Thinking It Through
Thinking It Through
Three years on from Circular 331, what have been the achievements and the challenges that still need to be overcome for the success of the startup ecosystem?
Henri Asseily After three years of implementation of Circular 331 the main consequence has been the depletion of capital. We now have banks directly investing in startups, we have venture capitals (VCs) funding them, and we have money going all the way to the startups and the employees. The disbursement of funds means we can now offer good salaries for these professionals to stay in the country; they can find well-paid jobs that are both lucrative and attractive. Companies are now able to look further out for bigger plans and bigger bets whenever they desire, deterring them from moving away in the meantime. Of the USD300 million of a total USD500 million included in the 331 pot, with Leap Ventures having raised USD71 million in the first closing. The pipeline is looking promising, and now we are over 40% deployed after just one year. The fact that we can take the risk and lead in big deals like this allows the private money to piggyback on the work we are doing. For example, we just closed a USD10 million investment out of a USD25 million round. Circular 331 had an amazing impact in a short period of time, and this something that has not happened elsewhere in the Middle East. That being said, we could still do better. There are many cracks to fix before we establish a fully functional ecosystem—some players are not operating correctly, talent is not being given a chance at the super-early stage, and we have big infrastructure problems with chocking internet data caps.
Maroun Chammas We have witnessed some of the biggest challenges come from the same teams when they are not properly integrated and lack cohesion. Putting a bunch of talent together working under the same business model can be tricky if we do not address early-stage problems such as solving business life expectancy and keep the team together to make them able to run successfully. We have applied specific programs to overcome this challenge by measuring the probability of success of the startups in the first three months. This way, we have avoided wasting precious funds in teams with little chances to succeed and we have been able to focus on those startups with a promising future. 331 has been going for three years, and we will still need another five years to have a comprehensible idea of where startups, teams, and businesses stand.
When it comes to the availability of funds, the approach from banks and VCs toward the risks has been different. What is the banking sector's take on the risks accrued by the ecosystem?
Nadim Kassar Banks generally shy away from risks due to the commitment we have toward our depositors. The high-tech industry is rarely understood for the banking sector, since it deviates from our traditional business lines. However, the emergence of 331 and all the initiatives that have followed have enabled our enrollment in the knowledge economy by funding many of these startups. We are now better equipped to fully understand how the ecosystem works. We have created a team of young talents that understands the industry and opened our portfolios to a new range of growing companies that we did not fund before. Companies such as Berytech and Leap Ventures have helped us better understand how the ecosystem works, and we have been successful in this new and exciting endeavor.
The spur of funds to the knowledge economy has brought attention to sectors whose potential was previously unidentified. What segments are the most promising?
Elie Akhrass We recently held a market study and identified three interesting sectors that can add to Lebanon's international competitiveness: financial technologies, wellbeing, and visualization. The country has the talent and the potential to play an active role in these three sectors in the region. We have a strong financial sector with a long tradition of operations abroad, one of the best healthcare industries in the Middle East, and we have creativity running through our veins. The results from this study show that we can be great performers in these three sectors.
Henri Asseily In my opinion, Lebanon's biggest strengths lie in its people's resilience, their connections, and openness to other cultures. We are in a demanding region and have always been an open nation to trade and exchanges that are good fundamentals for the creation of an entrepreneurial mindset. We have invested in different interesting companies across different sectors, some of them existed way before 331 was put in place, and we want to keep exploring opportunities in new endeavors in the digitalization of banking, in e-commerce, and in creating an e-government.
With the access of funding solved by Circular 331, the remaining problem goes up to market access for the products coming out from the knowledge-based economy. How can this problem be solved?
Henri Asseily This is the most important thing to the ecosystem, since there will be no company if the products do not succeed. In the knowledge economy you compete against top-notch companies and startups, hence offering the best product is crucial for your survival. Companies also need to tailor their products to the markets they are willing to attract, adjust to their rules, and realize than each market offer different opportunities and demands different assets. What we hope to achieve through the knowledge economy is to see design created in Lebanon and manufacturing produced in Germany or China. Most of the industry that comes out of the ecosystem does not need large factories with overwhelming machinery; they require small factories to produce thousands of electronic devices.
SALIM ZEENNI This was precisely one of the AmCham's goals when we organized Startup Lebanon last year: to attract people by increasing their expectations on the startups we took with us. We do not want our ecosystem players to emigrate; we want them to be exposed to international markets by producing and exporting from their own land. I do not think there is such complexity in customs; we have the Greater Arab Free Trade Agreement (GAFTA), which stipulates a strong custom framework across all Arab nations. We also have the Euro-mediterranean Free Trade Agreement, granting our products direct access to Europe. We also have the GSP system with the US. My point of view relates more to a lack of technology than to difficulties in our customs system.
HENRI ASSEILY We still need adequate customs laws to match the growing needs of the industry, since the current state is deterring investments to flow to certain sectors that are more dependent with the import or export of supplies and finished goods. We have seen some cases of high caliber companies that have to stop their profitable business due to the high monetary requirements they get at customs. After all, capital is not unlimited, and it will flow through the easiest paths to reach its targets, hence manufacturing holds little chances to benefit from it. Lebanon has the interesting and potentially profitable position of being in between the problems any emerging market presents and still having fully fledged development in certain economic areas. We can design and build products that match the needs of developing countries around the world. We understand the issues and we have the capabilities to create a competitive local industry. The fact that developed nations are not faced with these problems, and that they do not experience them first hand, gives us the comparative advantage to capitalize on these opportunities.
