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Entrepreneurship and the digital economy in Lebanon

Nov 08

Entrepreneurship and the digital economy in Lebanon

The shyness of a system

When making the rounds through the Beirut Digital District (BDD) to assess how Lebanon’s entrepreneurship system is developing, there is a lot to observe. Over the past five years, there have been several exercises—usually with significant self-promotion and marketing—to map this emerging system in all its components. Invariably, such exercises seemed incomplete by the time they were done, simply because the entrepreneurship realm was changing and expanding faster than it could be mapped.

Driven into existence by the initiative of Banque du Liban’s Circular 331, from the moment of the circular’s publication in August 2013, the ecosystem has grown with each passing year (with Executive committed to publishing annual observations on its progress). This year is no exception. Regardless of the months of political wrangling in the halls of the Grand Serail and Parliament, and also regardless of deteriorating conditions in key sectors of the real economy and intense propaganda-mongering about alleged crises in the Lebanese currency, the BDD at the end of the third and beginning of the fourth quarters of 2018 emits energy, optimism, and innovation.

The first vision of this year’s progress in the system was provided by accelerators, who presented their graduating startups in September and October. Flat6Labs and Smart ESA, two programs that stepped onto the Beirut startup support scene less than two years ago, both organized their second demo days. The professional organization of the events made a strong impression, as did the high quality of the programs’ new graduates.

In talking to the two accelerators, the picture sharpens. Mira Zeidan, project manager in the Smart ESA team, tells Executive that the accelerator—which demonstrates the importance of the role that academic institutions can play in the entrepreneurship realm, especially if they have good relationships with the local and international corporate sector—has seen considerable improvements in the quality of participating startups in its short history. “There might be lower numbers of applicants, so less quantity, but definitely higher quality,” Zeidan says. “This is also reflected in the quality of service provided by the support organizations. When you have better people working on realizing startups, you will require better quality support systems. This is a learning curve that we all are on, accelerators and startups, and this learning curve is confirmed by the improvement in quality of startups that we saw in 2018.”

Perceptions of what it means to embark on entrepreneurial journeys are also maturing, as more and more people understand how much it takes, and those not up for this immense effort orient themselves toward different trajectories. “The ecosystem started with people having the image of the startup being something built in a garage by someone who had dropped out of college,” Zeidan says. “There was a lot of mythology in that. A startup means very hard work, and people are realizing this more and more. Entrepreneurship is starting a business and requires hard work, dedication, and commitment.”

Over at Flat6Labs, managing director Fawzi Rahal tells Executive his observations on the direction of Lebanese entrepreneurship. He, too, notes that locally one sees “many more refined solutions, much more refined technology and much more refined entrepreneurs, when compared with just a few years ago,” characterizing the ecosystem’s development trajectory as “a game of numbers and a game of time.”

Improve financing efficiencies

Operating an accelerator that also integrates elements of a venture capital (VC) and seed funding operation, Rahal says that the Lebanese ecosystem needs to evolve to include efficiency gains in its financial flows. According to him, regulatory and legislative frameworks are not fully tuned for optimal entrepreneurship support, given that the current taxation regime and fee mandates draw funds from the system right back into the state’s fiscal cycles, even though the funding of startups is strongly based on funds that enjoy subsidization from the public through Circular 331.

When Flat6Labs supports a startup’s path through formal incorporation, it encounters layers of time-and money-consuming fees, such as an annual $100 fee that is to be paid to the Beirut Stock Exchange. This adds up to a considerable financial burden when a batch of eight or ten new startups goes through the process of properly establishing themselves as joint-stock enterprises—burdens that startups would not have to bear, Rahal says, if they had gone the dangerous route of non-limited liability companies.

This drains away funds that had entered the ecosystem as subsidies for startup companies in the knowledge economy .“This is not a very efficient way of transferring money. With this in mind, I am saying the intentions are there, but the regulations are not,” Rahal says. He notes, however, that there is a silver lining: probable improvements in the ecosystem’s financing efficiencies, as political and institutional stakeholders, such as the prime minister’s office, the Ministry of Labor, and UNDP, have more actively engaged with the ecosystem’s constituents in order to research how many jobs are being created and how regulations can be optimized.

“From the understanding that money inserted in digital ecosystem is coming back by way of adding to GDP growth, every penny spent on capacity-building [with an] entrepreneur, and every time we, as VC, invest the second time [with such an entrepreneur], the odds of a startup succeeding become higher and the capacity in the ecosystem improves,” Rahal says. “This is an impact that you can see [at the BDD] and it is a general direction that BDL is big believer in.” To his way of thinking, the impact of the ecosystem will improve by another great leap, once there are exits that grab real attention.

Exit with style

“Money is something that everybody will get the message of, from entrepreneurs to governments,” he says. “This will be seen the minute when we have our first [very large] exit. If a startup like [music platform] Anghami were to be acquired for a billion USD, you would suddenly have people that have a billion in cash, and if such an amount landed in Lebanon, it would get attention from people who would ask how we can get more of these companies. This kind of money is no joke, even with a prime minister or a governor of a central bank, and will make them ask how to assure that the least portion of this money is leaked via fees or other outflows, and how we can create a system that generate more such amounts.”

Positive entrepreneurial energy in the BDD in autumn of 2018 is in no way only concentrated in the accelerators that staged their demo days in September and October. Sami Abou Saab, the chief executive of accelerator Speed@BDD, was with a delegation of 13 Lebanese startups in Dubai in October, and told Executive upon his return that the entrepreneurs from Beirut were able to shine on the international stage.

