BUILDING HIGH-IMPACT ENTREPRENEURSHIP ECOSYSTEMS
HOW TO IMPROVE
ACCESS TO FINANCE
IN LEBANON
a report from:
supported by:
Lebanon needs a big win. We need
at least one major success story to
gain momentum around startups
and entrepreneurship.
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Endeavor Insight
Access to Finance in Lebanon
I.
II.
written by
Rabia Qari
Endeavor Insight
5
Introduction
6
Mapping the Finance Landscape
8
III.
How to Improve Access to Finance in Lebanon
12
IV.
Appendix
14
About
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V.
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Endeavor Insight
Access to Finance in Lebanon
I. Introduction
When entrepreneurs and investors in Lebanon are interviewed, the need for a first home
run is a resounding theme. “Lebanon needs a big win. We need at least one major
success story to gain momentum around startups and entrepreneurship,” said Elie
Khoury, Co-Founder of Woopra and YallaStartup. Achieving this type of success story
is a difficult feat, and one that is paradoxically tied to the existence of the very entrepreneurial ecosystem which a big success could help create.
In countries with a nascent entrepreneurial ecosystem, it is often difficult for
entrepreneurs to access venture capital, a key component of funding during a startup’s
crucial growth stage. When companies cannot access debt or rely on friends and family
for funding, venture capital becomes especially relevant. Infusion of capital can propel
a local star into a monumental success. In a study done by the Center for European
Economic Research, which surveyed 6,000 small- and medium-sized enterprises (SMEs)
in Germany, equity investment was found to be a key driver for R&D in SME’s.1 In
Lebanon, this kind of R&D is a needed asset. As seen below (Figure 1: Access to Venture Capital for Innovative Entrepreneurs), Lebanon rated 2.7 (on a scale of 1-7) for ease
of access to venture capital, the lowest amongst many MENA countries.2
Figure 1: Access to Venture Capital for Innovative Entrepreneurs
In your country, how easy is it for entrepreneurs with
innovative but risky projects to find venture capital? (1–7)*
4.2
Saudi Arabia
4
UAE
3.3
Morocco
3
Egypt
Jordan
2.7
Lebanon
2.7
*1 = very difficult ; 7 = very easy
There is a strong consensus that access to finance remains a pressing challenge for
entrepreneurs in Lebanon. Which begs the questions, what are the real obstacles to
obtaining finance and how can these issues be tackled?
1 Center for European Economic Research, 2006
2 World Economic Forum, “The Global Competitiveness Report”, 2011-2012
This report examines the financing landscape in Lebanon and relies on primary
interviews with 18 entrepreneurs, banks, venture capital funds (VCs), incubators and
government representatives. (See appendix for a full list of names.) The subsequent sections will first layout the current state of financing options in Lebanon and then provide
recommendations for how the situation can be improved in the short-term via quick
wins. These recommendations focus not on policy changes that would take years to fully
roll-out, but rather on proactive measures that entrepreneurs, funders, and the government can take to rapidly improve financing options.
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Endeavor Insight
Access to Finance in Lebanon
II. Mapping the Finance Landscape
Over the course of the last decade, Lebanon has experienced tremendous political
turmoil and government upheaval. This instability has hindered its ability to attract
foreign investment and increased its dependence on domestic capital. The local Lebanese
financing landscape appears minimal upon first inspection. Deeper analysis, however,
reveals that despite a limited VC presence, a robust environment of incubators and
entrepreneurial support organizations has emerged in the last three years.
Figure 2: Investment Landscape in Lebanon
Early
Berytech
Seeqnce
Funders
LBA
Berytech
Fund
MEVP
Cedrus
RED
Wamda
Fuacilitators
Kafalat
BIAT
Center
SME
Unit of
Ministry
Late
AltCity
Arab
Net
Bader
Mowgli
SouthBIC
Endeavor
2000
# of
VC
Deals
0
you see so many accelerators and incubators coming up now - to help these companies
grow.” Lebanon is now in a stage of waiting. New incubators and facilitators must do
their work and assist companies in growing large enough to warrant active VC deal flow.
A detailed look at both facilitators and funders further demonstrates the distinct roles
each must play to create the financial landscape so crucial to an entrepreneurial ecosystem.
DEBT FINANCING:
Banks
In Lebanon, only 23.8% of firms use banks to finance investments, compared to 51.9%
in Turkey.3 This stark distinction seems to be rooted in the risk-averse nature of Lebanese banks; banks often require collateral of up to 200% of the loan, making it impractical for start-ups to borrow money.
