Start Up Ecosystem in Lebanon: Challenges and Opportunities Ahead

I recently attended the First Lebanese Startups Conference in New York City and I was frankly pleasantly surprised by the top caliber of speakers and the spirit of Lebanese entrepreneurship.

30 speakers, 25 startups, 50 investors and 250 entrepreneurs and professionals at The Plaza Hotel in New York City. A real inspiring event to be remembered.

Beirut is clearly rapidly shaping up to be a powerhouse for startups in the Middle East. It has many of the key elements: A highly entrepreneurial culture; incubators and accelerators; venture capital; and access to growth funding. In part because it is the most liberal state in the MENA (Middle East and North Africa) region, and has a western-style banking system bequeathed to it by the French a long time ago, Lebanon is uniquely poised to generate startups which aim both at the Arab world and the wider world at large.

With the Lebanon Central Bank “Circular 331” initiative to inject major capital into the local startup economy, USAID investing $15 million to support Lebanon’s entrepreneurs and the UK government supporting a scheme to bring Lebanese startups to the UK and to the attention of London-based investors, Lebanon is without a doubt on the right path.

Circular 331, issued by Lebanon’s Central Bank and encouraging commercial banks to invest in startups is clearly one of the boldest and smartest initiatives undertaken so far by the Lebanese government. For the uninformed, the Central Bank now guarantees up to 75 percent of the value of a commercial bank’s investments into a startup. That move opened up a potential of $400 million that could be invested into venture capital funds or directly into startups. Over 15 Lebanese banks have already taken part in the scheme. With these banks also fueling debt financing to tech companies through a subsidized government loan program named Kafalat – a very innovative public sector initiative, Circular 331 has taken that up a notch by encouraging venture financing.

A couple of things that stuck to my mind at the New York Event that I heard again and again:

1. Lebanese entrepreneurs are driven by opportunity & passion to succeed, not by need. Ambition is at the core of the Lebanese mentality.
2.  Lebanese entrepreneurs are comfortable with uncertainty.

So the building blocks are all already here. Beirut is using its culture of freedom, its diversity, its low-cost high fun living standards and its location to its advantage in the Arab region despite the politicians still not agreeing on the election of their next President, despite the fact that Lebanon is still being hostage to a bunch of rag head terrorists (i.e: Hezbollah) – proxies of the Islamic Republic of Iran – and despite the government still lacking to provide running water, steady electricity or internet or simply protecting its people from thugs, beggars and bums from the last war spree.

Bottom Line: Still over 50% of all professionals I met out there still would not start a company in Lebanon. So what’s the message here?

Well, I believe not understanding and agreeing what “Entrepreneur” and “Startup” mean can sink an entire country’s entrepreneurial ecosystem. I am afraid Lebanon is a case in mind.

So for all the moron and clueless Lebanese politicians out there, I hope they wake up sooner than later and before their stupid actions shut down this great ecosystem in the making altogether.

So what’s a startup?  Who’s an entrepreneur? How do the ecosystems differ for each one? What’s the role of public versus private funding?

Having been over 30 years in the venture capital/private equity industry and having backed over 125 companies & serial entrepreneurs during my Wall Street career – worth in aggregate over $10 billion in the space -, there are really six types of start-ups to consider when building an eco-system.

They are: lifestyle business, small business, scalable startup, buyable startup, large company, and social entrepreneur. All of the individuals who start these organizations are “entrepreneurs” yet not understanding their differences screws up public policy because the ecosystem in supporting each type is radically different.

So for Lebanese policy makers, the first order of business is to methodically think through which of these entrepreneurial paths they want to help and grow and why.

Lifestyle Startups: Work to Live their Passion
A lifestyle entrepreneur is living the life they love, works for no one but themselves, while pursuing their personal passion. In Lebanon the equivalent is the web designer who loves the technology, and takes coding because it’s a passion.

Small Business Startups: Work to Feed the Family
Today, the overwhelming number of entrepreneurs and startups in Lebanon are still small businesses. They make up over 95% of all companies and employ the vast majority of all non-governmental workers. Small businesses are grocery stores, hairdressers, consultants, travel agents, Internet commerce storefronts, carpenters, plumbers, electricians, etc. They are anyone who runs his/her own business. They work as hard as any entrepreneur. They hire local employees or family. Most are barely profitable. Small business entrepreneurship is not designed for scale, the owners want to own their own business and “feed the family.” The only capital available to them is their own savings, bank and small business loans and what they can borrow from relatives. Small business entrepreneurs don’t become billionaires and (not coincidentally) don’t make many appearances on magazine covers. But in sheer numbers, they are infinitely more representative of “entrepreneurship” than entrepreneurs in other categories—and their enterprises create local jobs.

