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Cracking Turkey

By Yalim K Gerger

Are you an investor or an entrepreneur, a tech journalist or a mentor, an incubator or a start-up event organiser? Have you ever considered getting involved in Turkey’s start-up scene, but don’t know where to start? Here is a guide to cracking Turkey.

Governments can choose to either ignore the entire tech start-up movement or decide to be right in the middle of it. Fortunately for Turkish start-ups, the government is all-in and has been so for many years.

Turkey has put technological progress is at the core of its development strategy, and the government understands that this is best done by empowering entrepreneurs. It has passed countless laws and created a range of programmes to provide the necessary financing and infrastructure for technology start-ups to flourish. Here is a taste:

R&D status

The first perk that the government has offered to start-ups is the opportunity to open an office in a “Technopark”. These Technoparks are usually built on university campuses and are managed by the universities. After a thorough evaluation process, start-ups are given R&D company status and are allowed to open their office in the Technopark, where the companies are exempt from corporate tax and their employees are exempt from income tax.

A key benefit of being based in a Technopark is access to universities’ talent and laboratories, as well as working in a research-based environment. By 2014, there will be more R&D employees in Istanbul Technical University Maslak Campus (ITU), the largest campus in the city, than there are students. The benefit for students is that they are just a stone’s throw away from a great internship or their first job opportunity.

Yet perhaps the most important and most overlooked factor that start-ups gain from being based in Technoparks is credibility. Technoparks have such a high prestige among developers and Turkish enterprises that by just being based in one, your start-up is instantly respected. This makes acquiring new talent and, more importantly, new customers a lot more easier.

My company, Gerger, is in the ITU Technopark. Being accepted to ITU was one of the greatest things that we’ve accomplished. We have access to the best engineering talent in the country and my inbox gets flooded with networking opportunities. We’ve gained our enterprise customers’ respect instantly and get to spend every cent we make on our product.

Funding

Money is the blood of a company and the number one thing that is missing in many start-ups. The Government is also very much aware of this and has taken steps to ensure that Turkish entrepreneurs have access to finance.

KOSGEB, an organization specifically founded by the government to fund Turkish start-ups, has countless programmes that entrepreneurs can apply to for seed money. The organisation provides financing options with or without any payback. For example, one of their programmes offers to fund entrepreneurs 70 per cent of the money they spent on their start-up, up to the value of $400,000.

TUBITAK, the scientific technological research council of Turkey, has its own programmes. In one of these, the body pays 75 cents for every dollar that a start-up spends on developing its product, up to $220,000. In another, they subsidise 50 cents per dollar, with virtually no upper limit. I know of projects that have applied and received a million dollars through the scheme.

This is attractive for VC funds as it means that every dollar invested in a company is virtually multiplied by at least 1.5 instantly, and if the investment is made in a Technopark start-up, then every penny will be spent on the product. None of it will be wasted on taxes, which effectively increases the multiple to at least 2x.

Turkey’s tax law also favours early investors. Any capital gains from a stock held by an investor for longer than two years is tax free.

Infrastructure

It is virtually impossible for a technology start-up to exist unless the right ingredients are in place. Turkey is developing everything to help start-ups succeed: there are millions of internet and mobile users, extreme credit card usage, an amazing banking infrastructure, a young and educated population and a booming economy.

The country is also attracting large multinationals, such as Oracle, Vodafone and Novartis, to headquarter their regional operations in Turkey. This creates a strong business opportunity for B2B start-ups.

The start-up ecosystem itself is coming of age, too. At the last count, there were 20 incubators in Turkey. Under the leadership of Burak Buyukdemir, Etohum is emerging as the Seedcamp or Y Combinator of Turkey – its last demo day attracted investors and journalists from all over the world.

There are several VC firms with offices in Turkey, and the first Turkish VC firm, 212, was also founded last year. The incubators, VC funds and event organisers are all, essentially, start-ups themselves, which makes being part of this scene even more exciting. We’re all learning from one other as we go along.

Internet economy

Turkey is in the early stages of developing its internet economy. E-commerce is the natural first step. Gittigidiyor’s sale to eBay for $200 million was the first significant exit.

E-commerce sites are opening in every vertical you can think of, while Groupon and private shopping clones are growing too. One such site, Markafoni, is even expanding to neighboring countries. Trendyol, another private shopping site, recently received a $26 million investment from Kleiner Perkins.

