Lebanese venture capital firms face uncertain future as economy collapses

Lebanese venture capital firms face uncertain future as economy collapses
Lebanon's central bank has prevented all Lebanese startups from relocating abroad, thereby restricting their mobility and access to foreign funding. (AFP/file)
Short Url
Updated 23 July 2022

Lebanese venture capital firms face uncertain future as economy collapses

Lebanese venture capital firms face uncertain future as economy collapses
  • A number of startups have shut down their business in past 3 years, says CEO of Middle East Venture Partners

BEIRUT: With their money stuck in banks, the steep devaluation of the Lebanese lira, the de-facto suspension of Circular 331 and the rising inflation, investors and the Lebanese central bank Banque Du Liban have reached an impasse. 

“The first five years of Circular 331 initiative were great to the ecosystem, venture capitals included,” Walid Hanna, founder and CEO of Middle East Venture Partners, told Arab News. 

The circular released by BDL in late 2013 injected nearly $400 million into the entrepreneurial sector to build a Lebanese knowledge economy.

 “The initiative seamlessly empowered the ecosystem until the financial crisis occurred in 2019. Problems happened when venture capitals powered by the circular received capital calls from their banks and the BDL, either in Lebanese liras or US dollars,” said Hanna. 

A capital call is a legal right by which a fund manager asks the fund investors or shareholders to pay their pro-rata portion of their fund commitments. 

“The devaluation of the lira, which has lost more than 90 percent of its value, made the situation complicated and problematic,” added Hanna. 




Walid Hanna, founder and CEO of venture capital MEVP. (Supplied)

After local banks decided to withhold the savings of individuals and institutions at the onset of the financial crisis in October 2019, most VCs lost a significant amount of money. Still worse, the banks tethered their startups’ capital. 

Another problem was that the VCs received their capital calls — their due money from investors — in Lebanese dollars or “lollars.” 

A “lollar” is a US dollar stuck in the Lebanese banking system; in other words, a computer entry with no corresponding tangible currency.

The issue of the “lollar” made it impossible for startups to expand their businesses abroad. The fact that BDL required startups and VCs to not spend any “circular 331 money” outside of Lebanon didn’t help matters, explained Hanna.

“Therefore, it is a triple problem for the banks, the startups and BDL. This is where the decline started,” Hanna concluded. 

Stashed sums in the banks

When asked about how much money MEVP had stuck in local banks, Hanna replied that the Impact Fund, MEVP’s Lebanon-based fund, has $ 7 million in the banks. The company launched the fund in 2014 with an initial value of $70 million, most of which was invested in 29 Lebanese startups. 

“A number of these startups have already shut down their business in the past three years,” Hanna said dryly. 

HIGHLIGHTS

The circular released by Lebanese central bank in late 2013 injected nearly $400 million into the entrepreneurial sector to build a Lebanese knowledge economy.

Another problem was that the VCs received their capital calls — their due money from investors — in Lebanese dollars or ‘lollars.’

A ‘lollar’ is a US dollar stuck in the Lebanese banking system; in other words, a computer entry with no corresponding tangible currency.

While the VC relies on three other regional funds in the Middle East and North Africa to sustain itself and is doing quite well, the current situation in Lebanon has become a thorny problem for them, other investors and fund managers. 

“The primary thing that affected us was our lack of ability to disperse money to our startups, most of which are in their early stages,” Fawzi Rahal, managing director at Fla6Labs Beirut, told Arab News. “It also interrupted our capital call and fundraising process.”

Flat6Labs Beirut, which manages a $20 million fund, had plans to launch cycle 5 of its program, which involved investing in 8 to 10 startups. However, the bootcamp was interrupted when the crisis occurred in late 2019 and Rahal and his team could not complete the shortlisting of the startups into cycle 5. 

“Of course, later on, we realized that even had we done shortlisting, we wouldn’t have been able to continue with the investments because our capital call was delayed,” said Rahal.

BDL’s restrictions

BDL has prevented all Lebanese startups from relocating abroad, thereby restricting their mobility and access to foreign funding, which led many startups to go bankrupt and halt operations.

BDL also stated that it would not accept startup “exits” to be made in Lebanese liras or “lollars” but wants each startup to “exit” in fresh dollars i.e. to be bought by companies abroad with greenbacks.

“This is ridiculous,” Hanna says scathingly. “We have a country going backward with the GDP contracting in the past three years and reigning inflation, currency devaluation, brain drain and trauma from the Beirut port explosion. Why would anyone invest in Lebanon under such circumstances?”

