the story of growing wine under the constraints of the Syrian civil war holds quite a potential to enthrall lifestyle writers and wine journalists from outside the region, who have showered Domaine de Bargylus with much increased attention since unrest has engulfed Syria — the extra publicity related to the conflict may enshrine Syrian wine on a higher level of perception with experts and connoisseurs.
The 2013 vintage holds great promise for the vineyard in terms of both quality and volume — likely to be above its normal output of 40,000 to 45,000 bottled reds and whites per year.

Regulating quality

Growing wine in the Bekaa, where JRS acquired land for its Chateau de Marsyas around eight years ago at the doorsteps of the long-established Kefraya vineyard for an output of 50,000-plus bottles, is an exercise in economic stability, at least in comparison with the Syrian operation. However, the business’s progress is perhaps less than ideal because of one single factor that the Saade brothers experience as a common impairment in every one of their three Lebanese operations. The pain that drives the Saades to use the choicest expressions of outrage is Lebanon’s endemic lack of regulations. According to Sandro it affects and deeply threatens the travel agency sector as it does the property development sector and the wineries. He says that requirements for financial guarantees of travel agencies are way too low to protect consumers in case of an operator’s default. The fact travel agencies can deposit letters of guarantee for as low as LL5 million (roughly $3,300) and do business, is a “ridiculous legislation and should be changed immediately,” he argues, adding that the number of licensed travel agents is several times what it should be for the outbound tourism services market which he estimates at $900 million to $1 billion annually when adding the outbound hotel and services market of $300 million to the air travel market of $600+ million.

Insufficient bank guarantees are also a problem that the Saades see in the real estate sector, as trust in the sector is being eroded as customers are burnt by absconding developers. “There must be more criteria — every day, people take money for apartments and never deliver them. The government’s responsibility is to make all developers place important bank guarantees with the ministry to show that they are able to build for $50 or 100 million.”
In winemaking, the brothers’ ire is directed against the missing appellation d’origine controlee, a designation to certify wines by their region of origin. Together with regulations that give information on the origin of grapes that enter a bottle of wine the appellation controlee would help consumers in distinguishing quality wines from questionable tipples.

Regulations are paramount for keeping investors such as his family faithful to the country and bringing in new investors, says Karim. He does not accept the nation’s legislators postponing their work. “Something has to be done and it is unacceptable [if politicians] give a pretext that there are more important things to be done. These are the most important things: economy, economy, and economy.”

November 12, 2013 0 comments

The Buzz

Business briefing: 12 Nov 2013

by Executive Staff November 12, 2013

written by Executive Staff

Economics and Policy

Shares in Twitter Inc have been found eligible for investment by Islamic funds, according to IdealRatings, a company that screens stocks to determine whether they meet Muslim principles.

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The International Monetary Fund will help Lebanon streamline its consumer price index calculation in a bid to obtain more accurate information about the fluctuation of prices.

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The Egyptian government will launch a new economic stimulus package by the end of the year, the finance minister said Monday, bringing forward spending plans that will help revive the economy but put even more strain on state coffers.

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A number of Lebanese companies and businesses in Tripoli have had to close recently due to high competition from illegal Syrian firms, according to the head of the Development Association of Tripoli and Mina.

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Iran's supreme leader Ayatollah Ali Khamenei controls a business empire worth around $95 billion – a sum exceeding the value of his oil-rich nation's current annual petroleum exports – a six-month Reuters investigation shows.

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Companies and Business

Standard Chartered Bank intends to sell its retail business in Lebanon and focus more on wholesale operations.

Vodka – Lebanese style

by Nabila Rahhal November 12, 2013

written by Nabila Rahhal

"Our goal from the very beginning was to produce high end vodka, a luxury brand that has superior ingredients and superior production,” says Adam Aboulhosn, General Manager and Chief Executive Officer of Middle East Beverage Company, a Lebanese startup enterprise that has produced J2 Vodka, the first Polish vodka using Lebanese mountain water.

Named after the DNA identifier connected with some of Lebanon’s ancient inhabitants, the first shipment of J2 has just entered the Lebanese market and Aboulhosn says they hope to sell 7,000 to 10,000 bottles in their first year of operation rising to 40,000 to 50,000 bottles within five years. Though that number may seem ambitious, it represents only 5 percent of the market for vodka in Lebanon, according to Aboulhosn.

