The Lebanese startup ecosystem hasn’t failed. It’s just not solely in Lebanon anymore.
يناير 12, 2023
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You can also click here to read the article by Timothy Motte on his website The Realistic Optimist
A promising decade
Less than a decade ago, Lebanon’s startup ecosystem was a leading force in MENA. The country’s capital, Beirut, was widely recognized as one of the region’s most dynamic startup hubs, replete with international-minded and creative talent. The country’s globe-trotting and engaged diaspora provided the ecosystem with an undeniable advantage, a dynamic shared on a much larger scale by Lebanon’s neighbor and longtime foe, Israel.
The ecosystem was nascent but growing amidst a backdrop of continuous social, economic, and political turmoil that had plagued the country for decades. Local incubators were starting to make a name for themselves, and local VCs were starting to raise decent funds. Locally-bred startups such as Anghami, which later became the first Arab company to list on the NASDAQ, were starting to pop up.
In 2013, the ecosystem received a considerable boost from the government through the launch of Circular 331 spearheaded by the country’s now-infamous central bank, Banque du Liban (BDL). The initiative incentivized local banks to invest 3% of their capital into the local startup ecosystem by guaranteeing reimbursements of up to 75% in the case of failure.
The Circular initially aimed to unlock $400 million into the ecosystem, a target later augmented to $650 million in 2016. Admittedly, the Circular funded some of the country’s first tangible incubators, VCs, and startups. It showed some promise to an ecosystem accustomed to a dysfunctional and sluggish government.
“The Circular paved the way for hundreds of budding businesses and dozens of incubators and accelerators to receive financial support directly from commercial banks or through special venture capital funds. During that period, Lebanon moved from fifth to second place regionally in quantity and value of tech investments, now only trailing the United Arab Emirates (UAE).” – Le Commerce du Levant
Dusk sets in
While Circular 331 moved the needle, it wasn’t perfect. Companies receiving funds were bound to a couple of burdensome conditions, such as registering the company in Lebanon. Being a tiny market of 4 million people, Lebanese startups are obligated to expand internationally to achieve relevant scale, something a Lebanese corporate entity doesn’t quite facilitate.
The Circular unlocked necessary funding, but that funding came from banks. Traditionally risk-averse, banks viewed the failure of startups they invested in as a reason to lower investments, a rookie mistake for anyone familiar with the functioning of venture capital.
Some ecosystem actors take a more introspective view on the matter, arguing that the Circular unlocked too much money into an immature ecosystem leading to a bubble of high valuations, high salaries, and a number of bad investment decisions. Lastly, the Circular did little to address the underlying systemic issues the ecosystem faced, such as cumbersome regulations, oppressive bankruptcy laws, and decrepit infrastructure.
“Unfortunately, no matter how ambitious the Circular is, it could not recompense for the absence of a State and an economic ground favorable to innovation and creativity, both in terms of regulation and infrastructure” – Blominvest
A cascade of bad news
In late 2019, the Lebanese people took to the streets to protest their discontent with the government’s ongoing inefficacy, nepotism, and sectarian structure. The protests foreshadowed the Lebanese population’s distrust in their government, a feeling which would be vindicated around a year later.
On August 4th, 2020, just as the country was reeling in covid-induced pandemonium, a blast originating from a stockpile of ammonium nitrate fertilizer leveled Beirut’s port and parts of the city, killing more than 200 people. The evitable nature of the explosion, and the subsequent failure of the local investigation, strongly upheld the Lebanese population’s qualms about its government.
The Beirut port explosion marked a new turn in the Lebanese people’s relationship with their government. They were already angry and frustrated at its lackluster management of the country, but the explosion proved that its incompetence put the population in lethal danger.
The country’s financial crisis, a constant underlying cause during the events described above, also slipped further into oblivion. Starting in 2019, banks started issuing capital controls aimed at slowing down the withdrawal of dollars from Lebanese banks. Dollars and Lebanese pounds had long been used interchangeably in the country. The value of the Lebanese pound, which had previously been pegged to the dollar at a fixed rate, started quickly slipping away.
The situation has continuously deteriorated since and Lebanon’s economic situation is now regarded as one of the worst financial crises of the past century. In a potent exemplification of the situation’s severity, Lebanese depositors have taken to “robbing” their own banks, just to recuperate their deposits.
A closer look at the situation reveals that the robbing has been going on the other way for decades. Government mismanagement has obliterated the value of the Lebanese people’s savings, and the banks’ refusal to let them withdraw money has rendered depositors essentially powerless as they saw the value of their life savings go down the drain. One ecosystem actor told me that his savings, which could’ve bought him prime real estate pre-crisis, could now buy him a bicycle.
“The Lebanese pound has lost some 95% of its value, driving up prices and demolishing purchasing power in the import-dependent country. A soldier’s monthly wage, once the equivalent of $900, is now worth less than $50. Poverty rates have sky-rocketed in the population of about 6.5 million, with around 80% of people classed as poor, the U.N. agency ESCWA says.” – Reuters
Impact on the startup ecosystem
The country’s degradation has evidently heavily impacted the startup ecosystem. First and foremost, the country is losing its brightest talent at an even faster rate than before. In a sadly paradoxical move, one of the only avenues Lebanese startups have to keep their employees is to help them relocate abroad, aggravating the talent gap even further.
