Lebanese Innovation Ecosystem Post-Crisis Assessment - Part 2: Access to Capital

Jan 26 2023
Lebanese Innovation Ecosystem Post-Crisis Assessment - Part 2: Access to Capital
Share this article

Earlier this month, Arabnet published the first of a series of articles that examined the impact of the economic crisis on talent and skills in the Lebanese innovation ecosystem. These articles are based on a recent report produced by Arabnet in collaboration with the Konrad Adenauer Foundation that looked at the aftermath across 5 key dimensions: talent, access to capital, access to markets, infrastructure and operations, as well as regulation and government.

The report is based on a quantitative startup survey and one-on-one interviews with key ecosystem enablers. In the second installment, this article will focus on the effect the crisis has had on access to capital.

Download the Full Report: Braving the Storm: Safeguarding the Lebanese Innovation Economy

The crisis has had a pronounced impact on startups’ ability to access capital, with lack of access to investment and capital deemed as the most detrimental challenge to business by survey respondents. The gravity of the situation was also reflected in the urgency displayed by startups when it came to securing capital: On average, surveyed startups rated securing capital and liquidity as the area of business that they prioritized most in response to the crisis.

The current environment has been unanimously described as toxic for investors according to interviewees, who noted that the decrease in investment appetite is having a consequential, sometimes ruinous, effect on startups. Some investors have defaulted on their commitments and securing new deals has become bound by several restrictive conditions. Foreign investors, in particular, were reported to have become highly reluctant to consider deals with startups that have any connection to Lebanon.

A Game of Two Halves

Negotiations with investors and investment deals that predate the crisis have been largely negatively affected, with 41.3% of startups reporting that the crisis had turned away interested investors, and close to a quarter (23.9%) saying that committed investors had held back disbursement.

Furthermore, a small proportion of respondents (13%) had to renegotiate and revise existing terms with investors. Only 6.5% felt that investors had become more committed to the business.


Yet, despite an overall negative sentiment and outlook in the investment environment, a considerable number of startups were still able to secure investments: The startup survey shows that, since the beginning of the crisis, as much as a third of surveyed startups (32.4%) were able to secure funding deals. However, close to half (45.9%) had sought but failed to do so.

According to the interviews, startups with proven, scalable businesses and exportable goods were highlighted as propositions that may be able to secure funding. Having a market base abroad is also a significant boon. E-commerce was a commonly cited tech sector among interviewees as an area with potential for growth, as well as gaming and Software-as-a-Service (SaaS) ventures. Several interviewees also singled out fintech, owing to the existing banking experience available in the country and the potential local market for fintech solutions. Similarly, the agro-food, pharmaceutical, and fashion sectors were also mentioned for their export potential.

It is interesting to note that while startups are seeking funding from global and regional investors, the ones that have successfully raised funds are mostly from Lebanese investors. There may be an opportunity here to support entrepreneurs direct their fundraising efforts more towards local investors who appear to be more likely to support their business.

Early-Stage Bear the Brunt of the Crisis

According to the survey, startups that had managed to raise more than $500,000 prior to the crisis were more likely to secure funding deals after the crisis. Earlier stage companies, meanwhile, were less interested in seeking funds and had a significantly higher failure rate in seeking them.

Impact on Donor Priorities and Bank Lending

Donors priorities have shifted in line with emerging needs. As several interviewees – NGOs, and business incubators – noted, donors started allocating funds away from tech and entrepreneurship and towards relief efforts and providing basic necessities. Similarly, interviewees noted an increased attention to SME support and youth development – one interviewee who runs a digital upskilling program targeting youths pointed to a palpable eagerness from donors to support the program. The healthcare and education sectors were also singled out as new areas of interest for donors.

Bank lending has come to a standstill. The government’s failure to unify the exchange rate has severely restricted banks’ ability to operate as lenders. Namely, the persistence of the legality of the 1500 lbp exchange rate, particularly, for the repayment of loans, inevitably exposes banks to arbitrage.

How did Investors and Startups React

Startups have commonly resorted to registering their companies in foreign countries – with Cyprus being the most commonly mentioned destination – to be able to manage their cash flows and access US dollars. Doing so allows startups to access the full value of their capital. Furthermore, by eliminating the country risk, startups with legal presence outside of Lebanon also increase their chances to secure additional funding.

Emergency cash injections were also a vital tool. Funds were used to extend the runways of startups and allow them time to stabilize and potentially move out of the country. One interviewed investor managed to save 10 out of their 14 startup portfolio companies namely by plugging the working capital gap. This was achieved with the support of a foreign co-investor either through a secondary buyout or exit, a contingency plan that “can be replicated by others,” according to the investor.

Another investor said that he had to intervene with emergency cash loans, which was needed for about 20% of their portfolio companies. Another interviewee, the Managing Director of a regional business incubator, had resorted to matching local startups with Lebanese angels based outside of Lebanon.

Local emergency funds were also set up, with one such initiative securing investments for eleven 331 startups through a high-growth investment vehicle backed by local private and institutional investors.

To access the full report, further insight, and recommendations, click here.