Start Up Ecosystem in Lebanon

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…
Thank You.

Start Up Ecosystem in Lebanon

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