Finding the right formula

J2’s journey began two years ago when Aboulhosn’s brother-in-law — who works in the wine industry in the United States — told Aboulhosn he had made some contacts in the spirits industry and was looking to create a local spirit in Lebanon. Aboulhosn, whose background is in finance, liked the idea of creating a Lebanese spirit and together they started the Middle East Beverage Company.

After assessing the potential alcohols — which included wine, whiskey and beer — the decision fell on vodka because of its relatively straightforward production process and the fact that it is the fastest growing spirit in terms of consumption in Lebanon and the rest of the world. In 2010 Lebanon imported more than 1 million liters of vodka. “This is a huge chunk and the potentials are enormous,” says Aboulhosn. “If we only manage to capture 2 percent of that market, we would still be doing well.”

A bottle of J2 will retail for somewhere between $40 to $50, less expensive than their competitors in the premium vodka market such as Grey Goose which sells at $60 or Belvedere at $90 but still a high-end price. Aboulhosn says they chose to produce a premium vodka for two reasons. “If you look at the Lebanese brands that do well, they are usually high end ones and the Lebanese have pride when it comes to brands like that,” he says, giving the examples of Lebanese fashion designers and wine producers. The other reason was that they would not have been able to compete with current low-end vodka producers when it came to the economies of scale required to make a profit.

Keen to keep the product fully Lebanese, the company first looked at producing J2 locally. However, they found that the capital investment for the factory alone would be a million dollars. That high initial investment factor, coupled with the political risks and instability in the country and the perception among focus groups that Lebanese vodka would be poorly made, pushed their decision to locate the factory elsewhere. “As a Lebanese I wanted to produce it here because I am proud of Lebanese ingenuity and production but at the end [of the day], I am not going to fight the market. I am going to change it, but not at the beginning, it is going to take time,” says Aboulhosn.

Poland was chosen as their production base because it is well known among Eastern European countries for producing the smoothest tasting vodka due to it having the right temperaments leading to the best grains for the best ethanol production, explains Aboulhosn. “The Lebanese water that is used is the mountain water that has just melted and the mineral content of that water produces great tasting vodka. But, basically, it was a [process of] trial and error finding the right formula of both,” he says, adding that the water is shipped to Poland in special perishable-goods containers.

Middle East Beverage Company has invested $500,000 into the first investment phase of J2 to create the product. That figure was raised mainly from Aboulhosn, who is a major shareholder, his brother-in-law as the second major shareholder and other small investors who are friends of the family. Aboulhosn believes they will need to invest another half a million into marketing and sales, an amount he hopes might be raised from the sales themselves or by opening the company up. The amount needed for the final investment phase, the expansion phase, will be determined by the performance of the first two phases, explains Aboulhosn.

With regards to J2 distribution in Lebanon, Aboulhosn has directly spoken to a few select bar owners who have agreed to sell the vodka and the duty free shops in the Rafic Hariri International Airport will also be selling it. Mass distribution, however, will not happen before December and will more likely be through a distributor. “As we have only one product, it doesn’t make sense for us to buy a truck and go around distributing…we simply don’t have enough products for that, so we are going to have logistics help from a local distributor,” says Aboulhosn, adding that marketing will be kept in house allowing more control over the product and its image.

Spirit of life

With 60 percent of their budget on marketing and brand recognition, Aboulhosn says they plan to grow responsibly in a sustainable manner using non-conventional methods such as social media and brand ambassadors. “We mainly want to make people aware of the brand as we believe it will attract them because it is different. It is part of the Lebanese market and attached to them,” says Aboulhosn. J2 is being branded as the Lebanese spirit captured in a bottle: “the spirit we are trying to project is that of life above all else, the idea that no matter what happens I am going to live my life to the fullest because I know that tomorrow it can all be over,” says Aboulhosn.

J2 plans to grow into the Middle East and North African markets and while Lebanese expats will obviously make up a large percentage of their clientele, Aboulhosn is also hoping to attract the emerging new generation of the Gulf middle class who enjoy socializing, going out and who may be attracted by the Lebanese spirit that J2 hopes to represent. Aboulhosn is already in negotiations in parts of the Gulf that allow alcohol sales and says they will soon be entering the market there.

