The impact of the health crisis on the startup ecosystem will be significant

Without financial support, the impact of the health crisis on the ecosystem will be significant and is likely to last for three to six months.

Constantin Salameh – Senior Coach and Investment Advisor at Berytech, has long experience in financing, supporting and developing startups. Since November [2019], he has run free crisis management workshops for entrepreneurs. For him, the challenges currently facing startups are daunting, but not insurmountable. [Salameh was interviewed for the April 2020 issue of the Commerce Du Levant.]

What is the impact of the COVID-19 pandemic on the sector?

The specific difficulty in the Lebanese ecosystem is the management of two simultaneous crises, one economic and the other health-related. In Europe, colossal sums have been mobilized for the private sector while in Lebanon, the state clearly does not have the means to set up an emergency fund to help startups. Without financial support, the impact of the health crisis on the ecosystem will be significant and is likely to last for three to six months. International organizations will certainly have a role to play in helping to pass the course.

In an emergency context, startups need to refocus their basic activity, identify key functions, and communicate with the most strategic customers and suppliers to adapt operations. It is perhaps easier for them to adopt a flexible operating model from a distance, as practices such as working from home or online meetings were already prevalent in the community.

What are the challenges related to the financial and economic crisis facing the country?

First, there is a major funding problem. The funds available are now very limited; those guaranteed by BDL circular 331 are frozen. For venture capital funds, the priority is to preserve the existing portfolio and protect the ecosystem built over the last five years, at a time when many startups are in danger of going out of business. Investors are therefore forced to be strategic and focus on the 10% or 20% of their startups who can afford to survive the crisis.

In this context, some investors have not been able to honor their commitments and in particular participate in new rounds. The startups that counted on obtaining these funds found themselves put on the spot overnight.

In addition, there are problems linked to the liquidity crisis, which affects all companies: difficulties in accessing the dollar, inflation, cash management, etc.

Finally, there is the challenge of retaining young talents, tempted to flee the economic situation.

Are there alternatives to 331 funding for startups?

We must bet on business angels and the Lebanese diaspora, part of whose fortune is stuck in the Lebanese banking sector. In fact, for the latter, investing in investment funds or directly in startups is a way to get their money out of the banks and to diversify their assets, in the same way as other categories of assets such as bonds , gold or real estate.

On the other hand, some international donors, such as development agencies or international NGOs, have expressed interest in structuring new funds. They could, for example, vouch for investments.

Both Lebanese investors and international donors are aware of the importance of the sector, and the mess it would be to abandon an ecosystem rich in innovation. Everything must be done so that startups can keep part of their services and teams in Lebanon.

What immediate solutions do you recommend to limit the effects of the crisis?

There are a series of steps to take. To get around the restrictions on the dollar for example, opening a bank account abroad is a priority, it is a service that several banks already offer to Lebanese companies, especially in Cyprus or Dubai. It is absolutely necessary in order to be able to be paid by customers resident outside Lebanon and to pay suppliers abroad.

Targeting international markets is also a means of obtaining foreign currency liquidity. The local market was limited anyway, with an annual growth of around 1.5% in the past eight years, and is now in the midst of a recession. This can be done either through a distributor, a franchise, a joint venture or even the creation of a branch.

It is also necessary to reduce expenses, for example by converting part of the fixed costs (salaries, rent) into variable costs according to turnover or by replacing imported products as much as possible with local products.

Finally, to encourage talents to stay despite the crisis, it is, for example, possible to convert part of their salary into ghost shares, allowing employees to benefit from the appreciation of the value of the company without transferring ownership . It’s an ideal way to retain employees and involve them in creating value.

The important thing is to have transparent governance and to establish a clear communication plan on crisis management. As difficult as it may be, a crisis is an opportunity to reinvent yourself as an entrepreneur.

Which startups are best equipped to deal with the situation?

The startups, which employ local labor and produce in Lebanon while exporting their goods or services, are in a rather advantageous situation, since they benefit from the depreciation of the pound against the dollar. And Lebanon is not lacking: among the startups financed through the various funds and accelerators of Berytech, some generate more than 95% of the turnover abroad.

Those working in more innovative sectors than others, such as fintech, agritech and cleantech, are also better placed. Finally, in a context of crisis, donors are looking closely at the social impact of startups.

But if some startups manage to get by, this is not the case for all. Those who import to sell on the local market are hit hard by the depreciation of the currency and have no room for maneuver. Some of them have already had to shut down.

What future for the sector?

I am convinced that startups have a key role to play in the economy, today and tomorrow. Technology is an essential economic sector, it is a catalyst for change that drives innovation in all sectors, it is what allows us to have real added value in our products.

So I’m optimistic about the future of the ecosystem. We have the talent. We are at the heart of the crisis, but we are not the first country in the region to have experienced it. The crisis will eventually pass, we must prepare for the future.

Translated from French.  L’impact de la crise sanitaire sur l’écosystème start-ups sera important, selon Constantin Salameh. Published originally on March 27, 2020 in Commerce Du Levant April 2020 issue. Interview conducted by Nada Maucourant Atallah.

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