Executive Magazine

‘We make telecoms as secure as possible’

by Yasser Akkaoui November 14, 2013

written by Yasser Akkaoui

Anders Lindblad is the president and CEO of Ericsson Middle East. Executive sat with him to discuss telecoms in the region.

Why are your clients choosing Ericsson over Huawei? Huawei is working very hard.

Overall I would say we are already in the undisputed lead in the telecom industry and that’s of course a privileged situation to be in. Of course when you are a market leader, I think, that comes with some responsibility, if you want to stay a market leader. And that means that you have to invest in research and development. You have to invest in getting the best people. [This long-term stratgey is] not for Ericsson, it’s for the society, for other businesses. Comparative advantage is all about who has more information about the consumers.

You are providing and also assisting the operator at managing their data.

The consumer data is the operator’s. It’s not ours. So of course what we can do is to extract some behaviors etc., which we do with the operators to look at trends and how consumers behave. But that’s what we do — not directly — by utilizing the data from the operators. So I think when it comes to the basket of the consumers, it’s more our customers who are in the forefront in making sure that we can utilize that kind of information and aggregate that in a way so that it becomes appealing to the consumers.

Are we going to see operators outsourcing consumer trends or this decoding of the data that they have? Is this a service you’re going to provide?

We're practically starting to see two extremes of operator types. For the last 120 years every operator did the same thing. That is changing since the value chain here is maturing — which means that to create the same revenues and profits or defend their position, operators need to start to compete with other value chains. When they do that, it becomes less relevant for them to operate a network and that’s where we feel we have a space to fit into. Some operators say, “I’m an operator. I don’t want to complicate my business problems. I want to stay, to own my network and to operate my network.” They don’t outsource, typically, to us. So I think that in the end, when the operator decides to climb the value chain, we have an opportunity to fall off. If they don’t, they’ll continue to compete.

Have you ever taken a project at a loss?

That’s a decision you have to take, especially when you’re expanding. I mean the classical one where you expand with your existing customers with new solutions, or you take your solutions to new customers. When you do that, you’re competing at a green field and you have to think like a green field. You have to invest six months, twelve months to be able to get the benefit long-term. I never take a bad deal that is a bad deal over a very, very long period. That, we try to avoid.

How much do management services account for your balance sheet or your turnover?

I would say that we are around 15 percent of our revenues. We reported now the yearly revenue of 2012 was $15 billion. And on that revenue base roughly 15 percent or 13 percent were management services. That has gone from a single digit percentage — a low single digit percentage — to actually become a relevant two-digit number.

Knowing the value of intelligence that could be obtained through companies like Ericsson or the operators themselves, how worried should we be? You managed Israel…

We put the highest standards on technical state-of-the-art technology when it comes to creating the security infrastructure as we possibly can. I think that our software and the way we treat data in our technology solution is extremely rich. That is a distinction of course between what we do and then how people sometimes use our equipment. They are the regulators. So I think that, I cannot think of any country now that doesn’t have a very strong opinion on how they actually managed that, and there is regulation in each country. And we try to of course make sure that we do not sell equipment that we believe can be of risk when it comes to these kinds of things. In the end, if somebody wants to do something bad with your technologies, they can always do that. But the positive, the technology for growth really outweighs the risks.

November 14, 2013 0 comments

Business

Up to the challenge

by Livia Murray November 13, 2013

written by Livia Murray

Business-bound women with zeal and determination can get far in Lebanon, where a great number of women thrive as entrepreneurs. From a million-dollar tech company incubated in the startup hub of Beirut, to an agribusiness in North Lebanon, female entrepreneurs can be seen across the country. Whilst Lebanon affords women greater freedoms than other countries in the Middle East the extent of these freedoms differs from community to community.

Urban havens

Female entrepreneurs from Lebanon’s urban areas may not even cite gender as an issue when starting and running their companies. For these women managing a business involves other challenges not related to gender. This is particularly the case for tech companies, which have a high proportion of female entrepreneurs. "The typical response I get from female Lebanese entrepreneurs is that being a woman is just not an issue. When you press women on their challenges, most of them say that their gender has never factored into their challenges, it is startup challenges that they are facing,” says Nina Curley, editor-in-chief of online startup platform Wamda. She makes the disclaimer that Wamda interacts to a large extent with a very specific tech-oriented startup community, where women’s participation in entrepreneurship is high.

