Article via Seeqnce, a Beirut-based catalyst created to accelerate technology startups in the Arab World.

The emergence of a local venture capital industry in Lebanon has come as a breath of fresh air for Lebanese entrepreneurs, writes Elie Boujaoude, Investment Manager at Berytech Fund.

In the past few years, the landscape for financing start up and early stage enterprises in Lebanon has witnessed an embryonic however important development consisting of the prudent emergence of equity finance as an alternative to debt finance.

Indeed, whereas bank lending remains the traditional and almost only external source of financing for Lebanese companies, the shortcomings of debt with regards to start up and early stage companies have been widely recognised and the market is slowly changing towards providing them with more adequate financing schemes.

The first change took form in a re-adaptation of bank lending itself with the introduction of the “Innovation Loan” scheme by Kafalat, the leading loan guarantee institution for small to medium enterprises in the country. Under this scheme, innovative start up companies can benefit from an almost interest free loan with a limit of 200,000 dollars reimbursable over a period of five years including one year as a grace period and without any collateral requirements.

Nevertheless, in spite of its considerable success and positive impact, this lending model constituted only a half way solution for financing start up and early stage companies. Indeed, apart from the natural constraints of bank loans consisting of fixed re-payments and limited grace periods, lending has two other shortcomings for companies in their takeoff phase. The first is that the financing comes to entrepreneurs without any thorough qualitative input and support often necessary for enhancing their chances of success.

The second, of lesser importance, lies in the hesitation of entrepreneurs form dealing with the consequences of possibly defaulting on their loans and declaring bankruptcy. And this is in spite of the presence of limited liability structures. Given this, the entrepreneurs might refrain from venturing in the first place.

This bold introduction of the “Innovation Loan” scheme by Kafalat in 2006 in addition to the bourgeoning of institutionalised support structures for entrepreneurs with the establishment of Berytech Incubator in 2002 has set the stage for the launching of formal venture capital in Lebanon.

In effect, the first two VC funds were launched in 2008. These were the Berytech Fund, managed by Berytech Incubator and the Building Block Fund set up by the Bader NGO. International investors also raised the profile of this nascent industry with, for example, multinational giants such as Cisco and Intel participating in the capital of Berytech Fund and later on the direct entry in 2010 of private equity behemoth Abraaj on the Lebanese VC market for higher tickets. Furthermore 2010 saw the creation of two additional dynamic VC funds, MEVP and Cedrus Ventures. This is not to mention the creation of the first Lebanese Business Angels Network by Bader and the coverage of Lebanon by several other regional funds.

Such positive changes have insured that most early stages of financing are now available to Lebanese entrepreneurs with equity tickets raging from as low as 100,000 dollars to a couple of million dollars with the possibility of leveraging further with Kafalat guaranteed loans.

So far more than 13 investments have been declared by VC funds and about 25 companies have benefited from the Kafalat “Innovation loan” scheme. Given the nascent stage of the VC industry in Lebanon these are encouraging numbers.

In parallel to the emergence of the local venture capital industry, a support structure for entrepreneurs has slowly evolved and took shape into what is now a vibrant ecosystem of entrepreneurship. There is a full set of organisations providing all types of support for entrepreneurs: incubators, NGOs, mentorship programs, business plan competitions, grant scheme, corporate assistantship programs, networking platforms etc. Additionally, thanks to building a strong network of support through Lebanese expatriates, it has become increasingly easier for Lebanese start ups to access markets and resources from international hubs in Europe and US.

Today, with these changing market dynamics there should be no more room for entrepreneurs to hesitate. An improvement in the deal flow of funds both in terms of quantity and quality is being felt. Announcements of new investments are also more frequent. Nevertheless, the performance of the whole system, and specifically that of VC funds is yet to be discovered as none of the investments have been exited yet.