However, according to a senior investment source who chose to stay anonymous, the central bank has a different point of view.  

As part of the then-functional Circular 331, BDL had given a lot of money to the banks, and the banks had invested this money as shareholders or limited partners in the VCs. More importantly, they plowed in the money when the exchange rate for $1 was 1,500 Lebanese liras. Today, it is 25,300 Lebanese liras.

This is one of the reasons why BDL is not accepting startup exits in “lollars” or Lebanese liras and demanding fresh dollars instead.

“Basically, the BDL is asking if we are cheating them of its share. Because that’s how it looks like [to them],” an informed source told Arab News. 




People walk past a money exchange company in the Lebanese capital Beirut. (AFP)

He added that to make matters worse, there is no legal difference today between a “lollar” and a dollar in Lebanon. 

The “lollar” stuck in banks is legally the same as a fresh dollar “therefore, you cannot take someone to court and ask them to pay your dues in fresh dollars,” the source said. 

“And because the law does not differentiate between the two, the law cannot protect you or BDL in this case.”

Breaking the impasse

 “I think it is about aligning our interests as fund managers, BDL, the banks and the portfolio companies,” another senior banking source said to Arab News. 

“The fund managers and the bank shareholders are aligned in that they both want the best price possible for their exits.”

The source continued to say that, in the absence of follow-on investments and with most funds reaching the end of their five-year investment period, a realistic approach is needed regarding the best exit under the current challenging circumstances. 

“The ecosystem requires an update to the current 331 regulatory framework that considers the new challenges, allowing us to escape this deadlock.”

Our source reminded us that “the positive impact of the 331 circular offsets by far the challenges we are facing today.” 

Arab News contacted other venture capitals for this piece, such as Berytech, BY Venture Partners and Cedar Mundi but received no response.


Saudia to bring voice recognition technology, augmented reality on board: VP

Saudia to bring voice recognition technology, augmented reality on board: VP
Updated 10 sec ago

Saudia to bring voice recognition technology, augmented reality on board: VP

Saudia to bring voice recognition technology, augmented reality on board: VP

RIYADH: Saudia, Saudi Arabia’s national carrier, is aiming to integrate voice recognition technology and augmented reality to its services, the company announced during the second edition of the Global AI Summit held in Riyadh.

Saudia has signed an agreement, aimed at boosting artificial intelligence in the flight sector, with the Saudi Data and Artificial Intelligence Authority and the Saudi Company for Artificial Intelligence. Speaking to Arab News on the sidelines of the summit, Dr. Khaled Alhazmi, vice president of IT support and operations at Saudia, said that the agreement is the first step in introducing AI products to the airline’s services.

Alhazmi explained that the company is currently exploring voice recognition technology through one of SDAIA’s products, an app called SauTech.

“It is an amazing app; it currently gives accurate results for the recognition of the dialects of the Arabic language. And right now, we are trying to explore opportunities and use cases, to start implementing it in our services,” he said.

The company is also planning to adopt Internet of Things technology as well as augmented reality to ensure that they are first movers to implement AI into
their services.

“Our strategic direction is to build an ecosystem of partners who would enable us to digitize our services to our customers. We are aiming to deliver a first-class experience to our customers,”
he added.

Alhazmi believes that the digitalization factor currently in use at the airline such as downloading tickets to personal devices can be greatly expanded on, and
that there are huge opportunities to integrate technology into
the sector.

“We are digitizing everything under a program, which is adapting the digital first. Right now we believe that we need to put in use all the data science, all the technologies nowadays, and put them into the hands of the customer,” he said. The company wants to improve its self-service options by providing a personalized platform that will enable users to customize their journey according to their needs.

“That’s actually the main goal because we understand right now that we have a new generation of people who are more interested in technology, they are using technology every day,” he added.

Saudia has also recently partnered with agritech company Red Sea Farms to provide sustainable and high-quality meals for its customers.

“We can see that the adoption of technology in Saudi Arabia in general is getting more mature than other countries,” Alhazmi concluded.


Saudi budget surplus is calculated on $76 for brent price

Saudi budget surplus is calculated on $76 for brent price
Updated 30 September 2022

Saudi budget surplus is calculated on $76 for brent price

Saudi budget surplus is calculated on $76 for brent price
  • Real GDP growth is forecasted to increase by nearly 8 percent year-on-year in 2022 and 3.1 percent year-on-year in 2023

RIYADH: Based on the government budget figures, Al-Rajhi Capital assessed the government's 2023 budgeted revenues to likely be based on Brent at $76 per barrel.