Though gender is not the greatest obstacle among urbanites, gender barriers do exist. The gender conversation that is taking place globally is one worth having, according to Curley. She started a program in the summer called Wamda for Women in the Middle East targeting urban and tech-oriented women. Initially launched alongside of their Mix N' Mentor roundtables, as a separate but complementary conversation. Wamda for Women tackled issues of work-life balance, financing, stereotypes, and role models and leaders. They are planning on bringing it to Lebanon. “It just seemed like a conversation that no one was having. And it seemed like a conversation that was happening on the fringes of events,” says Curley.

Delphine Edde is a partner and publishing director with Diwanee, a group of online women’s content websites that attract 5 million users per month. At a roundtable discussion organized by the NGO Endeavour, Edde described challenges to starting a business — many of which were not related to being a woman at all. One of her major challenges, she says, is finding the right talent in Lebanon. Out of 130 employees, 80 are from Lebanon, with some in Dubai and a team of developers in Serbia. However she pointed out that women have some additional challenges when managing a business. In many cases, women did not know how to balance between work and personal life, and this dissuades many. “Women don’t know that they can have a husband, a baby, and can continue to work. They think they are bad wives,” she says.

Limited financing

Even for urban women who enjoy relative ease in starting a business compared to their rural counterparts, financial figures showing stark inequalities cannot be ignored. According to data from the International Finance Corporation, only 3 percent of bank loans are extended to female entrepreneurs. Financial institutions’ bias towards women is not confined to Lebanon or to the Middle East, but is a worldwide phenomenon. According to Tania Mousallem, head of strategic development at BLC Bank and leader of the Women’s Empowerment (WE) initiative, which works to increase access to finance for women entrepreneurs, private equity funds in the United Kingdom invest only 1 percent in women. Some banks’ initiatives in Lebanon have sought to remedy the situation through Kafalat, the government sponsored collateral-free loan program that is offered through many banks. BLC Bank has implemented programs to curb lending bias towards women. In addition to instituting a collateral-free loan that looks at a woman’s capacity to repay rather than her assets, BLC has also implemented policies to educate their employees to stop stereotyping women and belittling their capacity to run businesses. Loans to women tripled internally since the program was launched in 2012, according to Mousallem.

Cultural barriers

The impact of gender plays out differently from community to community. As a loose trend, the farther a woman gets from a city, the more prominently cultural and religious customs are manifest in skepticism toward female entrepreneurship. Meanwhile, in some communities taking out loans with interest is considered haram, meaning women must turn to informal methods to access finance, such as taking interest-free loans from family members.

“I think [women] definitely face different challenges, mostly on a family and social level, depending on rural versus urban,” says Nadine Okla, country director of Tomorrow’s Youth Organization, an NGO that supports underprivileged groups in Lebanon and in the region. “If you look at central Zahle [in the Bekaa valley], which is where we are based, and then you look at the outer parts of Zahle you can almost consider Zahle to be like Beirut. So in Zahle, although it’s traditionally an underprivileged community it’s very different from the surrounding areas,” she says.

Interestingly, cultural perceptions dissuading women from entering entrepreneurship can break as soon as the woman proves to be a bread-winner. Okla recalls one young woman who had a business plan to market her speciality chocolates but met resistance from her family.

“She had a fantastic idea, and she was super excited to be a part of the program but her family said no.” The woman’s father reluctantly agreed to let her participate in the initial four-day training after meeting with the organisation. “Right from the beginning, she started seeing profits,” says Okla, as the chocolates she produced were put in expos. “And her father started driving her to each of her sessions.”

Pulling through

Despite the barriers, if a woman has the will and ability to break through social stigmas — of varying intensity — she has the potential for success in Lebanon. “The women I’ve worked with so far who are serious and who are well-prepared have all found funding and are doing well,” says Allyson Jerab, regional coordinator of the Arab Women’s Entrepreneurship Program run by AMIDEAST. “I think if you have a proper business plan and you have your vision, and you have your matters in order then you face the same opportunities as men do,” says Jerab.