Aboulhosn admits it is a challenge for entrepreneurs to operate a successful venture in Lebanon given the state of infrastructure and the bureaucratic red tape which draws out even the simplest procedures. Yet, he says patience is of the essence in Lebanon and is heartened by the enthusiastic Lebanese entrepreneurs returning to work in their country despite the obstacles. “Working here is very stressful but rewarding at the same time; it’s exciting and I hope that people are excited as well, not just about this vodka but about all Lebanese products,” he says.

November 12, 2013 0 comments

The Buzz

Business briefing: 11 Nov 2013

by Executive Staff November 11, 2013

written by Executive Staff

Economics and Policy

Kuwait’s government plans to form a special committee to review subsidies on goods and services which are costing the Gulf Arab state more than $15.9 billion a year.

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Subsidised petrol and electricity programmes are causing a huge waste of energy across the Gulf and threatening economies, Oman's oil and gas minister has said.

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Companies and Business

Emad Mansour, a veteran Gulf Arab banker, is planning to set up an investment bank in Dubai’s tax-free financial zone, he said Sunday, joining a list of regional bankers taking advantage of a revival in deal making and a retreat by big investment banks.

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Abu Dhabi National Energy Co is selling its 40 per cent stake in a Dutch natural gas pipeline to a Danish pension fund for $240 million as the investment no longer meets its growth strategy in the country.

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German airline Lufthansa, the last European carrier with direct flights to Sudan, will end its service in January, a company document obtained on Sunday says, citing economic reasons.

Growing pains

by Livia Murray November 11, 2013

written by Livia Murray

In a country where businesses often operate along familial lines, with new investments coming from family and friends, Lebanon’s nascent entrepreneurial scene is experiencing some understandable teething problems when it comes to vital external funding and support.

Growth hits a ceiling constrained by one’s inner circle, and opportunities are limited for entrepreneurs with ideas and drive who may not have access to financing and technical support. Calls for more support institutions for entrepreneurs have been made among those interested in enlarging the sphere in Lebanon. “We need many accelerators, we need many incubators, we need many [venture capitals] VCs,” says Tarek Sadi, managing director at Endeavor Lebanon, an NGO working to support entrepreneurs internationally. “We need to have that healthy competitive tension between these people so that the entrepreneur becomes the party that has the most leverage, to get the best deals, to get the most support.”

Increasing the deal flow

Many of the players in the industry say increasing the deal flow — the amount of new ideas and new entrepreneurs that pass through the ecosystem — is key to increasing the number of successful entrepreneurs. For that to happen, institutional guidance and support is vital.

Having the right support out in the open could increase the number of entrepreneurs considerably. Companies in their earliest stages are particularly at risk, and have a large chance of failure. “A lot of entrepreneurs tend to get lost very easily in the early stages of building their startups,” says Samer Karam, CEO of rebranded start-up accelerator Seeqnce. “There’s just too much to do and it’s not very clear where they should start.”

Related article: Anghami – a Lebanese entrepreneurship success

Given the likelihood of failure in the early stages, more startups means more likelihood of success. Fadi Bizri, managing director at Bader Lebanon, which provides support to young entrepreneurs, talks of the need for a “factory of startups,” and reports that venture capital firms believe the country needs at least five accelerators.

Venture capital firms have obvious interest in increasing the size and quality of the deal flow, so they have more deals to choose from when they invest. They have taken some initiatives towards this end. Walid Hanna, managing partner at Beirut-based venture capital firm Middle East Venture Partners gives help to Bader, and says his firm spends around $20 to $30 thousand a year on promoting deal flows.

The country also has some help in this regard from Beirut’s sole incubator, Berytech, which is trying to guide a flow of entrepreneurs into its services. Berytech has a partnership with Bader where they host entrepreneurs once they have been coached by Bader. Their locations in Mathaf, Mkalles, and their most recent branch that opened this year in Beirut’s Digital District, are filled at 90 percent capacity.

The End-to-End Process

Despite some initiatives, Lebanon’s support institutions do not yet facilitate the end-to-end process. Lebanon’s startup ecosystem offers some support to early-stage startups, namely business plan and startup competitions that give entrepreneurs with ideas access to training and coaching. These initiatives haven’t succeeded in taking startups up to the level that investors would like to see to grant investments, particularly among the risk-averse investors in Lebanon.

