An Ecosystem in Exodus: The Future of Lebanon's Startups

Lebanon’s financial crisis began in 2019, when people took to the streets to protest the ruling party and were met by the Lebanese army and security forces.

Soon afterwards, the economy deteriorated and the value of the Lebanese currency dropped to an all- time low against the US dollar, losing almost 90% of its value in late 2019.

The crisis was further exacerbated by the dual disasters of the COVID-19 pandemic and the 2020 Beirut port explosion. After the country defaulted on its debt, banks began implementing withdrawal restrictions and withholding some depositors’ foreign currency accounts, resulting in many losing their savings, pensions, and even their businesses.

Unsurprisingly, this took a toll on startups in Lebanon. Investments dropped by more than 70%, from $54 million in 2017 to $16 million in 2021, according to a report titled ‘Braving the Storm’ by Konrad Adenauer Stiftung and ArabNet, an organisation focusing on tech business in the MENA region. The number of deals also dropped from 56 to 12, putting Lebanon in 14th place in MENA when it comes to the number of investments, compared to 2nd place in 2017.

RELOCATING ABROAD

The restricted access to bank accounts coupled with the drastic drop in investments forced many startups to look outside Lebanon for survival.

Avo Manjerian, CEO and co-founder of Schedex, a shift-scheduling startup for the F&B sector, set up a company in Armenia in December 2020 to mitigate the effects of the financial crisis on his business.

“The money I had in the bank went away. I can’t get it back,” Manjerian tells StartupScene. “Not a single investor will invest in a Lebanese company who only has a bank account in Lebanon, and I understand them. So, we set up a company in Armenia, and opened a bank account there. This is how we’re rolling. We’re using the flexibility of the Armenian company to sustain and grow our startup.”

Manjerian launched his startup in October 2019, just as the economic crisis was beginning in Lebanon. By 2022, he has managed to enter new markets such as Cyprus and Dubai, and is now eyeing expansion across the MENA region.

He is not the only entrepreneur relocating his startup abroad. Rana Chemaitelly, founder of The Little Engineer, an educational startup that focuses on science, technology, maths and engineering, travelled to Dubai in March 2020 during the onset of the pandemic. She was expecting funds to arrive from her partners overseas and wanted to open an offshore account for the transfer to arrive safely.

“The payment was scheduled to arrive in October 2019, but I requested to delay the transfer until I set up a company outside Lebanon,” she says. “I was worried I would not be able to access my money in Lebanon. The transfer arrived in May 2020, and thankfully this fund helped me stand on my feet.”

Now Chemaitelly is expanding her startup to the UAE and the KSA, while maintaining the company’s base in Beirut.

These stories are not unique. In a survey of 46 startups and 15 stakeholders, the ArabNet report reveals that 53% of local startups have moved their headquarters or parts of their business outside of Lebanon.

“The crisis is affecting people’s ability to operate and their ability to work,” says Omar Christidis, founder of ArabNet. “Today, the issue is, if you’re operating in the country, you cannot use the money you have in the bank to pay anything outside of the country. There is something called a fresh dollar, which is a dollar you bring in from outside that you can actually use. So, actually, the ability to transfer money or pay internationally is a big hurdle for startups.”

And that is exactly the challenge that Ziad Talge, founder of gaming startup Yayy, experienced when growing his startup. “My business relies heavily on user acquisition, on using social media channels to get customers,” Talge explains. “I have to spend a lot of money on digital marketing. This is not possible from Lebanon. We’re not able to spend the necessary amount required to grow. This is what triggered us to move elsewhere.”

As a result, Talge set up a company in Abu Dhabi in March 2022. The Abu Dhabi company acts as the content creation hub, while the Lebanese company focuses on upskilling talent.

GROWING DESPITE THE CRISIS

Despite this challenge, Yayy is one of the few lucky startups that was able to grow in the midst of the crisis. “The more the country went down, the more we went up, sadly but fortunately,” Talge says.

Right before the economic crisis hit, the startup secured $40,000 funding from Flat6Labs accelerator in Beirut. Once the funds were depleted, Talge began  working with international gaming publishers who were paying monthly retainer fees in US dollars. Payment in dollars helped the startup fight inflation, and enabled it to retain and hire talent, which in turn led to an increase in revenues.

“Revenue from abroad definitely helped me stay afloat,” says Talge. “And in recent months, it helped me grow. Today, there are about 15 people in the studio. When we first started, I was alone.”

Talge also pays his employees in US dollars to retain talent, especially since so many people left during the financial crisis. “Talent is excellent in Lebanon, but so many people have left, so it was hard to find experienced talent,” he says. “We are now coaching and mentoring young talent, which is great because in two years, the team will be able to grow and excel.”

Meanwhile, Toters, the Lebanese-based delivery tech platform, has also been growing despite the country’s economic challenges. It expanded to Iraq in 2019 and recently raised $18 million in a Series B round. Although the startup was launched in 2017, it quickly grew its scale of operations in Lebanon and Iraq while also increasing its range of services to include food delivery, grocery delivery, courier services, payment and financial services through a single platform.

“While the financial crisis affected demand and slowed down growth of the overall market, it also did a few things in our favour,” Tamim Khalfa, co-founder of Toters, tells StartupScene. “Competition couldn’t navigate the crisis while we remained financially strong, so we saw players leaving the market one after the other and took more share of the online market. Even though the food delivery market growth slowed down, the share of online markets has been increasing, so the growth of our addressable market is increasing as well. We couldn’t capture that without being financially sound.”

To that end, Toters protected their growth margins by maintaining profitability for their partners and suppliers, increasing  their vertical offerings, and raising funds quickly.

“Although we had money outside of Lebanon to fund our international expansion, a small portion was trapped in the Lebanese banking system as a result of the financial crisis,” explains Khalfa. “We took the loss, and started raising money to compensate and further fund our international expansion.”

LOOKING FOR THE SILVER LINING

In recent years, incubators and accelerators in the country have limited funds, if any, to invest in startups. Support systems for entrepreneurs are also quickly drying up.

“A lot of the usual players, not just investors, but also those that inject blood into the ecosystem, incentivize and inspire, are not present today,” says Fawzi Rahal, Managing Director of Flat6Labs in Beirut. “There is also a bit of defeatism in all of us, from the trauma of the blast to the healthiness of the banking system, which reflects onto everybody from the startups to the fund managers. People need someone to inspire them today. I wouldn’t say it’s gone, but there is a lot more that needs to be done today to support startups.”

While the crisis continues to storm on, a silver lining has started to emerge. The crisis helped some startups innovate their products and services, and expand into new markets. The currency devaluation also encouraged startups to export, bringing in much needed foreign currency. In fact, a little over 52% of startups said that the crisis pushed them to develop new products and services, and 47% stated that the crisis helped them expand into new markets, according to the ArabNet report.

There is also a shift in the types of startups emerging in Lebanon. More necessity-based startups are being created, such as agri-food, renewables and clean tech, which could grow as a result of the crisis.

“I’m seeing startups with very complex and great ideas to critical problems that may not have emerged had it not been for these difficult times,” Rahal says. “Of course, the situation is more challenging, but I think generally, the ecosystem is finding a way to survive.”

Despite the challenges that lie ahead, Rahal is hopeful about the future of Lebanese entrepreneurs. “The odds are not in their favour, but they’re Lebanese, so they’ll figure it out. The resilience is what makes us special, the positivity that almost looks naïve, but it isn’t. It’s hunger, it’s the will to continue and make a difference.”