A prototype of manakish distributor developed by a Lebanese startup. Photo P.H.B.
“Startups have suffered a double blow, with first the banking restrictions (put in place since the end of August), and then the Covid-19 confinement measures, which were decreed by the authorities in March and began to be gradually lifted in May,” Fadi Bizri, partner at B&Y Venture Partners and program manager at SE Factory, told L’Orient-Le Jour. Lebanese banks have drastically restricted the banking operations that can be carried out from dollar accounts – excluding fresh money, whose freedom of disposal has been guaranteed since April by the Bank of Lebanon (BOL).
“This has created significant operational problems for startups with financial commitments abroad,” Bizri said referring, for example, to payments of server rental fees. This development is a little more nuanced for fundraising. While many investors have decided to postpone or cancel their decisions, as a result of banking restrictions and unfavorable economic conditions due to the impact of the Covid-19 on the global economy, some have decided to move forward.
Circular No. 331 “Frozen”
“BOL’s Circular no. 331 is unofficially frozen today, but in any case, it was not the primary means for startups to receive funds. 'Business angels' and foreign funds were and still are the majority,” said Jihad Bitar, director of the Beirut-based Smart ESA business incubator/accelerator. Published in 2013, the circular encourages commercial banks to invest in innovation by guaranteeing 75% of the sums injected.
“(Some) startups were having a harder time getting investments a year ago than they do now. Today, some angel investors prefer to take their money out of banks, given the economic situation, and invest in startups in Lebanon,” he added. However, this trend is not as straightforward as it is in real estate, in which many depositors facing restricted access to their funds have invested in recent months.
In other respects, the crisis, in all its dimensions, has of course severely disrupted the pace of businesses with the closure of banks and administrations, whether in the weeks following the start of the anti-government protests that erupted on October 17 or with the imposition of the state of health emergency on March 15. “Some startups have even seen their opportunities disappear with the shutdown of sectors they have relied on, such as tourism and catering,” Bizri said, while others focusing on areas of immediate interest, such as medicine, have created many opportunities and had great success despite the circumstances.
There is currently no overall estimate of the number of startups that have had to put things on halt. “You can just see that those who were already in advanced stages and who have money abroad are doing better than others,” the entrepreneur added.
However, this unfavorable situation has not been enough to discourage the supportive ecosystem for Lebanese startups, said Berytech, which published a strategic report on May 14 about the sector’s issues. Produced in collaboration with the Cooperation Platform for Economic Development in the Mediterranean (ANIMA) and under the initiative called The Next Society, which is active in seven Mediterranean countries, the document includes a list of 29 “concrete recommendations” to “stimulate the transfer and commercialization of technologies in Lebanon.” The authors of the report have already communicated their findings, especially on social networks.
In addition to the state and its institutions, which are invited to strengthen cooperation with the private sector, these tracks are aimed primarily at five private universities – the American University of Beirut, St. Joseph’s University, the Lebanese-American University, Balamand University and the Holy Spirit University of Kaslik – which Berytech is asking to “revolutionize” the process of technology transfer. The report also calls on the government to finally invest in the sector with the aim of propelling the “knowledge economy” to the forefront of the Lebanese scene.
McKinsey Plan
Last September, the BOL’s governor estimated that the digital and technology startup sector was worth nearly $1 billion and contributed 1.5% to the gross domestic product (GDP).The development of innovation, also known as the “knowledge economy,” has regularly been proposed as one of the possible alternatives to transform the Lebanese economy into a more productive model. The government’s recovery plan devotes a few lines to it, but it was mainly the McKinsey & Company report, commissioned by Lebanon in early 2018 and published a year later, that considered the sector a major axis representing great potential for the country.
In its report, Berytech notes the country’s shortcomings in this area. Its authors cite, among other things, the lack of strong intellectual property protection regulations (a fact that is regularly pointed out by the US Trade Representative), the lack of funding sources dedicated to the creation of prototypes and the too marginal exchanges and partnerships with university alumni associations abroad. The lack of skills in certain areas (particularly experienced coders) is also problematic.
Regarding solutions, Berytech suggests, among other things, the creation of a scholarship fund for research, dedicated to Lebanese students and researchers in Lebanon and abroad, to encourage the creation and commercialization of prototypes. It also proposes allowing the Lebanese Industrial Research Achievements (LIRA) program to apply for international funding.
“Despite the crises, there is no time to lose!” the Berytech communications office told L’Orient-Le Jour. For Bitar, “the problem of the Lebanese ecosystem is above all a mentality problem. It wants to copy the American model while we would have to invent a local model, which ESA has developed. Cooperation at the Lebanese level is necessary for the sector to develop. But this is still far from being achieved in Lebanon.” Without fundamentally questioning Berytech’s approach, he suggested starting with convincing the state – if it succeeds in negotiating external aid after its discussions with the International Monetary Fund (IMF) and getting the country back on track – to start by investing $2 million a year to finance local startups.
(This article was originally published in French in L'Orient-Le Jour on the 3rd of June)