“It is a very small ecosystem in Lebanon and we really care for the whole Lebanese startup ecosystem to be highlighted on the international scene,” Abou Saab says, noting that the decision to attend the Future Stars competition at Gitex was based on the positive experience of Lebanese startups at the event a year earlier. The success of teams from Beirut on the Gitex stage, surrounded by enormous competition (140 startups in 2017 and over 230 this year), was, for Abou Saab, another validation of Lebanon’s entrepreneurial capacity. “We have strong local talent and have seen the value of our talent being highlighted and able to shine on those stages,” he says.

Just one notch below the acceleration of amazing new startups, the graduation of coding seminars at SE Factory last month added another paving stone to Lebanon’s road toward the transition to a digital economy that must extend far beyond just the biotope of tech startups. Fadi Bizri, one of the co-founders of SE Factory and a partner in venture capital firm B&Y Partners, tells Executive that over the coding program’s existence of more than two years, interest from banks and companies in the wider economy has increased, and been reflected in the hiring of graduates by all sorts of enterprises, from startups and software houses to some large companies. Bizri says that some explanations that local corporate players used to give for their reticent approach to digitization are no longer convincing. “We think that Lebanon is an ideal place to skill digital talents, and not only local companies agree with that but also foreign companies. I do not buy into the argument anymore that there is not enough internet availability in Lebanon.”

The many positive developments in the tech entrepreneurship realm are not diluted by the observations—shared by many stakeholders in the ecosystem with whom Executive spoke—that much development is yet to be achieved, and that the enthusiasm for this new system, which on occasion boiled over into vapid and sometimes counterproductive hype during the past five years, is most effective in moderation. As Nicolas Rouhana, general manager of IM Capital, puts it, there are issues that make the use of the term “ecosystem” for the entrepreneurship space in Lebanon somewhat questionable.

“It is a landscape with missing parts. There are parts in place but others are missing and we need to keep growing them and tie them together so that they can all together form an ecosystem,” Rouhana tells Executive, noting the sector’s need for more and better mechanisms for exits, as well as a more complete legal and regulatory framework, mechanisms for channeling funds into early stage startups, and research and development. “Universities need to have bigger roles [and we need] more innovation labs. What we are somehow doing well in is the middle stretch of the startup road,” he says.

Digital transformation

Other essentials that are not yet fully developed in the context of Lebanese entrepreneurship are governance and communication, specifically constructive communication in case of problems that arise in any entrepreneurship environment. There is plenty of room in the local entrepreneurship culture for the construction of much better ways to settle financial disputes that are inevitable in these risk-rich realms. This year provided a lesson in that regard, as the failure of one enterprise with a—by local standards—large investment of BDL-backed VC money is still unfolding (see report on the Bookwitty case on page 20).

One big concern that relates to the need for improving risk culture in Lebanon is which paths the stakeholders in the national economy, and, critically among them, the traditional corporate stakeholders and family groups, will choose in transitioning into the inescapable digital economy. Not a single person inside and outside of the entrepreneurship realm uttered any misgivings that this transition is coming and needs to be supported from many angles (see interview about the data center, and its importance in digital infrastructure, on page 50).

From the perspective of BDD insiders, there is much potential for tech entrepreneurs and successful startups to contribute in important ways to the country’s digital future. IM Capital’s Rouhana notes that the Lebanese corporate sector and legacy business community is lagging severely in moving toward the digital world, and emphasizes the urgency of cultural change. The extant corporate culture, he says, is becoming a major hurdle. Companies need to change their mindset and be put in a position to see that the choice to commit to digital transformation will determine whether they remain relevant.

As Flat6Lab’s Rahal sees it, there are many ways for the economy to advance into the digital era, but such a move cannot be orchestrated solely by entrepreneurs left to their own devices. “There is potential and there are intentions to utilize the BDD entrepreneurship ecosystem as a lever for speeding up digital transformation, and the only institution I can name that is wholly behind this is BDL,” Rahal says, adding: “It would be fake news if I said the youth can take this nation forward into the digital transformation of the economy if you just give them the space to do so. A lot more has to happen, on a regulatory, infrastructure, and cultural basis. However, that does not devalue the fact that you have to start somewhere. And that [ability to begin this digital transformation] is where I see the power of the entrepreneurs.”

For the perspective of a successful business group contemplating the digital future, Executive spoke with Hisham Itani, chairman and chief executive of RGH group. RGH is invested in using digital capacities in areas that a few decades ago were ruled by traditional methods and mindsets. “Digital transformation in Lebanon is manifested through several entities, such as BDD and other incubators and accelerators,” Itani says. “For the last ten years, it has been growing steadily through the private sector as well, and more precisely technology-based companies in the country. RGH is one of the companies that invests in technology startups and entrepreneurs, and we are constantly on the lookout for opportunities that drive the digital transformation in Lebanon.”

Itani agrees with the stakeholders in the BDD entrepreneurship system that tackling the legal and regulatory framework is a matter of urgency, to prepare the ecosystem for digital transformation. “We are pushing for this with the government along with other stakeholders. [The country] is going in this direction, and applications are now being deployed very fast. We are looking at important projects that the new government is poised to implement … including the digitization of Lebanon’s civil registry, which contains files that date back to 1932,” he says. “With this achievement, Lebanon is taking a leap into the future. It is the cornerstone for any regulatory reform in the digital transformation.”

Itani goes on to conclude: “We have to think outside the box to create examples and set standards that others will follow, and this in return will create a better ecosystem. The story is not about competing [with other Lebanese players in the same sector or specialty]. Once you create the entrepreneurship ecosystem, you create a nation-level tech hub, and this is my dream.”

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