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Venture capital firms poised for new initiative

File - Students work on their computers at a university in Beirut, Tuesday, Sept. 10, 2013. (The Daily Star/Hasan Shaaban)

BEIRUT: The Central Bank is finalizing a framework for the implementation of circular 331, which provides incentives to commercial banks to make equity investments in startups or venture capital funds.

Circular 331, which was issued last August, aims to support Lebanese entrepreneurs and help create new job opportunities, according to Central Bank representative Marianne Hoayek, who is overseeing the project.

“Circular 331 is new to all of us even at the Central Bank,” Hoayek told The Daily Star. “The procedural aspects of it have taken a bit of time.”

While Lebanon’s commercial banks have limited experience with equity investments, Hoayek says the Central Bank is encouraging them to work directly with startups in addition to venture capital firms.

Under circular 331, the Central Bank guarantees up to 75 percent of the value of banks’ investments in startups or VC funds. A commercial bank that agrees to invest in startups receives a seven-year interest-free credit from the Central Bank that can be invested in Treasury bonds.

The total contribution of the program to the economy could reach $400 million, provided that commercial invest 3 percent of their total capital, which is limit set by the Central Bank.

“In order to support a culture of equity investment, we are encouraging commercial banks to both invest in VC funds and give money directly to startups even if they currently do not have enough experience dealing with startups,” Hoayek said.

“Banks deal with loans and credit and are unfamiliar with equity investments, but it is coming.”“

For this reason, VC funds are likely to receive the lion’s share of initial investments by commercial banks that would rather avoid direct investments in startups at an early stage, Hoayek said.

Paul Chucrallah, a senior adviser at Berytech fund, said that circular 331 came at an opportune time.

“Due to the security situation, fundraising in 2012 and 2013 was especially tricky, particularly if the fund would be oriented toward Lebanon,” he told The Daily Star.

Berytech is in the process of creating a new fund of around $30 million. The group is “highly optimistic” about the potential of circular 331 and is “being approached on a daily basis by a number of startup companies,” Chucrallah said.

Middle East Venture Partners recently announced the launch of a $50 million fund compliant with circular 331 set to be operational next month. Blominvest bank, MedSecurities Investment, BankMed, Bank Audi and Banque Libano-Francaise were named as “tentative investors.”

“It’s going to be like a regular venture capital fund,” said Jad al-Boustani, an associate at Middle East Venture Partners. As such, startups must pass a “very strict due diligence process.”

“We study their business model and assess their market potential.”

Hoayek says the circular was designed to help startups secure funding without going through overly complicated procedures.

“We do not want it to be very bureaucratic,” she said.

“We do not want it to be complicated, but we do want things to be done in a correct way.”

In a common refrain, some Lebanese startup founders are concerned that VC funds will impose excessively strict criteria before investing in nascent startups.

“The venture funds are expecting us to be a risk-free investment. We can’t offer them that, since we are startups and we don’t know if our plan will be the next Instagram or a failure,” said Piotr Yordanov, founder of the social network Beepl.

However, Chucrallah said Berytech had proven it was willing to take on significant risk for investment-worthy companies.

“We’ve already had a first fund, and we’ve demonstrated that we have dollars for risk,” he said.

“When you invest in early stage companies you run a significant risk of failure,” though “we’re not happy when it happens,” he said.

Paul Saber, founder and CEO of eTobb, a medical based Web service, expressed concern that VC funds would have a monopoly on funds committed by commercial banks.

“My biggest fear is that money will end in the hands of a few venture capital firms, which increases their negotiating power tremendously at the expense of startups founders,” he told The Daily Star.

For startups lacking solid business plans, the Central Bank is also planning a series of training sessions to help boost their tenability.

“Because we really want this culture to be built rapidly, we also have to encourage boot camps and training for startups,” Hoayek said. “Startups need to learn how to set up their business and run a company, and you really have to teach them that.”

Seedstage startups will not be the only ones to benefit from circular 331, Hoayek insists.

“In the circular, we do not [say] whether the startup should be in a seed stage or in a growth stage, or any other stage. What is important is to have a Lebanese SAL with a technological element and to really have a future of growth,” she said. “You want funds to help seed startups, but you also need funds to help absorb the growth stage.”

Arab Net CEO Omar Christidis also believes that there is reason to be optimistic about Lebanon’s technology sector.

“There are good schools and qualified candidates, and it is a more open society that provokes creativity,” he told the Daily Star.

But it remains unclear whether circular 331 will give Lebanon the boost it needs to be the next Silicon Valley, or even Dubai, which has become a tech hub in its own right.

“It is difficult to say where we would be in three [or] four years’ time due to the political instability,” he admitted.

 
A version of this article appeared in the print edition of The Daily Star on March 18, 2014, on page 5.

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Summary

The Central Bank is finalizing a framework for the implementation of circular 331, which provides incentives to commercial banks to make equity investments in startups or venture capital funds.

While Lebanon's commercial banks have limited experience with equity investments, Hoayek says the Central Bank is encouraging them to work directly with startups in addition to venture capital firms.

Under circular 331, the Central Bank guarantees up to 75 percent of the value of banks' investments in startups or VC funds. A commercial bank that agrees to invest in startups receives a seven-year interest-free credit from the Central Bank that can be invested in Treasury bonds.

For this reason, VC funds are likely to receive the lion's share of initial investments by commercial banks that would rather avoid direct investments in startups at an early stage, Hoayek said.

In a common refrain, some Lebanese startup founders are concerned that VC funds will impose excessively strict criteria before investing in nascent startups.

Paul Saber, founder and CEO of eTobb, a medical based Web service, expressed concern that VC funds would have a monopoly on funds committed by commercial banks.


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