B2B, PaaS and SaaS startups are just around the corner. Watch out for Hazelcast and its data distribution platform for Java, Imonacloud with its business software cloud service and Apsiyon, which aims to revolutionize property management in Turkey.

The next big Turkish start-up success outside of e-commerce will be a B2B start-up. With the ever-expanding Turkish economy becoming more and more international and competitive, there are so many organizations that need to modernize their software, it is a giant
opportunity for start-ups to feast upon.

The pitfalls

Not everything is rosy, though. Turkey’s start-up scene is, by no means, a walk in the park. In fact, everything I’ve written above can also be seen as a downside. We are, indeed, at the beginning of our internet economy. Today, it is virtually impossible to make money as a SaaS company in Turkey, and it isn’t obvious when this will change – it may very well never happen. For now, the cloud is just an object in the sky.

Making a social network start-up successful is also an uphill battle. Mekanist, our Yelp clone, has only 300,000 users. Getting the next 300,000 users could take too long, not because Mekanist is doing a bad job but because there seems to be a digital divide in our society. While a few million people are embracing it, the other 70 million just don’t care about or can’t afford it. The transition to a digital age may take longer than a feasible investment period.

On the enterprise side, it’s difficult to find visionary decision makers, which are essential for B2B start-ups to gain a foothold. IT directors and CTOs take the motto “nobody got fired by choosing Microsoft”, very seriously.

Even though Turkey’s population is around 75 million, GDP per capita has only recently passed $10,000. This makes scaling internet businesses a challenge, as for most people, an internet connection is just not a high priority. The local market is big enough to make a good living for any entrepreneur, but even the biggest exit might not be big enough for a VC.

A start-up culture is emerging, but it has not emerged yet. If you’re looking for a US-style entrepreneur, who has perseverance, dedication and is in it for the right reasons, you’ll be looking for a long time.

Online toy retailers are in the business not because they believe that every child deserves a toy, but because they happen to know a wholesaler. The founder of an online dating site isn’t in it because he himself is a lonely, desperately romantic nerd who wants to remove physical barriers to find love and soulmates online, but because he saw a gap in the market. Entrepreneurs here still think that the internet is an easy way to get rich quick. It’s disheartening.

So you’ll see a lot of people quit before really starting up, and this includes employees too. Working in a start-up is always a challenge, but here even the most talented engineers’ biggest dream seems to be working a 9-5 job at Turkcell, the leading mobile carrier in Turkey. Very few get it. The financial incentives are also not there, and the notion of a stock option doesn’t legally exist.

A VC might find himself in the odd position of talking to an entrepreneur’s parents to convince them, ensuring them that their son won’t get in trouble or that you won’t sue them for spending the investment money, even if the venture fails. I’m serious – this happens.

Local investors, meanwhile, are greedy. They try to gain control of 60 per cent of a start-up in exchange for seed money, which kills the business before it even starts up. We also have very few people who understand the internet economy and have the financial resources to invest in start-ups. Raising a VC fund from local limited partners is virtually impossible.

There is also a lack of cooperation. Forming clubs and societies, which are essential in creating the start-up ecosystem, is challenging at best. A lack of planning, and trying to make it all work in the last minute in panic mode is a way of life. Even our national soccer team notoriously plays really badly until everything is on the line. Turks are also always late to everything. Nothing starts on time in this country.

The Turkish conservative culture can also be seen as very anti-entrepreneur. Failure is something to be ashamed of – even worse, it’s something to avoid your whole life. Most people die here without ever failing, but nobody realises that they died without trying.

Young people are expected to comply with traditions. Being a misfit or a trouble maker – the very definition of an entrepreneur – is difficult in every country. I always check a country’s history of political activists to determine how open their culture is for entrepreneurship. All of our activists are dead. “If the word is silver, silence is gold.”

Where to start?

If none of this scares you, and you’re ready to invest or work in Turkey’s start-up scene, where do you begin? The most helpful tip I have is to work with a local partner. This seems to be the number one rule of success for any international organisation trying to making its way to Turkey.

People who have tried it on their own have crashed and burned. Turkey has its own dynamics, its own culture and value system and its own rules of doing business. Even the world’s largest corporations, such as McDonalds, BMW or Starbucks, have entered Turkey with a local partner.

Is Turkey right for you? It depends. If you’re thinking of moving here to make a quick buck or for a semi retirement lifestyle, where you can enjoy the ride with little effort, don’t bother: you’ll be eaten alive. But if you’re willing to walk the walk and put in the hard work and create something valuable for this country, Turkey welcomes you with open arms.


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