A solution to this problem emerged in 2000, with the founding of Kafalat, a financial company that guarantees loans for SMEs, allowing them to obtain loans from banks
with little or no collateral. Kafalat offers different loans depending on business needs. Its
loans can reach up to $400,000. Since its inception, Kafalat has provided loans worth a
combined total of $123 million.4 With interest rates subsidized by the Lebanese treasury,
Kafalat is the easiest way for a new business to get financing with reasonable collateral
and interest rates. “Kafalat is a great product”, says Walid Hanna of MEVP, “when we
see a company has received a Kafalat loan, it automatically checks a lot of boxes for us in
our diligence process.”
Several Lebanese banks, including BLC Bank, are beginning to create programs and
loans with the specific aim of supporting entrepreneurs. As long as more banks adopt
this approach and this attitudinal shift continues, there will be more and more opportunities for entrepreneurs to get funding.
2012
0
0
VC/
Growth Capital
0
0
0
Incubator/
Accelerator
0
0
2
Bank
Guarantor
1
7
Facilitator
9
5
Angel
Size of bubble indicates how many investments have been made
*YTD
Source: Zawya Investor
The chart above (Figure 2: Investment Landscape in Lebanon) outlines the evolution of
the entrepreneurial ecosystem in Lebanon since 2000. Two trends are immediately apparent. First, the number of VC deals done over the last three years (from 2010 – 2012)
is twenty-one versus just three over the previous ten years (from 2000 – 2009). Beyond
number of deals, most of the funders and facilitators in the entrepreneur ecosystem have
also emerged in the last five years. Because the ecosystem is still at a nascent stage, it is
likely too early to see the impact of these new VCs, incubators, and facilitators. There
appears to be tremendous potential for the future as they gain traction.
Omar Christidis of ArabNet, the hub for Arab digital professionals and entrepreneurs, commented, “You don’t have that many VC-ready startups” he says, “this is why
EQUITY FINANCING:
Angels
Angel investors are a common source of seed funding for entrepreneurs. Perhaps the
smallest community in the ecosystem, the angel community in Lebanon is still in an
early-stage of development, consisting mostly of “family and friends” investments. The
only formal network, the Lebanese Business Angels (LBA), was started in 2009 by
Bader, a program whose mission is to support entrepreneurship throughout the entire
life-cycle of an entrepreneur. LBA has completed two investments to date. Several of our
interviewees also noted that the potential exists for an angel network to develop outside
of Lebanon that consists of Lebanese expats currently residing in the US, Europe and all
over MENA. There is a large Lebanese ex-pat population, some of whom may be willing
to invest in their home country.
VCs
VCs were most often cited in interviews as the primary source of growth capital in
Lebanon. Yet, one recurring complaint from Lebanese entrepreneurs is that there are
not enough VCs to approach. (The real issue may be, however, that there are not enough
start-ups ready to approach VC firms). The main VC players in Lebanon are Berytech
3 IFC Data, 2009
4 Kafalat website (kafalat.com.lb)
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Access to Finance in Lebanon
Fund, Cedrus Ventures, MEVP, Riyada Enterprise Development (RED), and the
Wamda Capital Fund. The chart below (Figure 3: VC Investment in Lebanon) summarizes the number and average value of transactions that have been publicly disclosed by
these firms for solely Lebanese investments.
Figure 3: VC Investment in Lebanon
Average Amount Invested by VCs
Number of VC Deals
2010
2011
$0.84
7
$0.46
8
Source: Zawya Investor
From 2010 to 2011 there were a total of 15 VC deals done for 11 companies.
Regardless of this limited scope, the fact that VC funding has steadily grown over the
last two years is encouraging. Typically, VC funding is considered a viable way to raise
funds for those companies that have a proven model and are ready for growth capital.
Few startups in Lebanon are currently at this stage. Any further trajectory upward for
growth in VC deal-flow will require significant investment on the part of incubators and
accelerators and other facilitators to ensure start-ups are scaling to the next level.
Incubators/Accelerators
Incubators and accelerators are designed to support startups by offering resources like
mentorship, development and training in addition to financial assistance. In Lebanon,
there are currently only two accelerators: Berytech and Seeqnce. The next few years
should give rise to additional incubators to spur the development of early-stage companies.
ENTREPRENEURIAL SUPPORT:
Facilitators
Facilitators include a wide range of organizations that do everything from plan conferences and educational events to mentor and provide resources and connections for
entrepreneurs. The main players in this space include AltCity (startup and SME support), ArabNet (platform for digital startups), Bader Young Entrepreneurs Program
(mentorship, workshops), BIAT or Business Incubation Association Tripoli (business
creation support for Northern Lebanon), Endeavor (resources, mentorship), MIT Enterprise Forum of the Pan Arab Region (business plan competition), Mowgli Foundation
(mentorship), SME Unit for the Ministry of Economy and Trade (platform providing
resources), South Business Innovation Centre or SouthBIC (business creation support
for Southern Lebanon) and Yalla Startup (startup weekend event). This group of organizations, along with the incubators, will be a main source of entrepreneurial activity in
the coming years as they continue to support young companies in the development and
scaling of their businesses.
