ExecutiveMagazine - 5/10/2019 10:44:11 AM - GMT (+2 )
Scale-ups—startups with success and growth potential—can help economies more than other types of SMEs, and providing them with the right kind of support to succeed would take comparatively little effort but garner a large impact, according to a joint 2018 report by global consultancy firm Strategy& and entrepreneurship non-profit Endeavor, which was revealed at an event on April 12 in Beirut, followed by a panel discussion by key industry players.
The study emphasizes on the importance of stakeholders recognizing the significance of scale-ups in the context of their local markets, identifying priorities for public and private sector initiatives, and mobilizing ecosystems to help these companies succeed—so that they, in turn, can have positive economic impact on their countries. These recommendations are framed as especially helpful for struggling regional economies, like that of Lebanon.
The report analyzes several national scale-up ecosystems in the region—Lebanon, UAE, Saudi Arabia, Jordan, and Egypt—and presents recommendations on how each ecosystem can help these companies flourish.
According to the report, research on the topic of scale-ups in the region is limited, and given that a scale-up is not a type of company, but rather a temporary state during a company’s life cycle (a pivot point for growth), the segment can be difficult to research. Scale-ups can be from any sector and of any age, with a proven business model. Consolidating several international definitions of the term, the report defines scale-ups as “companies that have an established business model, are fast growing, poised for significant growth, and are typically led by entrepreneurs who can act as role models.” As such, it states that scale-ups represent on average 5 percent of SMEs globally.
The report credits five Lebanese tech companies (including DNY Group, Diwanee, and Anghami) with contributing to the emergence of up to 80 other tech companies between 2006 and 2016, through, among other things, mentorship and investment. Strategy& assessed a sample of Endeavor-assisted scale-ups in MENA, concluding that, on average, a successful MENA scale-up can generate up to 3.4 times more revenues and eight times more employment than a company from the regular SME segment, concluding that this impact has “the potential to drive employment, particularly high-quality jobs, and significantly boost GDP.”
Exploring how to increase scale-up potential led the researchers to create a scale-up readiness index for the countries addressed in the report, to assess the maturity of the scale-up segment, based on four growth pillars: business fundamentals (regulations, technology, facilities), business propellers (financing, talent, mentorship, and networking), demand creators (access to customers and markets), and country readiness (lifestyle and country stability), each of which is ranked in terms of vitality to the business. Financing and talent were rated as top priorities.
Is Lebanon scale-up ready?
With the top grade being 3, Lebanon scored 1.2 on this index, coming in second after the UAE, which had a 1.6 rating.
A closer look at Lebanon reveals that it shares the top rank with Jordan on business fundamentals, each scoring 1.3, despite Lebanon’s low 0.9 score in regulations (the second-lowest). Lebanon’s highest score—2.0 for facilities—is explained by the country’s relatively affordable office space and utilities. However, Lebanon’s shaky infrastructure received a score of 1.4, though this is second in the region to Jordan, and higher than that of UAE, explained by the fact that costs are higher in the UAE.
Lebanon also got the top score of 1.6 on business propellers, along with UAE. It ranks highest on the financing subcategory, with a 2.0 score. The report credits active VCs and Circular 331 from Banque du Liban (BDL), Lebanon’s central bank, for this, especially in the tech sector. In the talent subcategory, Lebanon scored 1.1, with the report explaining that though there is a large pool of skilled talent, there is a significant brain drain. When it comes to hiring foreign talent, the country also has major regulatory hurdles. Lebanon scored second highest on mentoring and networking, with 1.7, credited to the country’s well-developed mentoring and networking organizations, but the report points out that offerings are more geared toward earlier-stage technology startups.
Lebanon’s score of 0.3 on demand creation ties with Jordan, and is only 0.1 higher than the lowest country, Egypt. Domestically, local companies struggle to find potential customers in Lebanon, and as it is a very small market, access to larger markets is essential. However, the country has suffered from a reputation for poor quality control of exports over the past decades, and there are few government initiatives to support exports.
Though Lebanon scored only 1.1, the second lowest, on country readiness, it ties with UAE on lifestyle with a 2.0 score. The average is significantly dragged down with its country stability score of 0.5.
According to Strategy& Middle East Partner Mahmoud Makki, in a statement in the event’s press release, “Lebanon provides affordable facilities, funding opportunities channeled by Venture Capital funds and the Central Bank, and a skilled talent pool. Yet our study shows that there are several challenges facing Lebanon’s SMEs, including access to domestic and global customers, the non-conducive regulatory framework, in addition to brain drain.”
The report identifies seven key priorities for a flourishing scale-up ecosystem, including facilitating access to: financing, talent, foreign markets, large customers, clear and transparent regulations, better facilities and infrastructure, and networking and coaching opportunities.
Ultimately, the recommendation is for each country to set up a scale-ups support network, comprised of already successful entrepreneurs, public sector actors, academics, NGOs, tech players, financial institutions, real estate companies, strategy consultants, incubators, and accelerators, as well as other companies, that would encourage these companies. Each country’s unique ecosystems would need custom strategies, but one entity should be responsible for defining scale-ups, selecting the most promising ones, and nurturing them utilizing the public, private, or a collaboration of both sectors.
Though supporting scale-ups can help the local economy, entities that take on this feat should proceed with caution so as not to shift focus completely away from small-scale early-stage startups in Lebanon, who were poised to be the original knowledge economy torchbearers at the launch of Circular 331—largely considered the turning point in Lebanon’s startup ecosystem—and are already widely complaining about the lack of support they receive. While it is true that there are significant, quality programs available to them, many VCs opt to invest in larger companies with bigger tickets for higher margins.
The report comes at an interesting time for the region. The acquisition of Careem by Uber in March has given many entrepreneurs a lot of hope that their business can scale too. In Lebanon on the other hand, this good news comes hot on the heels of a major loss in the ecosystem—the bankruptcy of what was until last year one of the country’s most promising scale-ups, Bookwitty. Part of the reason for its fall was the fact that the company was growing fast, was not yet profitable, and delays in funding caused it to crash. An increased focus on supporting scale-ups could help prevent such tragedies from happening in the future.