The Digital Bosphorus Lives (and thrives) On

5th February 2018  

By Daniel Kratkovski, Analyst at U-Start

Whenever discussing Turkey, one can hardly avoid mentioning how it’s stranded between continents, civilizations and cultures, all while retaining a unique identity reinforced by its rich history.  Perhaps, at the risk of running into an omnipresent cliché, no other analogy renders itself as useful in describing the current state of Turkish VC ecosystem: that of global ambitions, taking the best practices from the  West, while continuously looking eastwards.

The reason why we at U-Start care to analyze ecosystems is the dichotomy between ‘feels’ and ‘reals’. Ideologically, there is no reason to believe that the nature of entrepreneurship is somewhat bound by national borders, i.e. great returns can be attained wherever there’s swell talent. On the ‘reals’ side, ecosystems matter because they make returns more (or less) probable. Hence this short article is an update to our previous writings on Turkey, updated with learnings from industry insiders as well  as the Turkey’s ecosystem report I’ve had the privilege to co-author. 

Here’s a quick recap of where the ecosystem stood at in 2013: a crunch in the funding market virtually across all stages; investors preferring risk-averse investments into validated business models, inciting a generation of (fortunately) successful clone companies focused primarily on the domestic market; mushrooming networks of entrepreneurs, centered around both public and private initiatives; an entrepreneurial vigor, fueled by abundance of top-tier talent, that is quite hard to match. So what has changed since?



For all the shortcomings of the ecosystem, that are rather well-documented, it’s worthwhile to remind ourselves how unique, yet non-linear, is the development of Turkish VC ecosystem. We in the western world often eerily correlate technology adoption and startup investments – if cloud adoption is high that country must have some slay startups. Yet this thinking falls short of reality - Turkey’s mobile users are one of the most ardent shoppers of e-commerce, as well as users of mobile banking and QR code scanning. Its swelling young population are one of the most addicted social media users and the country has a enviously high adoption of card payments and a slick network of logistics providers. En plus, Turkey ranked 33rd on IESE’s index of PE&VC attractiveness index, trailing only to Poland in the CEE region, while bypassing all other countries in the region by a wide margin. And for all of its worth, since 2011 only $371M were invested in Turkish startups (figure 1). This mismatch does confirm that Turkish ecosystem follows a different cycle to that of most western entrepreneurial ecosystems. Firstly, when you have tens of millions of active internet users, your primary test of validation is in the domestic market. And secondly, when your digital literacy is so high, you also might want to focus on picking the low-hanging fruit, capitalizing on prevalence of card payments and the versatility of its infrastructure. The first assumption is being tested as we speak, while the results of the second are seen clearly.

Figure 1: Fundraising Activities in Turkey

Source: Startups.Watch



For a young ecosystem it is, Turkey does already have two distinct generations of startups. During mid-to-late 00s, startups in Turkey have been cloning proven business models to apply them to the domestic market, more notably in the verticals of e-commerce (Markafoni, Hepsiburada, Gittigidiyor), food delivery (YemekSepeti) and ride-sharing (BiTaksi). With the first generation of Turkish startups growing by day, international investors flocked to get into the deals, among whom were Abraaj Group, General Atlantic, Naspers, KPCB and Tiger Global. As much as this generation piggybacked of Turkey’s credit card adoption and logistics infrastructure, applying proven models in domestic market required operational mastery of highest levels, only to be validated by the first exits Turkish startups have experienced. In 2011 Ebay acquired Gittigidiyor for $217.5M, while Naspers splashed out for $200M to acquire Markafoni, with the culmination of Delivery Hero paying a hefty $589M to acquire Yemeksepeti in 2015. Besides this the ecosystem saw Monitise acquire m-commerce provider Pozitron for $100M, as well as hosting service provider SedeceHosting being acquired for $47.5M and sports media group Mackolik acquired for $30M+.