Also of note is the facilitative role that IDAL (Investment Development Authority
of Lebanon) and the Office of the Prime Minister play in the ecosystem. In addition to
coordinating the database of all ecosystem actors, the Office of the Prime Minister has
created the Entrepreneurs Lebanon website with the Central Bank, piloting a project
for innovative ideas with the European Union, and planning to launch a seed fund in
conjunction with the World Bank. IDAL, a support branch of the Office of the Prime
Minister, focuses on coordinating all of the ecosystem actors. Some of IDAL’s main
initiatives include holding workshops for accelerators andamending laws to be more
favorable for IT companies.
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Access to Finance in Lebanon
III. How to Improve Access to Finance in Lebanon
Based on the number and complexity of issues around access to finance in Lebanon,
below are detailed, actionable steps for the three main players in this ecosystem: the
government, the funders and the entrepreneurs. These steps reflect the themes which
emerged from the direct responses of all 12 interviewees when asked what they would
do to improve access to finance.
What everyone should do:
1) Engage and organize the Lebanese diaspora: An estimated 14 million
people of Lebanese decent live outside of Lebanon compared to just 4 million
people in Lebanon itself.5 Ecosystem actors should develop a strategy to leverage
this group.
The government could invite prominent ex-pat business leaders and entrepreneurs to visit Lebanon, meet with dynamic Lebanese entrepreneurs and experience the entrepreneurial ecosystem. IDAL plans on employing this exact tactic
by working with organizations such as LIFE (Lebanese International Finance
Executives) and LebNet. Their goal is to help to encourage more mentorship and
angel investment.
VCs should try to engage Lebanese entrepreneurs in Silicon Valley and other
locations, similar to what is being done by LebNet. By involving these entrepreneurs on their boards and in their investment committees, VCs can expose the
Lebanese start-up community to the influence, inspiration, and guidance of the
most successful Lebanese entrepreneurs across the world.
What the government should do:
1) Focus on infrastructure: “The government needs to work on providing the
basics,” said Elie Akhrass of Kafalat. 100% of the funders and facilitators interviewed said that the main thing the government should work on was developing
infrastructure. In order to foster a truly dynamic entrepreneurial environment,
the basics, electricity and internet, need to be reliable utilities.
2) Create a space to foster entrepreneurship: The government should invest
in creating a space that is exclusively for entrepreneurs. Similar to the concept of
New York’s General Assembly, which receives city funding in order to promote
education around technology, design, and innovation, providing a home for this
sector will encourage collaboration and foster education amongst entrepreneurs.
“We need a home for this space,” comments Omar Christidis of Arab Net, “this
is a key way to stimulate growth in the sector.”
What entrepreneurs should do:
1) Learn to bootstrap: Too many entrepreneurs see successes in Silicon
Valley as evidence that funding should fall at their feet. As Elie Khoury, cofounder of YallaStartup says, “YallaStartup means ‘start working!’ You as an
5 Foreign & Commonwealth Office, United Kingdom
entrepreneur have to start figuring out how to make it work with low funding.”
Entrepreneurs in Lebanon need to learn the importance of making sacrifices and
bootstrapping. Plenty of entrepreneurs have created highly successful businesses
with only limited funding in the early stages, but it required great sacrifice to
pursue what they believed in.
2) Be investment ready: Entrepreneurs should not plan to approach VCs until
they are ready. They need to have something to show, a prototype, a demo or
a proven model before approaching funders. Too often, entrepreneurs show up
with a “great idea” and a business plan without any proof of concept or revenue
model. “Take the time to go through the process,” advises Walid Hanna of
MEVP, “build the business, work with incubators, be patient, get good mentors
and wait until you are ready to approach VCs.”
3) Look for strategic partnerships: After seeking out family and friends, most
Lebanese entrepreneurs in Lebanon approach VC firms for funding. However,
there is an alternative to traditional VC that can often be a better match – strategic partnerships or smart money. “Liaise with bigger companies that can benefit
you in ways other than capital,” recommends Fadi Daou, serial entrepreneur and
founder of MultiLane SAL. For example, rather than seeking traditional VC
funding, a startup focused on providing media services might consider developing a partnership with a top media agency in Beirut. These types of partnership
can provide strategic direction in addition to funding.
What funders (VCs) should do:
1) Build a team that includes former entrepreneurs: VCs should make sure
they have a good mix of investment professionals and ex-entrepreneurs on their
teams. “VCs need more people who have started their own business and have
walked in our shoes,” comments Rabih Nassar, founder of Element^n. Endeavor
has seen great examples of successful entrepreneurs becoming VCs in other
emerging markets, such as Kaszek Ventures in Latin America. These entrepreneurs-turned-VCs can offer extra value to their investees based on their experience.
