Can Lebanon's entrepreneurship ecosystem survive?
BEIRUT: Beirut made headlines worldwide as a devastating explosion shook the Lebanese capital’s port area last week, resulting in an estimated 170 deaths, damage to 90,000 properties, more than 300,000 people displaced, and a full government resignation.
In close proximity to the explosion site lies an area that was home to offices of local startups, many of which were already struggling with a collapsing economy and rising social unrest, later coupled with hurdles caused by the Covid-19 outbreak.
The explosion further compounded the pain and difficulties that startups in Lebanon have had to cope with as of late. The immediate consequences of the blast were physical damage in terms of destroyed infrastructure and collapsed offices and loss of workers.
“Our offices were right next to the port, our team was there and the explosion resulted in loss of lives. We lost three drivers and 70 to 80 people from our team were injured. A lot of our partners were also based in that area, their restaurants were completely destroyed,” says Tamim Khalfa, CEO of food delivery app Toters. “We automatically shut down operations as a first response to the blast. It was complete chaos on the ground.”
Other startups were lucky enough to survive the explosion and the ongoing economic disaster. Lebanese tech-enabled drone inspection management startup NAR Technologies was acquired by US-based B3Bar and the team moved to the US right before the economic crisis escalated.
“We were lucky indeed with the exit, it came in the right timing at the start of the economic collapse. However, our journey won’t stop here, we will be supporting the ecosystem in Lebanon whichever way we can, be it financially or through providing mentorship, we will always be there for Lebanese entrepreneurs,” says Nicolas Zaatar, co-founder & chief technology officer at NAR.
The blast left Beirut’s supply chain shattered, as the port featured a logistics free zone that connected businesses with regional and international markets. With the destruction of the port, the city will experience fiscal and economic pain that will hit startups hard.
“The port for anyone dealing with logistics was fundamental, and now it is torn. Businesses are severely affected and shipment operations became very limited. There are going to be impacts that we do not understand the magnitude of yet,” says Riham Hijazi, co-founder of modest fashion platform RUSH & REEZ. “Deliveries will certainly be delayed, the factories we are working with have been destroyed as they were in the industrial area, with close proximity to the explosion site.”
Moreover, delivery networks across the city have been impacted as delivery agents either suffered from injuries or rushed to help those affected by the blast.
“Our team needed time to process what happened and a lot of the drivers were mourning and spending time supporting their families and friends, so we had to relaunch with limited capacity,” says Khalfa.
Back to business
Over the past few years, the number of venture capital (VC) deals has gradually fallen, while the future of the Circular 331 financial decree which kickstarted the country’s entrepreneurship ecosystem seems unclear. Lebanon is the first country in the Middle East to experience hyperinflation and last year became the world’s third most indebted nation. Even those that are well-funded will struggle to resume business in light of recent events.
“We have 100 employees, thousands of drivers, and businesses depending on us, and obviously the business that we built and worked on so hard cannot just be thrown away. We decided to put the emotional hurt aside and focus on how we can relaunch our business for the sake of this. We found a new office as ours was completely destroyed and reopened two days after the explosion with limited operations,” says Khalfa.
However, not all businesses are prioritizing resuming operations amid the state of the country at the moment.
“We are not focusing on reviving business now at all, rather raising awareness to help all the relief efforts taking place. Some people may feel it is ok to resume business at the moment. Our stock is here, we can promote for our products and sell them, but it does not feel right,” says Hijazi.
A UN donor conference held virtually last Sunday saw world leaders pledge nearly $300 million in aid to the Lebanese capital. Additionally, companies around the world have launched relief initiatives and donation campaigns to support the recovery of Lebanon in the wake of the deadly blast, including the likes of Uber, Airbnb and Talabat among a long list.
But the impact Lebanese startups are bearing will need a more tailored approach for them to be able to survive. Fewer foreign and Lebanese investors will consider investing in Lebanon-based startups while the talent pool is set to decline as the most talented will likely seek opportunities in more stable companies and markets. This is all causing pressure on entrepreneurs and negatively impacting the entrepreneurship ecosystem in Lebanon.
“The entrepreneurs who set up in Lebanon know that almost all the odds are against them, yet they want to make something work in a country where nothing is provided. From the infrastructure to stability and financial means, in addition to capital controls that are imposed which make it impossible to operate,” says Ceem Haidar, founder and managing partner of Ment Communication.
Local ecosystem players and investors are lending a hand of support for startups, by offering pro-bono mentoring, crisis management, business planning, and financial assessment and aid through donation campaigns.
“We can be emotional and talk about solidarity and unity, but the fact remains that we cannot recover without outside help and support. The country is bankrupt, the government did not have the ability to help before, imagine now. People are broken, but the Lebanese are very resilient,” says Hijazi.
There is still a need for fundamental support from the government in terms of infrastructure and financial aid. Entrepreneurs are increasingly looking to relocate their startups abroad where a more advanced ecosystem is in place.
“While the IMF and the international donor community have reiterated their commitment to financially support Lebanon to bear the costs of the disaster, over time, [we] expect that in the absence of key steps toward plausible economic and fiscal policy reform, sustained official external funding support to accompany a government debt restructuring will not be forthcoming,” said Elisa Parisi-Capone, vice-president and senior analyst at financial services company Moody’s.
To date, Lebanon does not have a legal status for startups and instead registers them as a normal company, which if it were to go bankrupt, the founders will be prevented from starting another company. Given the high rate of failure among startups, this policy can end up hindering the entrepreneurship ecosystem.
“We are not quitting now, and hoping that this is the bottom of it. All the success we had over the past three years was in a country where corruption is the norm, imagine what we could do in a good setup. Companies in Silicon Valley think about how to innovate their businesses, and we need to innovate ways to deal with lack of infrastructure,” says Khalfa.
Others are just as determined. “Startups will play an essential role in rebuilding the economy. Just imagine a unicorn exit in Lebanon, it could potentially contribute to saving the economy and the country. They should be mainly aiming at international clients,” says Zaatar.
Resilience is a word commonly associated with the Lebanese and its startups are no different, but it will require more than just resilience to save the ecosystem.