One of their successful entrepreneurs is Ameena Barakeh, a young woman from Saida who turned her passions for skateboarding and graphic design into a business. In 2011 she founded SK8 961, which sells custom-designed skateboards with parts imported from Canada. Her skateboards are available at various branches of Lebanese sport retailer Mike Sport, whilst some Lebanese skateboarders stock them at home, ready to sell to local enthusiasts.

“I don’t know if it’s international or just Lebanon, but people would rather buy skateboards from people they know,” says Barakeh. Her business idea attracted the attention of Samir Saliba, owner and managing director of Mike Sports. Now an investor and a partner, Saliba was introduced to Barakeh’s ideas when she pitched her business on television for the Ideaz Prize. Saliba was a judge on the show.

Barakeh describes the choice to start a business versus having a family as the choice between two worlds. “As a woman it is challenging to have a business because we’re expected to get engaged. Through the course of my startup my aunts got me about four suitors,” she says. At one point her parents put so much pressure on her that she drifted away from her business and got a regular job. “But through a lot of struggling and believing in the idea I got my family to get back on track with me and they’re supporting me,” she says.

November 13, 2013 0 comments

Comment

Time to pipe up

by Jihad Yazigi November 13, 2013

written by Jihad Yazigi

Competition over energy resources has played a major role in the power struggles of the Middle East over the last half century. However, its importance in the Syrian conflict remains difficult to adequately assess.Syria lies at a crossroads of energy export routes and various pipelines, existing or under plan, across its territory. The most significant of these projects involve countries such as Iran, Iraq, Qatar and Turkey.

One of the pipelines being planned is the Islamic Gas Pipeline (IGP), which should see the transport of gas from Iran to Iraq, Syria and Lebanon, and from the port of Tartous in Syria to European markets. The agreement over this project was signed in early 2011 by the four countries. In its first stage leading it to Tartous, the pipeline will be 2,000-kilometers long and will cost $2.5 billion to build. When completed, it will have the capacity to transport 110 million cubic meters of gas a day from Iran, including 20 million cubic meters that will be sold to Syria and 25 million to Iraq. This pipeline would bypass Turkey.

Interestingly, the gas is supposed to come from a field shared by Iran and Qatar — named South Pars in Iran and North Dome in Qatar — that is considered to be the largest gas field in the world.

Qatar, which has developed its side of the field much more rapidly, is also reported to have a project to build a pipeline that will transport its gas through Turkey and from there to European markets. The pipeline will have the advantage, for Qatar, of bypassing the Strait of Ormuz. However, Qatar is considering two options, one that would run through Saudi Arabia, Jordan, Syria, and then Turkey, while the other would go through Saudi Arabia, Kuwait and Iraq to Turkey.

Although these facts point to strong competition between the two countries, it is difficult to draw from them clear conclusions as to their impact on the struggle in Syria.

Iran, for instance, is not yet a serious competitor for Qatar because, for obvious political reasons, European countries have refused to sign any long-term contracts with Tehran. In the absence of purchasing contracts from the EU, which is by far the largest market for natural gas, Iran will be unable to be a serious competitor. Also, the capacity of the pipeline will be relatively small compared to the consumption of the European Union, which is currently at 1.5 billion cubic meters a day, set to grow rapidly in coming years.

Meanwhile, the Qatari pipeline will not necessarily use Syrian territory and Doha would first need the approval of Saudi Arabia — never too enthusiastic when it comes to helping its small neighbor and rival — for either of the two options it considers. It is also worth noting that in the years preceding the conflict no negotiations were reported to have taken place between Syria and Qatar on the project, in spite of the very good relations existing at the time between the two governments.

There are also two arguments that diminish the importance of the energy geopolitics in the Syrian conflict. The first is that if Iran were to develop an important gas export capacity, its first and main competitor would be Russia. Indeed, Europe is currently highly dependent on Russian gas and Moscow uses this as a lever of power in its relations with the EU. Russia was actually one of the main opponents to the defunct Nabucco pipeline, which would have transported gas from Iran and Azerbaijan through Turkey to Europe.

Also, if energy had such importance in the conflict in Syria, one would have expected the Syrian regime to highlight it much more frequently. In the two years of the uprising, the Syrian authorities have almost never mentioned the issue of the gas pipelines as a reason for the involvement of regional countries in the conflict.

There is little doubt that the Syrian conflict will have consequences on regional energy projects. It is difficult, however, to make the case that this issue is the main reason for the regional competition over the struggle in Syria.

