In the summer of 2013, the Central Bank of Lebanon introduced a policy through Circular 331, to de-risk equity investments Lebanese banks make in local technology startups. It would guarantee 75% of the investment value in case of a loss and share 50% of the profits in an exit. And it was allowing banks to invest up to 3% of their entire capital in startups. This marks the first time banks in Lebanon have been able to participate in equity.
So far six funds were approved with a volume ranging between $30 to $75 million, and a ticket size range between $300,000 to $500,000 at the low end and $3 to $5 million at the high end.
Two funds are directly addressing the seed stage, which was previously absent. To boost dealflow and ensure new startups come to market, the Central Bank is also fully funding a Bootcamp program, and several training centers and accelerators.
We talked to the organizer of the Bootcamp program in Lebanon, David Munir Nabti, who is also an angel investor in the space, about Circular 331 and the recent growth of the Lebanese ecosystem.
SSW: First of all, David, what is Bootcamp?
DMN: It is a program that developed straight out of the Circular 331 directive to train entrepreneurs who are just getting started. The Bootcamp consists of two weeks of training, including the problem and concept validation, and from our side, team validation. Then they can either graduate directly into the next phase or take up to two months of continued iteration and validation until they are ready to move to the next phase.
The second phase focuses on analytics, landing pages, prototyping, business model development, financial models and pitch development. In return, we’re mandated by the Central Bank to take up to 5% equity from the startups.
SSW: How many startups are you aiming to graduate through Bootcamp this year?
DMN: For 2016, our goal is to graduate at least 100 startups through the first phase, and then have at least 15 to 20 high quality startups to come out of the second phase, ready to be picked up by accelerators and other investors up the chain. We would like to get Bootcamp to a point where we can also take it to regional hubs, and attract Lebanese expats, giving them the option to go through the Bootcamp and only come back to Lebanon if they get funding for their startup.
SSW: Two years on, how do you assess the impact of Circular 331 on the Lebanese ecosystem?
DMN: The Circular helped to accelerate the momentum of growth. The biggest business benefits, such as access to finance, have rapidly improved, and this trend will continue as new funds launch. All the different support structures, starting from Bootcamp and online accelerators, to the Kafalat loan guarantee program, VCs, and the universities, are creating a forward momentum. Ultimately, we hope this will trickle down to the government ministries and they will start feeling the pressure to address the infrastructure issues that only be addressed by them.
SSW: Apart from the Central Bank of Lebanon, do you see the banks already playing an active role in the startup ecosystem?
DMN: Yes, and we will soon see an increase in competition around funding startups. The banks can get involved with the startups in two ways; either they invest in them directly, or they allocate the money for the VC funds, which then in turn use it to invest in startups. As we get more quality startups coming on board, we’ll see more and more funding options available. And this will filter down to which investors can offer the best terms to the startups, not just for funding, but also who can offer smart money.
SSW: Who do you think holds more power in the ecosystem right now? Investors or entrepreneurs?
DMN: Definitely the investors for now. But as the startup community becomes more savvy, the power dynamic will likely shift to the startups. The banks are constrained slightly more than startups, because Circular 331 requires them to invest in startups based in Lebanon. However, if startups don’t get the terms they want, they can still go abroad.
We’ve already seen many startups move abroad in search of better investment and growth opportunities. Ideally, we will see less of that, and more startups staying here because with the coming years, they will be able to get better deals, smart money, great support from the ecosystem, people to hire and work with, and the opportunity to stay closer to their families.
SSW: At which stage would you say the startup ecosystem is in Lebanon right now?
DMN: The ecosystem as a whole is still at the seed stage. We need to have more accelerators, more investor networks supporting startups at different stages, technical labs, and research universities. When you look deeper into something like universities, every educational institution should have a hackathon or some equally in-depth experience at least once a month to involve its students and faculty members. On the bright side, we’ve already had a couple of sizeable exits, with a few more on the way this year. The entrepreneurs that come out of that do stay on in the ecosystem and invest as angels or VCs and build on their success to help others. And that leads to having more smart money in the ecosystem.
SSW: Finally, are you optimistic about the quality of startups coming out of Lebanon?
DMN: We are starting to see a trickle of brain gain and it is a reason to be optimistic. It is still smaller than the brain drain that continues to bleed talent from the country, but we are seeing more expat entrepreneurs looking to base at least part of their operations here, or return completely. This is an exciting indicator of a reverse trend and we aim to do even more outreach events to Lebanese communities to continue it.
Our diaspora has built up substantial experience, good financial means, and influentials network, and it would be a great benefit to the country if we could engage them in a meaningful manner. As Mark Zuckerberg says, “Train your people so they can go anywhere; treat them such that they don’t want to go anywhere.”