2) Be transparent: VCs can be more transparent by explaining what they are
looking for and how they plan to work with entrepreneurs. By putting out
sample term sheets, similar to what Fred Wilson of Union Square Ventures in
New York City posts on his blog, companies will get a sense of what they should
expect. Similarly, VCs can include templates for the types of presentations and
information they are looking for in pitches along with sample financial models.
“They also need to talk about the investments they have made and how they are
doing” comments Samer Karam of Seeqnce, one of the few accelerators in Lebanon. By being more transparent about their requirements and their performance,
both VCs and entrepreneurs can save a lot of time.
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Access to Finance in Lebanon
IV. Appendix
List of people interviewed (in alphabetical order)
Antoine Abou Samra, Bader (Facilitator)
Elie Akhrass, Kafalat (Funder)
Nemr Nicolas Badine, Eastline Marketing (Endeavor Entrepreneur)
Ghassan Bejjani, LIFE (Facilitator)
Sami Beydoun, Berytech Fund (Funder)
Brahms Chouity, At7addak (Endeavor Entrepreneur)
Omar Christidis, ArabNet (Facilitator)
Fadi Daou, MultiLane SAL (Expert, serial entrepreneur)
Lara Ghibril, Zawya (Research)
Elie Habib, Riyada Enterprise Development, Lebanon (Funder)
Habib Haddad, Wamda (Funder)
Walid Hanna, MEVP (Funder)
Samer Karam, Seeqnce (Accelerator)
Elie Khoury, Woopra, YallaStartup (Facilitator)
Jad Khoury, Print Works (Endeavor Entrepreneur)
Diana Menhem, IDAL (Facilitator)
Rabih Nassar, Element^n (Endeavor Entrepreneur)
Salam Yamout, Office of the Prime Minister (Facilitator)
V. About
About Endeavor
Endeavor is leading the global high-impact entrepreneurship movement to catalyze longterm economic growth. Over the past ten years, Endeavor has selected, mentored and
accelerated the best high-impact entrepreneurs around the world. To date, Endeavor has
screened more than 30,000 entrepreneurs and selected 726 individuals leading 455 highimpact companies. These entrepreneurs represent over 200,000 jobs and over $5 billion
in revenues in 2011 and inspired future generations to innovate and become
entrepreneurs too.
About Endeavor Insight
Endeavor Insight is the research arm of Endeavor that seeks to deepen understanding
of how high-impact entrepreneurs contribute to job creation and long-term economic
growth in order to educate key constituencies, such as policy makers. In addition,
Endeavor Insight seeks to serve as a knowledge center for high-impact entrepreneurs,
VCs and others in order to provide useful information and tools that assist high-impact
entrepreneurs as they grow their business.
About Omidyar Network
Omidyar Network is a philanthropic investment firm dedicated to harnessing the power
of markets to create opportunity for people to improve their lives. Established in 2004
by eBay founder Pierre Omidyar and his wife Pam, the organization invests in and helps
scale innovative organizations to catalyze economic and social change. As of August
2012, Omidyar Network has committed more than $550 million to for-profit companies
and nonprofit organizations that foster economic advancement and encourage individual
participation across multiple initiatives, including entrepreneurship, financial inclusion,
property rights, government transparency, consumer Internet and mobile.
To learn more, visit www.omidyar.com
About The Abraaj Group
The Abraaj Group is a leading alternative investment management group in global
growth markets. Founded in 2002 by Arif Naqvi, the group has raised over US$ 8
billion and distributed c. US$ 3.5 billion to investors. Employing over 300 people, the
group has 33 country offices spread across 7 regional hubs in Bogota, Dubai, Istanbul,
London, Mumbai, Nairobi and Singapore.
The Abraaj Group currently manages approximately US$ 7.5 billion across 25 sector
and country-specific Funds across 3 primary strategies: (i) Private Equity (majority and
significant minority investments greater than US$ 50 million); (ii) Small and Mid-Cap
(SMC) PE investing (targeting influential minority investments of less than US$ 50 million); and (iii) PE Real Estate (primarily yield-generating real estate investments).
Funds managed by the group have holdings in over 150 partner companies that
collectively employ in excess of 100,000 people and create sustainable value in sectors
including manufacturing, education, retail, aviation, oil and gas, financial payments
infrastructure, healthcare and agribusiness. The group’s current partner companies
include industry leaders such as Network International, the largest independent payment
solutions provider in the Middle East and Africa, Integrated Diagnostics Holding, the
Middle East’s largest privately owned medical testing laboratory, Brookside Dairy, the
largest dairy in East Africa, and Iasacorp, a long established family run women’s retail
business in Peru.
The group is committed to the highest environmental, stakeholder engagement
and corporate governance standards and is a signatory of the UN-backed Principles for
Responsible Investment and the United Nations Global Compact.
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Endeavor Insight
November 2012
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