Jihad Yazigi is editor-in-chief of The Syria Report

November 13, 2013 0 comments

Society

A home away from home

by Nabila Rahhal November 13, 2013

written by Nabila Rahhal

It is impossible to miss the three glittering towers of the Verdun Gardens compound as one drives by. The new project, at the intersection of the Qoreitem and Verdun areas of Beirut, also incorporates a collection of stores located in the green plaza beneath.

The compound is the latest development from Soligran SAL and Soligran Hotels — both fully owned subsidiaries of Bahaa Hariri’s Horizon Development, a property investment and development group.

Two of the 22-floor structures are exclusively residential, while the remaining one is the country’s first Staybridge Suites, the international long-term stay hotel franchise operated by the InterContinental Hotel Group (IHG). So far, the project’s residential branch is performing reasonably well, with 17 of the 44 approximately 575 square-meter apartments sold — mainly to Lebanese — at a starting price of $5,500 per square meter (sqm) at the first level and up to $6,775 per sqm, according to a source from Horizon Development. Of the 10 retail shops at the base of the residential buildings and along the main entrance of the complex, only one has been rented out — to Hallab, the Lebanese sweets chain. Rent for these outlets is $1,000 per sqm at the ground level.

The presence of Staybridge Suites Beirut, which is IHG’s sixth venture in Lebanon and the third Staybridge in the Middle East, is what marks the project apart from other residential developments in the country. “IHG saw that the concept of an extended stay upscale hotel was lacking in Beirut and wanted to bring something new to the country,” says Ihab Kanawati, general manager of Staybridge Suites Beirut. He further explains that in Lebanon extended stay outlets are usually 2 or 3-star properties and lack the facilities and comforts of fancier venues.

With the idea of a long stay in mind, Staybridge is truly designed to feel like “your home away from home” and no detail, from the aroma of warm cookies that greets you as you enter the lobby, to the corkboard with little post-its hung in each room, is spared to invoke this feeling. Each suite has a kitchenette, office space and a private balcony with a view of the city.

Wild Discovery is the perhaps the most famous company in the JRS family

“Staybridge has all the amenities found in all 5-star hotels but in a more cozy and natural manner,” says Kanawati. He gives the example of Staybridge’s breakfast serving style; rather than a typical hotel buffet, breakfast items are placed in a refrigerator in the cafe and guests can take what they want. Other touches of home include the Pantry, where guests can purchase food items to stock their own kitchen cabinets, rather than using a minibar in the room, and the laundry room, where one can wash clothes at any time of the day. The hotel also includes a fitness room and a rooftop pool with a breathtaking view of the city. Guests are invited twice a week for a socializing and networking barbeque, a way to get to know their neighbors.

According to Kanawati, Staybridge traditionally attracts businesspeople from global corporations who are relocating or are in the city for a particular project and he believes Beirut’s Staybridge will attract the same type of people. He says the group is in communication with companies that are already familiar with Staybridge Hotels. “Staybridge would be ideal for them as they do not have to waste resources allocating the right apartment for their employees,” elaborates Kanawati.

Within walking distance of the bustling Hamra district, Staybridge’s location makes it attractive to both business and leisure travelers who can enjoy the shops and cafes of Verdun.

Staybridge has 121 suites, divided into 33 studios, 77 one-bedroom rooms, and 11 two-bedroom apartments which range from $200 to $335 per night.

Only a month into operation, and in what is considered a low season for the hospitality industry in Lebanon, Staybridge has a 35 percent occupancy on most days, which Kanawati says is better than expected. “Selling rooms is not a problem for us, the only problem is the security in the country; once that is guaranteed, then we have no problems,” he says.

Though there are no further short term plans for IHG in Lebanon, Kanawati believes opening Staybridge in Beirut is a sign of the group’s belief in the country and its potential. “Opening this hotel shows that we are not going to give up on Lebanon and that Lebanon will remain standing and investments will continue,” he says.

November 13, 2013 0 comments

The Buzz

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.

More from Reuters

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.

More from Reuters

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

More from Reuters

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.

More from Reuters

November 13, 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.

More from Reuters

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.

More from The Daily Star

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.

More from Reuters

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.

More from The Daily Star

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.

More from Reuters

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

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

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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