Scalable Startups: Born to Be Big
Scalable startups are what Silicon Valley type entrepreneurs and their venture investors aspire to build. Google, Skype, Facebook, Twitter are just the latest examples. From day one, the founders believe that their vision can change the world. Unlike small business entrepreneurs, their interest is not in earning a living but rather in creating equity in a company that eventually will become publicly traded or acquired, generating a multi-million-dollar payoff. Scalable startups require risk capital to fund their search for a business model, and they attract investment from equally crazy financial investors – venture capitalists. They hire the best and the brightest. Their job is to search for a repeatable and scalable business model.  When they find it, their focus on scale requires even more venture capital to fuel rapid expansion. Scalable startups tend to group together in innovation clusters (Silicon Valley, Shanghai, New York, Boston, Israel, etc.) They make up a small percentage of the six types of startups, but because of the outsize returns, attract all the risk capital (and press.) While large companies execute known business models, startups are temporary organizations designed to search for a scalable and repeatable business model.

Buyable Startups: Born to Flip
In the last five years, web and mobile app startups that are founded to be sold to larger companies have become popular. The plummeting cost required to build a product, the radically reduced time to bring a product to market and the availability of angel capital willing to invest less than a traditional VCs– $100K – $1M versus $4M on up – has allowed these companies to proliferate – and their investors to make money. Their goal is not to build a billion dollar business, but to be sold to a larger company for $5-$50M.

Large Company Startups: Innovate or Evaporate
Large companies have finite life cycles. And over the last decade those cycles have grown shorter. Most grow through sustaining innovation, offering new products that are variants around their core products. Changes in customer tastes, new technologies, legislation, new competitors, etc. can create pressure for more disruptive innovation – requiring large companies to create entirely new products sold to new customers in new markets. (i.e. Google and Android.) Existing companies do this by either acquiring innovative companies (see Buyable Startups above) or attempting to build a disruptive product internally. Ironically, large company size and culture make disruptive innovation extremely difficult to execute.

Social Startups: Driven to Make a Difference
Social entrepreneurs are no less ambitious, passionate, or driven to make an impact than any other type of founder. But unlike scalable startups, their goal is to make the world a better place, not to take market share or to create to wealth for the founders. They may be organized as a nonprofit, a for-profit, or hybrid.

So what does all of this mean?

Well, when I read Lebanese government policy papers trying to replicate the lessons from Silicon Valley, I’m struck how they seem to miss some basic lessons and are so “green” about it.

  • Each of the six very different startups I have described requires very different ecosystems, unique educational tools, economic incentives (tax breaks, paperwork/regulation reduction, incentives), incubators and risk capital.
  • Regions building a cluster around scalable startups fail to understand that a government agency simply giving money to entrepreneurs who want it is an exercise in failure. It is not a “jobs program” for the local populace. Any attempt to make it so dooms it to failure.
  • A scalable startup ecosystems is the ultimate capitalist exercise. It is not an exercise in “fairness” or patronage. While it’s a meritocracy, it takes equal parts of risk, greed, vision and obscene financial returns. And those can only thrive in a regional or national culture that supports an equal mix of all those.
  • Building a scalable startup innovation cluster requires an ecosystem of private not government-run incubators and venture capital firms, outward-facing universities, and a rigorous startup selection process.
  • Any government that starts public financing entrepreneurship better have a plan to get out of it by building a private VC industry. If they’re still publically funding startups after five to ten years they’ve failed.

To date, Israel is the only country that has engineered a successful entrepreneurship cluster from the ground up. It’s Yozma program kick-started a private venture capital industry with government funds, (emulating the U.S. lesson of using SBIC funds.), but then the government got out of the way.

In addition, the Israeli government originally funded 23 early stage incubators but turned them over to the VC’s to own and manage. They’re run by business professionals (not real-estate managers looking to rent out excess office space) and entry is not for life-style entrepreneurs, but is a boot camp for VC funding.

So unless the people who actually make policy start truly understanding the difference between the types of startups and the ecosystem necessary to support their growth, the chance that any government policies will have a substantive effect on innovation, jobs or the gross domestic product is low.

You want to transform Lebanon’s Start Up Ecosystem into a true “powerhouse” in the region? Start emulating the Israeli model to the letter, fire or educate all your politicians who are too stupid to get it, get yourself a businessman President instead of another moron military man and shut down Hezbollah and all of Iran’s proxies in the region.

It is only then that you will see billions of dollars flowing into Lebanon with or without government support and the Diaspora all mobilized to move in there. Any other path is plain wishful thinking.

At the end of the day, it all boils down to are we talking about turning Beirut into the next MENA Silicon Valley or the 90s internet bubble?

You say it is a dream? Well if you can dream it you can do it.

The choice is really yours.

Good luck…

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