The consensus seems to point at the hindrance antiquated rules cause to the system. How can this issue be solved and how can you as players bring about these changes?
HENRI ASSEILY The strategy we have embraced is to put pressure from the bottom to the top. With all the complexities in the political sphere, we are aware that the change must come from the economic environment, so we apply pressure to at least bypass the unsolved problems that political classes should be addressing. For instance, putting pressure on the use of the internet, which is jeopardizing the real sectors of the economy. We want to build up the knowledge economy, and to make it really valuable and interesting, so that nobody can sweep it under the carpet. We want to make enough buzz so the problems that are dragging the sector's potential down can be solved.
SAMER KARAM I am actually on the other side of the table concerning these issues. I do not believe we have any challenges. We are no different than any other country when it comes to challenges. All nations face obstacles, and they all deal with them in different ways according to their capabilities and the opportunities they see in them. Lebanon is not departing from an undesirable situation; we have a stable economy, we are not under siege, and we have human talent and economic resources. But we seem to focus more on the problems rather than the solutions. My view is that today we do not have to see why this or that happens, but how we can bumper the opportunities that are in front of us and how we can stream the pipelines of talent, funds, and accelerators to exit profitable startups. There is USD600 million available today, and that is not remotely close enough to how much the knowledge-based economy can take. We have an enormous pool of talent waiting to consume these funds and develop its ideas. We have the money, so let's do everything that is in our hands to keep people here.
In terms of promoting this new breed of startups and to help realize their potential at an international level, how are you attracting potential investors to Lebanon?
MAROUN CHAMMAS One of the concerns that needs to be raised today is the need for seed capital. Berytech started Speed as an accelerator for growing startups and the response has been overwhelmingly positive, but we need to have a stronger ecosystem at the seed level. It is all about the level of the universities and the technical schools—all the things that are pre Speed. We need to call attention on universities to do more with their students, to foster their talents while they are still studying. Today we have a bug chunk of startups that have come out of Speed to operate in Lebanon, in Saudi Arabia, or in the Emirates. But in order to widen the pipe and accelerate the process, we need the universities and technical schools involved in the ecosystem.
SAMER KARAM This concern Maroun talks about is actually being shaped at the moment. We have a big conference coming up this year, where the target is that 30% of an estimated 100,000 attendees will be students. We are aiming at going one step back in the process and tapping the culture in the country. Sometimes, we forget that in order to make entrepreneurs, we need to develop an entrepreneurial culture. We need to nurture their minds and make them see their potential in the long term. Every Lebanese individual who recently graduated from university wants to open his or her business; they realize the ease in which businesses can be achieved in Lebanon. The problem is that many of them do not see the light at the end of the tunnel when it comes to the country's situation. This has changed with the stability brought about by Circular 331; we have created a non-political sector that stays apart from corruption or conflict of interests at the political level. It is now just a matter of getting them to realize that money can be made this way. It is more hard work, it is longer term, and there is a high risk of failure, but the rewards are enormous.
TAMARA ZAKHARIA The fact that most institutions are outdated creates a huge gap in linking talents to funds. When students graduate, they are unaware of what awaits them in the entrepreneurial ecosystem, and most of the time their skills are not parallel to the challenges they face when developing a startup. That is why we created Innovation Weekend as a joint initiative with Startup Megaphone to serve as a bridge between university students and the private sector. We had students from all over Lebanon coming for a three-day workshop where they faced the task to solve a company's problem as a practical experience method, the company was so impressed by the students' work that it decided to set up an innovation unit, and it offered the finalists the opportunity to join its program.
How can such initiatives be scaled up to bring about necessary changes in the approach of tertiary education toward innovation?
HENRI ASSEILY Academia in Lebanon has never been research focused. The fact that universities in Lebanon are teaching-driven does not create the necessary type of people to get them into the entrepreneurial spectrum. Students need to go back to research.
NADIM KASSAR Universities here are focused on getting their students jobs once they graduate. The education system does not cater to the creation of entrepreneurs at all. Of course, every graduate cannot become an entrepreneur and the concern of universities to find him or her a job is both fair and understandable, but we need more effort from their side.
SAMER KARAM Entrepreneurship is a last resort. This is a heritage of many academic programs that do not see that innovation comes from entrepreneurship, and this has an impact when resources are allocated on research. We try and connect companies to young talent to incorporate them with those areas where company innovation is needed, since these kids have no limits for their thinking. Companies are impressed by how much can be created in such a short period of time and by how many new concepts can come about. Corporations need to focus on internal investments and on creating value that comes out of innovation. They realize that, and that is why they are prone to support the ecosystem. But we need to bridge this cooperation before a few key players take over local industries and vanish any chances of success for an exited ecosystem.
Are there a fair number of technical schools and an adequate level of quality among them to graduate the qualified people Lebanon needs?
HENRI ASSEILY Wherever you ask this question the answer will always be the same: It is never enough. The world is in a constant state of evolution and everything is moving: intelligence, software, digitalization, mobilization; it is us who are lagging behind. The world does not have enough people to feed this ever-growing revolution. We have increased our level of talent production in Lebanon, and we are able to retain them within our borders. Things are moving forward indeed, but it is never enough.
ELIE AKHRASS In the particular case of the UKLTH, we are in the process of creating an academy to deliver certified technical and soft skills trainings, and where we can set a forum to discuss everything that is happening in the ecosystem. We have reached a consensus and will start it by the end of 2016.