Fast forward into today, we can spot two trends. Firstly, the ecosystem is involving into one that has startups coming from a lot more diversified range of sectors, ranging from fintech and smart mobility to healthcare. Notable examples include companies like Modacruz (watch out Poshmark), Iyzico (Stripe keep your guards on) and Nokta. These startups are different from the first gen since their excellence is primarily technological – even if the business model is a clone their superiority lies in the technological prowess. These startups are also way more globally, least regionally, oriented. The second trend takes into account the developments of the last year or so. Fast forward 2016, and you can see that regional domination becomes difficult, economic and political instabilities pervading the region and international investors decreasing their participation in Turkish deals. But wait, we said that entrepreneurship has no physical boundaries, right? So you could build a born-global business out of Turkey and scale up operations abroad? Successful companies such as Udemy and Koding, have proven that Turkish founders can build global operations, thus offsetting the risks associated with domestic situation from startup’s success. This trend is something Enis Hulli, Venture Partner @500 Startups Istanbul, calls “geo-arbitrage opportunity”, rightfully noting that “although talent itself is Turkish, but operations can be global, and this second wave of startups is more about trying to build global businesses while retaining a footprint in Turkey, like Udemy does with its developers”. 



In 2013, a funding crunch was apparent virtually across all stages, as most Turkish investors lacked experience in company-building as well as the know-how of dealing with risk-prone asset class of venture capital. Fast-forward to today, seed funding is readily available from multiple sources, however $10M+ rounds are still hard to come by. Three distinct developments have led to the increase in funds’ availability.

Taking the best practices from more developed ecosystem (for instance that of Israel), Turkey has launched a number of government funded initiative to improve the early-stage funding freeze and activate the ‘snowball effect’ through the use of public funds, as many European ecosystems have and are successfully doing. Programs such as TUBITAK, TTGV, TEPAV and several others provide entrepreneurs with seed capital through their grant programs, subsidizing the costs of initial R&D. More to that, the 1514 program of TUBITAK, the government agency can contribute up to 20% of capital raised by a VC fund, with established fund-of-fund of 500M Turkish liras to augment the availability of capital. Foundations such as Is Girisim and TURKVEN have already made combined investments of $3.5B since 2000, laying the foundations for today’s ecosystem. Given the high mortality rate of startups in Turkey, longer time-to-exit and the lag time in capital utilization, the positive ‘snowball effect’ is expected to bear fruits further in the future.

Second development has been an increase in availability of private capital, fueled by the ‘multiplier effect’ of successful exits and participation of select private investors. Aslanoba Capital deserves a separate mention here, as back in 2013-2014 it would account for the majority of all seed-stage investments in Turkey. Angel networks, bolstered by presence of successful entrepreneurs, are showing more activity with BUBA, BIC Angel Investments and Galata Business Angels leading the way. VCs with local teams, such as Earlybird, Revo Capital, 3TS and Hummingbird Ventures, in addition to purely local players such as 212, hold capital in excess of $200M ready to be deployed. In addition to this, Turkey hosts a score of VCs focused on IP-intensive investments, with DCP and ACT  standing out of the crowd. This ‘leading by example’ model, triggered by established entrepreneurs acting as role models, has effectively served as a catalyst for an improved early-stage capital availability.

Finally, the ecosystem will not grow if participating entrepreneurs do not receive mentorship, expertise, skill-sets and networks. Up to today, the most effective way to dissipate these qualities into the ecosystem is to organize entrepreneurs into networks, either through accelerators, incubators, launchpads or simple networks of know-how sharing. Most acceleration programs in Turkey are campus-based (Koc Univesity Incubation Centre, Girisim Fabrikasi, Inentram, ITU Cekirdek, YFYI, ATOM and Teknojump), however established players such as Etohum deserve a separate mention for their hard work since late 00s. Breadth of participation of corporates is surprising, as both international and national corporates are increasingly supporting launchpad-styled programs: Turkcell backing Girisim Fabrikasi and Koc Holding with Mitsui Co. backing inventram. International structures, such as Endeavour, are also major contributors to the ecosystem, as they activate network effects within the ecosystem, with positive cycle of reinforcement with funded entrepreneurs joining networks thus enlarging their reach and influence. 



To my mind, as much as VC is driven by asymmetry of (dealflow) information, lack of transparency and information sharing can hinder ecosystem’s true potential. Malevolent asymmetry can lead to disorganized dealflow, valuations that are hard to benchmark and investee performances that are hard to compare. Deeper funding competence can only come if players in the ecosystem realize the greater good of transparency, either coming through networking associations, co-investment opportunities or more thorough classification of mandated investors. Turkish ecosystem holds enormous potential, unbarred by uncertainty, and it’s on the stakeholders to come together and assume what the bright future holds for them.