More than USD 300 million were invested over the past ten years in funding in excess of 400 startups and SMEs in Lebanon in an effort to strengthen the entrepreneurial ecosystem in the country, resulting in the launch of hundreds of companies, the creations of thousands of jobs, the development of innovative products and solutions and the retention of top talents in the region.
Berytech, the first and largest player in this sector, has funded over the past 8 years more than one hundred companies through its funding arms (Berytech Fund I, Berytech Fund II, IM Capital), accelerators (Agrytech and Speed) and business angel funds (Seeders and LWAF).
The ultimate measure of success for the entire entrepreneurial ecosystem and all its players is not only in the number of companies and jobs created but in the entrepreneurial and financial value created by these companies throughout their tenure, varying between 5 to 10 years, with their related investors.
Value of Created Startups
The best way to measure the financial value created by the hundreds of startups and SMEs funded over the past ten years is through the following two steps :
- Define the percentage of the funded companies that the VC funds were able to exit (i.e.; to sell their shareholding position to another investor). As an example, Berytech Fund I was able to exit five of its investments over the past two years and is planning to exit another 5 over the next couple of years, making it the first VC fund in Lebanon to create financial value by finding investors willing to buy its shareholding position at a higher valuation than the one agreed to in the first round of funding.
- Define the multiple at which the VC fund exits their invested companies. As an example, let us assume that a VC fund has invested USD 15 million in 15 companies and was able to exit or sell its shareholding position in 10 of the 15 companies at an average multiple of 2 over a 5 years period. Let us also assume that the remaining five companies went bust and that the balance USD 10 million resulted in USD 20 million paid back to the investors in 5 years. This fund would have created a financial value of USD 5 million from its entire portfolio generating an annual return of around 5% to its shareholders.
Measuring Investment Success
In summary, the ultimate measure of success for the many investors active in the Lebanese ecosystem depends on the following essential dimensions :
- The ability to appropriately select the companies to be funded through a thorough due diligence process, and evaluating their teams, value proposition, business model, competitive positioning, innovative capacity, scaling potential and ability to create sustainable value over the long-term.
- The ability to negotiate a realistic valuation with the existing shareholders as several owners have unrealistic expectations of their company valuations due to a large number of funds available chasing too few interesting ventures and thus resulting in unrealistic valuations. The role of the VC funds is to work in close collaboration with the founder and his board in setting realistic valuation and developing a plan to accelerate the value creation potential of the company.
- The ability to continuously add value to the founder, the leadership team and the board through effective and regular mentoring, coaching and training services.
- The ability to find another investor, financial or strategic, over the next 3-5 years with an interest to buy the existing shareholding position at a premium with the potential to continuously add value to the venture.
- The ability to re-invest the collected funds in another venture with similar scalability potential so as to institutionalize the investment and exit processes and scale them geographically across all the regions in Lebanon and across many promising sectors such as AgriTech, CleanTech, HealthTech, FinTech, and other sectors.
We sat down with veteran Sami Beydoun for a quick Q&A about exiting. Beydoun is currently the Vice Chairman of Berytech Fund II and Managing Partner of Berytech Fund I. He spent most of his career with major US investment banks, namely Merrill Lynch, EF Hutton, Shearson American Express and Lehman Brothers, in Beirut, New York, and London.
Berytech: Why is exiting important for BFI?
Samy Beydoun: As Berytech Fund I, we have an obligation to our investors to return back to them their investments plus profit within a 7-year period. This can only be done by exiting from our portfolio companies.
B: What are the challenges of exiting today in Lebanon?
SB: Lebanon does not have a developed secondary market through which to exit.
B: What are the different ways you employ to exit a company you have invested in?
SB: Four different ways of exiting: 1. Selling to a strategic investor who is interested in the technology and venture. 2. Selling to financial investors. 3. Selling to another fund who is looking to acquire companies matching the profile of our portfolio companies. 4. A management buyout i.e. selling back to the founder.
B: How long is the exiting process taking?
SB: Currently it takes up to two years to exit a company. The big challenge is finding an interested party willing to acquire a Lebanese company in the secondary market.
B: What are the pre-requisites for a good exit?
SB: Most important is for the portfolio company to show growth.
About The Author
Constantin Salameh is a Senior Coach and Investment Advisor at Berytech. He has coached and mentored dozens of entrepreneurs and executives in Europe, the Middle East, and Africa over the past 35 years.