The breakdown of the Lebanese banking system has impacted Lebanese startups in two major ways. First, the economic quagmire makes it nearly impossible to get local and foreign investors to pour money into Lebanese bank accounts, let alone startups. Second, capital control restrictions have made it a nightmare to pay for foreign services through a Lebanese bank account, a heavy blow for inherently-digital startups.
“Startups in Lebanon are being barred from wiring money abroad to pay for marketing, software, ads, and foreign talent, which is having an adverse effect on their financial standing.” – Executive Magazine
Feeble internet and electricity infrastructure has also been heavily detrimental to the functioning of startups. The ones who can afford it rely on co-working spaces to maximize their ability to work. From a more human perspective, the evident moral damage caused by the disastrous recent couple of years has created understandable mental fatigue within ecosystem actors. As always in Lebanon however, resilience is the word of the day.
“There is also a bit of defeatism in all of us, from the trauma of the blast to the healthiness of the banking system, which reflects onto everybody from the startups to the fund managers. People need someone to inspire them today. I wouldn’t say it’s gone, but there is a lot more that needs to be done today to support startups.
The odds are not in their favor, but they’re Lebanese, so they’ll figure it out. The resilience is what makes us special, the positivity that almost looks naïve, but isn’t. It’s hunger, it’s the will to continue and make a difference.” – Fawzi Rahal, Managing Director of Flat6Labs in Beirut
Local reaction: Lebanon-specific innovations
In response to the dire state of the country, the local ecosystem has naturally been leaning towards solving urgent, local issues. This has given way to the emergence of an especially active circular economy ecosystem. Incubators such as Berytech support startups attempting to make the most out of local resources while reducing reliance on exports which, given the state of the national currency, have become unsustainably expensive. Innovations in agritech, waste management, and clean energy have also emerged out of a shared need to rethink the way the country functions at its core.
Local VCs are also adapting, with VCs such as IM Ventures closing the $12M Save our Startups (SOS) fund in collaboration with USAID, aimed at maintaining the ecosystem afloat during the crisis.
While most of these startups are focused on the national market for now, their potential application in other countries facing similar problems as Lebanon, such as Venezuela, can’t be discounted.
Increasing “south-south” startup synergies have been recently emerging, out of the realization that what works in one country with a specific demographic and economic situation can work in another one with the same traits, even if it’s on the other side of the world. The expansion of Mexican unicorn Kavak into Oman is a cogent exemplification of said trend.
Long-term adaption: the creation of a decentralized Lebanese ecosystem
In their quest to survive, Lebanese founders have ended up creating a new version of the Lebanese startup ecosystem. In true anti-fragile manner, the Lebanese ecosystem has spread out, spanning multiple continents while taking advantage of what each of them has to offer.
For example, a significant amount of Lebanese startups are now HQ’d in the Gulf or Cyprus, utilizing a more recognized corporate structure and saner banking system to ease foreign investments. They’ve combined that with keeping a local team in Lebanon, taking advantage of the unfortunate fact that the breakdown of the economy has made Lebanese-based talent cheaper than in many other places.
The crisis has also created an imperative for Lebanese startups to open foreign markets following the tumbling of Lebanese people’s purchasing power. While this has killed many startups in the process, the ones that survived have come out stronger. Toters, a Beirut-based delivery startup that just raised a Series B for expansion into Iraq, is a case in point.
Similar to a river adapting its shape to continue flowing despite branches and rocks put in its way, the Lebanese ecosystem has morphed into a decentralized entity, with founders, investors, and operators dispersed around the world. In doing so, it might be pioneering a new type of startup ecosystem, one where borders are porous and founders cherry-pick where they want particular parts of their business to be.
Conclusion: A brave new world
When one searches for “successful Lebanese startups”, names such as Anghami, Kitopi, or Sarwa pop up. Most of these startups have a strong foreign presence, either by being incorporated abroad, operating outside of Lebanon, or having non-Lebanese people on their teams. In other words, all successful Lebanese startups are “default-global”.
Interestingly, the way Lebanon’s startup ecosystem has developed into a global and decentralized entity, as a result of adverse local conditions, is a premonitory sign of what all startup ecosystems will end up looking like in the very near future.
The globalization of talent and capital, combined with the explosion in digitalization rates worldwide, is constantly opening new markets for startups to penetrate. From Uzbekistan to Brazil, from Nigeria to Sierra Leone, startups will leave no stone unturned. To service these markets, startups won’t wait for local conditions and regulations to change but will look abroad to access the services they need to grow.
By doing so, the startup world will become an amorphous and cosmopolitan ecosystem, where a Brazilian founder will incorporate in the US, raise from a Japanese VC, hire a Nigerian software engineer, and mentor a Vietnamese fellow founder all within the span of one afternoon. At least that’s what I believe.
The Lebanese ecosystem has already moved into that new setup, not by choice but by necessity. And in that aspect, it is a pioneer.
Source: The Realistic Optimist