What impact will the Lebanon protests have on its startups?

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The Arab social contract was designed to placate the people – provide public sector jobs and free social services, and the population will abide by the government and live in a satiated society.  

But as populations have ballooned, governments across the region have struggled to provide the steady jobs and, in some states, basic services like electricity and water. This has left governments with a large population of dissatisfied youth, who now have little motivation and little reason to abide by the demands of the state.

Over the past few weeks we have seen protests erupt and continue in Lebanon, Iraq and Algeria. The difference between them is stark. While Iraq and Algeria exude a feeling of helplessness, Lebanon maintains a sense of hopefulness, a country on the verge of real change.  

At the time of the “Arab Spring” Lebanon’s young population stayed pretty silent, there were some protests in 2011, inspired by the uprisings in Tunisia and Egypt, but they fizzled out by the end of that year, overshadowed by the war that broke out in Syria.

The risk of another civil war was too unpalatable and instead, the Lebanese continued on a path that has become all too familiar: study, graduate and move abroad.

But as evidence of government corruption has surfaced while basic services like electricity and collection of rubbish are not being met, the country’s young population have taken to the streets, demanding change.

“Everyone is embracing what is happening, even the business community. It’s something we understand is a sacrifice…everyone agrees it’s healthy for the future, for the hope of having a better government,” says Riham Hijazi, co-founder of RUSH & REEZ, a modest fashion e-commerce site based in Beirut.

A devastated economy

With a debt burden of close to $75 billion, Lebanon has one of highest debt to gross domestic product (GDP) ratio in the world at 140 per cent, behind Japan and Greece. Risk of further taxation to relieve the state of this deficit, encouraged more than a million people to protest. Interest payments currently consume close to half of the government’s revenues with little left to invest in public infrastructure and with the influx of 1.5 million Syrian refugees, the country’s economy has suffered.

The country launched 3G mobile telecoms infrastructure when other states in the Middle East were gearing up to launch 4G services. Even now, the cost of mobile broadband data in Lebanon exceeds that of its neighbours. One gigabyte of data on average costs $9.21 in Lebanon, compared to $4.14 in Syria and $2.06 in Palestine. The government touted the idea of a “Whatsapp tax”, charging $0.20 daily for voice calls made through the app and other voice over internet protocol (VOIP) services, which became the rallying call for the nation’s youth who have been protesting every evening for the past two weeks.

“For us, it’s the beginning of something and we hope it moves us in the right direction. If the political situation continues as is, we will face a lot of financial difficulties and the country will be crippled. We need lots of reforms, the time is right to fix stuff in a very fast way,” says Elie Nasr co-founder at FOO, a financial technology (fintech) company based in Beirut.  

So what does this mean for the startup ecosystem?

Lebanon’s startup ecosystem was one of the most promising when entrepreneurship began to take hold in the region. Its highly-educated population who had experience of surviving through war had the tenacity and creativity to establish strong businesses around the world particularly in Africa, Australia and the US. Today, successful startups like Anghami, Sarwa and Kitopi are spearheaded by Lebanese entrepreneurs.

Lebanon’s Circular 331, a financing decree by the country’s central bank that enabled the commercial banks to dedicate up to 4 per cent of their capital to enale a knowledge economy, was instrumental in establishing a startup ecosystem in the country, providing close to $700 million in funding to date. But its funds have waned over the past couple of years. 

Last year, there were 36 venture capital deals closed in Lebanon, worth $74 million, accounting for just 10 per cent of total investment deals in the region according to data from Magnitt. While the value of deals has increased by 57 per cent from 2017, the number of deals has fallen by 32 per cent. With a population of just six million, Lebanon’s market is too small for startups to scale, so many have not only expanded their presence to the wider region, they are also attempting to tap into investments in the GCC too. 

“If you look at the Lebanese startup scene, startups don’t focus on Lebanon itself. Most of the business is happening in the GCC, so I don’t think investments will be hit,” says Fadi Bizri, partner at B&Y Venture Partners. "Many of the funds in Lebanon are under the 331 initiative, so it’s a question of looking at whatever reforms will happen, or whether now it will affect the fund's access to further capital from banks, which are the main entities in the 331 fund. In the medium term, the availability of capital for startups remains to be seen, there are no implications of 331 not continuing.”

Bizri believes that investor appetite will likely decrease and startups who have the means, might relocate their headquarters to the GCC if the business environment does not improve. But most are biding their time, trying to work around the current situation.

“We’re all working during the day and at night we’re participating in the revolution. We’re not going into the office, it’s hard to reach the office because of demonstrations and roadblocks so we’re all working from home. We’re all managing to deliver stuff remotely,” says Nasr.

For Hijazi, her customers are still waiting for their products.

“Our only downside is not being able to deliver the products to customers, just because the roads have been closed for local and international orders. There are many logistics and last mile [companies] that are trying to deliver, sometimes they can, sometimes they can’t,” says Hijazi. "Another thing that has been hindered is our actual production. We were producing an upcoming collection and it had to be stopped. We could not ask the workers to come and work or ask the factories to open and finish our work. It might change in the coming week.”

It remains to be seen how much longer this sense of hope will last. The world witnessed a similar act during the Egyptian revolutions, which took a devastating toll on its economy and took some seven years before its startup ecosystem bounced back. But as ever, we will have to wait and see what happens.

“We need to see what kinds of reforms are enacted to re-establish confidence and create excitement, hopefully those reforms will happen,” says Bizri.

 

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