“You know the quality of the companies that are participating in those business plan competitions are less than average, says Hanna, “We can barely look at the top three out of hundreds and thousands. We’ve seen many winners of business plan competitions that got some funding and then they closed down shop a year later. So we need a lot more mentorship at the startup level.”

Support for these smaller fish is currently meager at best. There is more support for more developed startups, who have a minimum viable product, as venture capital firms offer mentorship and guidance to the companies they have invested in. Lacking from the picture is a proper accelerator, which would give institutionalized support to burgeoning entrepreneurs before they reach the stage where they can qualify for venture capital. One attempt, Seeqnce, produced a batch of startups in 2012, but the team then decided to go their separate ways. Currently Samer Karam, Seeqnce’s CEO, is leading the development of a virtual accelerator named Alice by Seeqnce, intended to serve as a global platform for startup acceleration.

Demand for early-stage guidance is becoming apparent at the grassroots level. Coworking spaces are starting to creep up around Beirut to satiate the need for startups to learn from peers and coaches. The latest addition is Coworking +961, which launched in July in the grassy hideout of Sursock Gardens. Coworking spaces create a cluster of entrepreneurs who benefit from working in the same environment. “They learn from each other in terms of experiences and expertise,” says Jad Hilal, community organizer at Coworking +961. The demand for such spaces hints at a broader desire within the entrepreneurial communiy for structured early-stage insitutions. “We keep getting people who want to be part of our space, but we’re full.” says Hilal.

Coming together

The support system for startups is beginning to coalesce. The ecosystem for startups has ballooned over the past couple of years, and there are efforts to promote collaboration. The Global Entrepreneurship Week, scheduled for the third week of November, includes activities at the local, regional, and global level that will bring together entrepreneurs and stakeholders who work to support them. This year more than 50 partners are participating in Lebanon, up from 35 in 2012. In preparation for the event various players in the ecosystem have been meeting in recent months.

The sophistication of the scene has in many regards come a long way, but they do not yet constitute a coherent system that facilitates the startup-creating process from A to Z, and have some ways to go in terms of their overall effectiveness. “In some ways there are more supports building up than actual startups,” says David Munir Nabti, Mayor of co-working space AltCity. The system has potential through their resources, but the various actors need to come together to ensure its smooth operation. There is also an increased awareness among players in the field of the need for open communication and collaboration, although this is yet to solidify. “It is in the minds of the various actors, there are talks around it, but there is nothing yet concrete,” Bizri says.

A further announcement has people thinking about collaboration. At the end of August the central bank passed Circular 331 guaranteeing 75 percent of commercial banks’ equity funding in SMEs for up to $400 million. The decision encourages investment both in startups and in start-up infrastructure, and could potentially lead to a spur of investments come 2014. However, the central bank has yet to develop implementation mechanisms, and will only start to consult with players of the ecosystem this coming month. Too much reliance on this initiative for bringing the different players together could have adverse consequences if it does not live up to the high expectations that are being placed in it.

November 11, 2013 0 comments

Business

Anghami: Moving through the entrepreneurship ecosystem

by Livia Murray November 11, 2013

written by Livia Murray

Established in December 2012 by co-founders Elie Habib and Eddy Maroun, Anghami is a mobile app that lets users download and listen to Arabic and international music on their cellphones. It is now the most downloaded music app in the Middle East, with 3.4 million users. Anghami is a start-up success story that benefited from Lebanon’s support infrastructure.

“Over the last couple of years there has been an ecosystem starting in the region,” says Habib. Anghami raised its first round of funding — $1 million — from venture capital firm Middle East Venture Partners (MEVP). It is now finalizing its second round of funding with a Saudi company for $1.5 million. According to Habib, the company’s valuation has multiplied by five since it was founded last year. In October they joined the network of Endeavor, an entrepreneurship-advancement non-profit which helps companies grow. Since May they have expanded from three to twenty employees.

Habib and Maroun are seasoned entrepreneurs and went straight to venture capital funding, bypassing the start-up competitions generally held for young and inexperienced entrepreneurs. “I have founded three companies,” says Habib. “When we launched with MEVP as a seed company, we raised $1 million dollars, which is far more than the competitions,” whose cash prizes do not exceed $50,000.

