BEIRUT: In the first step toward creating an estimated $72 million equity fund that would be the largest source of venture capital for Lebanese startups, the World Bank signed a $30 million loan agreement with the Finance Ministry Wednesday.
Once the loan is approved by Parliament, the national credit guarantee agency, Kafalat, will offer $25 million in loans to small and medium enterprises that have secured a matching capital commitment from a preapproved list of institutional investors in the private sector and $2.5 million in concept development grants of up to $15,000 to entrepreneurs with viable new commercial ideas.
By mitigating some of the financial risk intrinsic to early stage venture capital investment, the World Bank’s loan is expected to mobilize an additional $42 million for the fund from private sector investors.
The iSME project was conceived to address barriers limiting the availability of sustainable, early-stage financing for innovative Lebanese SMEs identified during surveys with the country’s 10 active venture capital firms, according to Randa Akeel, a World Bank senior economist for the MENA region.
“We literally interviewed all the active VC investors in town,” Akeel told The Daily Star. “They all tell you it’s a very hard market [for startups] because they require such a high initial investment and are so risky, so if they are going to do it, they need to minimize the risk.”
While the number of venture capital deals in the MENA region increased by 28 percent in 2010 and 2011, according to MENA Private Equity Association’s 2012 Venture Capital Report, most of the capital was venture or growth capital targeted at existing SMEs, indicating that regional investors remain relatively risk averse compared to their counterparts in countries with larger VC industries.
Lebanon accounted for 9 percent of the total VC transactions in the region between 2010 and 2011 and recorded 16 deals between 2006 and 2012, the third-highest number in the region.
Despite the liquidity of the country’s banking sector and government incentives to stimulate SME lending, the World Bank found that Lebanese entrepreneurs still suffer from three major gaps in the financial environment. The iSME fund targets these market failures, namely funding at the early concept stage to develop ideas into viable commercial concepts or products; seed funding to start a company; and the absence of venture financing needed for the firm to reach its growth stage and beyond.
The iSME will target beneficiaries in three categories of risk: $25,000 to $200,000 for seed capital loans, $200,000 to $500,000 for venture capital loans and $500,000 to $2 million for growth capital loans. The goal is to offset the losses from seed capital loans – approximately 60 percent of startup and early-stage companies typically fail – with more stable returns from the lower-risk categories.
“Ultimately the returns from levels two and three will offset losses from early stage companies,” Akeel explained.
Meanwhile, the World Bank expects many of the venture loan beneficiaries that fail will learn from their mistakes and spread this knowledge to a new generation of entrepreneurs.
The fund is “sector agnostic,” Akeel said, but the companies must have a new, innovative business model with an underlying economic development objective. Though there are no minimum job creation requirements, loans will only be extended to companies registered and doing business in Lebanon.
An independent board of experts appointed by Kafalat will evaluate the applications and determine a list of potential institutional investment partners from around the world that beneficiaries must secure capital matching commitments from before submitting an application to Kafalat.
Kafalat will maintain the constantly updated list of potential equity investment partners in the private sector that meet certain criteria. Approved investors must be well established in the venture capital field and have the capacity to offer mentorship and other support to the startups they invest in.
The World Bank’s project loan to the government has a maturity of 17 years and a grace period of six years.