Real GDP growth is forecasted to increase by nearly eight percent year-on-year in 2022 and 3.1 percent year-on-year in 2023, according to Al-Rajhi Capital.

Inflation is expected to be 2.6 percent and 2.1 percent in 2022 and 2023 respectively, Al-Rajhi said.

Revised 2022 revenues are mostly in line with estimates, however, the expenditure budget is much higher than from an earlier announcement, it said.

The 2023 spending budget was raised by 18 percent, with a slight fiscal surplus of SR9 billion expected for 2023.


Saudi Arabia to record a budget surplus of $24b in 2022

Saudi Arabia to record a budget surplus of $24b in 2022
Updated 15 min 23 sec ago

Saudi Arabia to record a budget surplus of $24b in 2022

Saudi Arabia to record a budget surplus of $24b in 2022
  • Total revenues expected to reach about SR1.12 trillion in 2023

RIYADH: Saudi Arabia is expecting its budget surplus in 2022 to hit SR90 billion ($24 billion), and another SR9 billion next year, the Ministry of Finance announced on Friday.

Looking at the full year 2022 projections, real GDP is expected to grow by 8 percent, while the inflation in 2022 may record about 2.6 percent.

Looking at the next year’s projections, Saudi total revenues are expected to reach about SR1.12 trillion in 2023, while reaching about 1.21 trillion in 2025, according to the Ministry of Finance's preliminary statement of the state's general budget for the year 2023.

Total expenditures are expected to reach about SR1.11 trillion in the next fiscal year 2023, and that the expenditure ceiling will reach about SR1.13 trillion in 2025.

The objectives of the state's general budget for the fiscal year 2023 come as a continuation of the process of work to strengthen and develop the financial position of the Kingdom, the finance minister said.

“The government attaches great importance to enhancing the support and social protection system and accelerating the pace of strategic spending on Vision programs and major projects to support economic growth,” Mohammed Al-Jadaan said.

The Kingdom’s economy has demonstrated its strength and durability by achieving high growth rates, after taking many policies and measures with the aim of protecting the economy from the repercussions of inflation and supply chain challenges, he added.


Deals worth over $27bn available for Saudi businesses with leading national firms

Deals worth over $27bn available for Saudi businesses with leading national firms
Updated 30 September 2022

Deals worth over $27bn available for Saudi businesses with leading national firms

Deals worth over $27bn available for Saudi businesses with leading national firms

RIYADH: Saudi companies are being encouraged to tap into investment deals and contracts worth more than SR100 billion ($26.62 billion) with two of the Kingdom’s biggest firms.

Representatives from the Saudi Electricity Co. and the Saudi Basic Industries Corporation — also known as SABIC — unveiled various opportunities for firms in the Kingdom to work with them during workshops organized by the Federation of Saudi Chambers, according to Saudi Press Agency.

The Saudi Electricity Co. set out its strategy for the localization of the electricity industries, known as ‘Bena’, which aims to encourage and support local manufacturing.

It also includes three initiatives: to raise the percentage of localization in the company's projects; increase the purchases of materials from national factories; and identify investment opportunities required to be localized.

The firm indicated the volume of future demand for or purchases and contracts is expected to reach SR100 billion.

SABIC explained that the investment opportunities under the umbrella of its Nusaned initiative to enhance local content, contributed to supporting economic development with more than $1 billion of gross domestic product.

The company approved 43 investment opportunities, with the total investment opportunities amounting to 351 opportunities.

The number of investors has reached 183, while the number of feasibility studies has hit 74.

 


Recycling in Saudi Arabia to pull in $32bn income by 2035: minister

Recycling in Saudi Arabia to pull in $32bn income by 2035: minister
Updated 30 September 2022

Recycling in Saudi Arabia to pull in $32bn income by 2035: minister

Recycling in Saudi Arabia to pull in $32bn income by 2035: minister

RIYADH: Recycling in Saudi Arabia will generate an annual income of SR120 billion ($32 billion) by 2035, according to the minister of environment, water and agriculture.

Speaking at an event organized by the Riyadh Economic Forum, Mansour Al-Mushaiti said the forecast is based on estimates made by the National Center for Waste Management.

Al-Mushaiti also used his speech to flag up a study by the World Bank which warns the cost of the annual environmental burden on the economy comes in at SR86 billion a year, of which SR8 billion comes from poor waste management.

The minister talked-up the Kingdom’s sustainability policies, including the Crown Prince’s pledge to plant 10 billion trees in the coming decades.

He also flagged up the move to zero carbon neutrality by 2060, as well as seeing 94 percent of waste recycled by 2035 instead of being taken to landfills.