With their recent entry into Endeavor’s network, Habib anticipates getting a lot out of their mentorship program and experiencing considerable growth. “Having Endeavor connecting us to people in the United States and Europe who have experienced start-up growth, consumer businesses will actually be able to help us scale so many facets in our business,” he says. Habib stresses that entrepreneurs cannot create a company without having proper mentorship — something Lebanon still lacks.

Habib speaks favorably of Lebanon’s growing support infrastructure for entrepreneurs. When he started his first company in 2004, there was no support for burgeoning entrepreneurs. “Incubators were something that were not remotely available,” he says.

“Clearly an entrepreneur in 2013 in Lebanon is so much better off than in 2010,” says Habib, referring to the support infrastructure for startups that has boomed over the past couple of years.

November 11, 2013 1 comment

Real Estate

Structural rehab

by Karim Makarem November 8, 2013

written by Karim Makarem

The Beirut cityscape is dotted — and often blotted — by rundown skeletons of abandoned sites — industrial warehouses, storage depots, schools, etc. Whether the remnants of former industrial sites destroyed during the civil war or warehouses replaced by larger and cheaper alternatives outside the city’s municipal borders, these are buildings often made of crude concrete and many still bear visible war stigma.

Industrial-era structures exist in cities around the globe and architecturally vibrant western cities have found imaginative ways to recycle such old built-up stock: Warehouses are turned into residential lofts, modern offices, or avant-garde design studios. The renovation fever that started with the waning of industry in metropolises such as Paris, London or New York, has been booming since the 1990s and today extends even to small towns, particularly in Europe and North America. Uncharacteristically, however, the trend has been slow in finding its way into Beirut. To date, the market has still to see the first notable conversion of an industrial building into lofts.

And yet, supply is abundant. From Bourj Hammoud to Nahr el Mott, the city has a large stock of former industrial warehouses and workshops. Many of these have been abandoned since the civil war.

In many instances, present-day zoning regulations mean that destruction of an existing industrial building and replacement with a new structure would yield a smaller built-up area than what already exists. It is therefore financially unsound to demolish the existing construction. Also, a number of these buildings have historical or aesthetic value.

On the other side of the equation, demand has been slow to accept such a very modern concept. Bernard Khoury’s neo-modernist, experimental projects prove with their tremendous success that the market is eager to try out revolutionary architectural designs. True, converted warehouses will not appeal to traditional buyers or tenants, but a more westernized, young generation is receptive to such new alternatives.

Creative vision

Converted industrial spaces can be turned into stunning work or living areas. High ceilings, plenty of natural light, authentic period materials (naked wood, concrete or brick patches of walls) and roof beams can create a unique space that exists in no other newly built project.
Successful entrepreneurs among Lebanon’s growing creative community have begun to invest in such gems. A wave of artists, designers or simply trendy, moneyed buyers have been eagerly purchasing in projects designed by the country’s few avant-garde architects.

It remains to be seen what size the demand can shape up to and whether there is sufficient demand for all of the old stock that could potentially be converted into new-wave business or residential units. The market’s current reluctance to venture into this type of new architecture might be due more to the general economic slowdown than to a lack of aesthetic aspirations.

Financial incentives exist for both the owners of these old structures and potential buyers or tenants. To owners, converting these structures or selling them to developers offers a more viable financial option than keeping them idle or putting them back to industrial use. To potential buyers or tenants, being located in a fully refurbished former industrial warehouse converted into an office or a home is a prestigious stamp that is worth the investment.

There is no easy formula on the cost of a conversion project. Former industrial properties often beat the going market rate for standard products. Renovation costs are high, but the finished product can be offered at a much higher final price than existing standard products. In our estimate, the uniqueness of such a product could translate into a premium of 20 to 30 percent added value above market prices in the surrounding or comparable area.

We have recently seen a small awakening of conversion efforts in the Bachoura area, but end products look more like standard new units than personalized former industrial spaces.

It will take vision and financial guts to pioneer the conversion market, but once the trend sets in we expect it to boom. The raw material is both abundant and architecturally varied — our database contains former industrial spaces, workshops, warehouses, schools and even a church. Visionary architects and young companies or homebuyers who want to set themselves apart have much to choose from.

Karim Makarem is director of Ramco Real Estate Advisers

November 8, 2013 0 comments