Circular 331: where has Lebanon's money gone?
It is said that innovation is an entrepreneur’s best friend.
But in Lebanon a strong second contender has to be the central bank (Banque du Liban - BDL).
In 2013 it launched a $400 million stimulus package for banks called Circular 331 to boost investment in startups. It worked. Today, the entrepreneurship scene in Lebanon is unrecognizable compared to what it was three years ago.
Circular 331 encourages investment in local startups by offering seven-year interest-free government loans to private banks, which can be invested in treasury bonds with 7 percent interest rates.
The deal is that the banks must then invest their own money (up to 3 percent of their total capital holdings) in local startups, either via funds or directly. The central bank guarantees 75 percent of any capital invested. The program’s main objectives are to slow and eventually reverse Lebanon’s famous brain drain and stimulate entrepreneurship.
What’s happened in the last three years?
Circular 331 has, by and large, significantly reduced the capital hurdle that Lebanese entrepreneurs faced in the past.
There are now investors, accelerators, incubators and startups in the entrepreneurship ecosystem, creating a pipeline of startups and supporters at and for different stages of growth.
“Circular 331 has changed the landscape of technology and entrepreneurship in Lebanon,” said Sami Abou Saab, CEO of accelerator Speed@BDD, which launched after the circular was implemented and obtains two thirds of its funding from the program. “It opened up new opportunities that weren’t available before and it helped develop an ecosystem at its very early stage.”
BDL Executive Office director Marianne Hoayek estimates from current figures that banks have allocated roughly $230 million to private venture capital funds, and directly invested another $40 million.
Although investments from a few funds have been announced, with Berytech Fund II announcing a $13 million spend at the end of 2015, the ecosystem is still waiting for VCs MEVP and LEAP to announce how they’ll invest their multi-million dollar funds.
Problems in the small print
As Wamda noted when it first reported the launch of Circular 331 in 2013, the devil is in the details. While there is no shortage of praise for the BDL, there are a few elements within the circular and its implementation that – although not a deal-breaker – do require improvement.
Firstly, there is an element of transparency that is missing.
A detailed breakdown of the funds raised so far, and their allocation, is not publicly available. As such, an estimation of what has been spent, where and by whom, can only be obtained at the discretion of banks and VCs. This makes it difficult to verify how public monies are being spent.
Hoayek said the BDL wanted to fix this in 2016.
“We’re in the process of the consolidation of the numbers that are there,” she said, saying Startup Megaphone and the UK Lebanon Tech Hub were helping in this endeavor.
“In the coming six months, I believe we will have a complete vision of what has been spent and allocated,” she said.
Further, Lebanon for Entrepreneurs managing director Abdallah Jabbour believes that metrics used to evaluate the success of Circular 331 should be published in tandem, as he asserts startups should be judged on their financial return above other measures.
“I suggest BDL ask all the banks and funds that benefit from 331 to provide relevant metrics on a regular basis so that good information about the ecosystem can be gleaned,” he said.
“At the end of the day, the ultimate success of Circular 331 will be judged primarily by the financial return on the capital that is being invested under its auspices.”
Amendment 408 - pros and cons
An amendment to the circular, issued in November last year, sets the maximum equity a 331-using accelerator can take in a startup is 5 percent, and also allows the BDL to take a cut on the payout if the startup achieves a successful exit.
It also prohibits people who are both “directly and indirectly managing” accelerators which incubate startups and benefit from 331-money, from investing in these same startups after graduation.
Though the wording of ‘directly and indirectly managing’ is ambiguous, banks and investors that have invested 331-money into incubators and accelerators may be banned from giving follow-on funding into graduating startups.
There are pros and cons to this amendment.
“We did not want to create a conflict of interest. If you are involved in an accelerator you cannot invest in a startup when it is out, because you have much more information [about it] than others,” Hoayek said. “If you have inside information it is unfair to others.”
But there are concerns that the amendment could damage the nascent startup pipeline of startups moving from early to growth stage.
It will cut off access to capital sources from those indirectly involved in the accelerator - for example, a bank which has invested in it - for startups that have graduated from the self-same accelerators.
Lebanon’s pipeline of both startups and investors is already fairly small, so limits on who can invest in what will have implications in the future as startups who initially benefited from 331 find a there’s a marked shortage in who can invest in them.
Problems with the pipeline
But there is also a problem with the pipeline itself: there simply are not enough high-quality startups to justify the kind of investment $400 million brings.
Jabbour said “various sources”, including estimates by local VCs and data from the Invest in Lebanon directory, number Lebanon’s tech companies at 200-300. However, many of these are not fast-growth, and globally VCs typically look at an average of 1,000 companies to get to a portfolio of 10.
“Of these ten, one or two generate virtually all the returns for the fund,” he said.
“Therefore, if the global VC formula holds, and there are ten 331-compliant funds, Lebanon will need to spawn over 10,000 tech startups for Circular 331 to generate a financial return.”
Jabbour believes the BDL’s future focus should be in strengthening the pipeline.
“I strongly suggest BDL channel the remaining 331 money toward projects that support the demand side [entrepreneurs] rather than toward the creation of new funds.”
Hoayek herself notes the importance of having funds that target every stage of a startup’s lifecycle, and is not limited to Series A or B funding.
“We want all the lifecycle of a startup to be covered. We have two funds that are targeting the seed stage, two which are targeting the intermediate stage, and two which are targeting the growth stage,” she said.
The BDL’s future plans remain hidden for the moment. Hoayek was tight lipped about what’s in store but did identify some factors to watch this year.
One is that the BDL has identified a sector, as yet still secret, that it wants to focus its resources on. Hoayek refused to give any details, only that it’ll be announced some time this year and that the decision was made with ecosystem stakeholders and diaspora.
“This is a sure sector in which Lebanon can excel, and have a comparative advantage with others in the region and internationally,” explains Hoayek. “[We] will create a drive for young people to focus and channel their creativity towards this certain sector.”
The BDL also has future financial plans for the ecosystem.
“We’re not going to stop only at the $400 million,” says Hoayek, who explains the central bank’s intention to pump in more money. “We’ve already started looking at new [financial] engineering which could help the ecosystem – it will move it a huge step further.”
She also hints that foreign investment is high on the agenda of the BDL’s to-do list for 2016. “The title of [the plan] will be attracting even more international [investment] to Lebanon.”
Here’s hoping that 2016, and what lies ahead, lives up to Hoayek’s hype.