In Lebanon, and way before the arrival of seed money, venture capital, and other forms of equity support for start-ups and innovative ventures, the main source of support came from the SMEs bank loans guarantee programs provided by Kafalat.a With successful platforms implemented by the Lebanese Central Bank through initiatives such as Kafalat, the entrepreneurship ecosystem started to take shape and flourish through universities in the early 2000s. The catalyst was support from the Lebanese Central Bank in 2014 in the form of Circular 331,b,c injecting an estimated US$400 million in the Lebanese enterprise market through private equity funds, with the support of local banks. Such support gave rise to the U.K. Lebanon Tech Hub in 2015 (UKTH), an international accelerator initiative between the U.K. government through the U.K. embassy and the Lebanese Central Bank, in addition to the launch of new accelerators and incubators including Speed in 2015, Flat6Labs, and Smart ESA in 2016. In parallel, the World Bank supported the launch of the iSME Fund, a private equity fund entrusted to Kafalat to manage in 2015, and Circular 331 provided the support to launch Berytech Funds, Broadgate Y Venture Partners, Middle East Venture Partners, and many more venture capital and private equity funds.d
Despite the challenges that Lebanon has faced over the past five years, several success stories materialized in its entrepreneurial ecosystem. Since 2015, UKTH/The Nucleus Ventures accelerated 100 start-ups, created 2,000 jobs, with 42 start-ups reaching the seed funding stage, 10 series A, four series B stages, and one successful entry in the online gaming space. Three current companies in the Nucleus Ventures portfolio have valuations above US$10 million, with Proximie valued at over US$30 million.
Speed, another solid accelerator in the Beirut Digital District, accelerated 42 start-ups through six cycles, with one of its venture companies, NAR Technologies, getting acquired by U.S.-based (San Antonio, TX) B3Bar Holdings. NAR Technologies was founded by two Lebanese American University (LAU) graduates—Charlie El Khoury and Nicolas Zaatar. NAR identified the opportunity in dramatically improving the labor-intensive and time-consuming process of data analysis and reporting performed following each inspection flight by drones.
The ecosystem of the entrepreneur in Lebanon will need to adapt to a different form of deliverables management, along with the newly burgeoning support of academic institutions.
Kafalat, through the "Grant" component of the iSME Fund, deployed the full US$2.5 million by the end of 2019. The fund reached 175 beneficiaries with grants of up to US$15,000. Over 65 of those beneficiaries have been able to attract investments of over US$15 million from venture capitalists and investors to date, and numbers keep on rising. Moreover, through the "co-equity" component of the iSME Fund, Kafalat deployed US$14.5 million up till 2019 in 21 start-ups. The co-investment in these companies from the local venture capital funds had reached US$38.8 million for the same dates. On the bank loan guarantee front, out of the 41 Kafalat INNOVATION loan guarantees, 23 loans were repaid and their funded companies continue to thrive, achieving a 56% success rate in such high-risk investments. Moreover, out of 91 Kafalat PLUS loan guarantees to technology companies, 79 loans were repaid, achieving a super-stellar 86.8% success rate for such start-up loans.
The three most active universities in the Lebanese venture development and acceleration processes are USJ, USEK, and LAU. USJ Berytech and its funds accelerated over 130 companies, with over 3,600 entrepreneurs supported, US$70+ million invested in start-ups, and four major exits. Currently, Berytech has 31 companies in its portfolio, and supports a large number of SMEs through the USAID-LED program. USEK Acher Center accelerated 25 start-ups in one cycle, with more than US$4 million raised for its portfolio in a very short period of time. Last, LAU FMIC accelerated nine start-ups in one cycle, with limited amounts of funding raised to reach the prototype stage by five of the nine start-ups.
More to Be Done
As with all major initiatives, there is always more to be done, and Lebanon is no exception. The Central Bank's Circular 331 restricted the capital support to only Lebanese companies; with such export-driven ecosystem, the need by locally funded companies to scale up outside Lebanon to facilitate trade and local services to international clients got chocked up by the lack of international funding that Circular 331 did not support. An updated Central Bank circular in this regard should be requested by the stakeholders of this ecosystem.
An overhaul of the Lebanese commerce laws is long overdue, and both fund managers and entrepreneurs should take the lead.
In addition to the much-needed private equity risk management expertise, the Lebanese commercial laws have not been developed enough to meet the needs of the structured approach with private equity investments. In particular, the Lebanese commerce laws lacked any legal premise for a Lebanese corporation to issue stock options, stock warrants, and shares of stock with preferred rights (preferred stock). Accordingly, an overhaul of the Lebanese commerce laws is long overdue, and both fund managers and entrepreneurs ought to take the lead.
The ecosystem of the entrepreneur in Lebanon will need to adapt to a different form of deliverables management, along with the newly burgeoning support of academic institutions. By leveraging Lebanon's human capital, leading universities such as LAU, AUB, USJ, ESA, and USEK will play key roles in providing the critically needed support to nurse the new entrepreneurial initiatives in Lebanon by providing both space and coaching to the emerging new entrepreneurial ventures. Financial support will be driven by both local and international funding structures, all hinging on sound business concepts and the solid execution by the local teams leading such ventures. Combining these strengths will provide the oxygen needed to push forward an innovation-driven economy in Lebanon, an economy in critical need of hope, perseverance, and above all, the solidarity behind delivering a stellar performance in such a dynamic ecosystem.
d. The Lebanese venture capital and private equity funds launched their own association in 2018; http://bit.ly/3mEYHot
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