Evaluating the State of the VC Market in Turkey

2 September 2015

Cem Baytok, Managing Partner
idacapital

The Turkish VC market is at the tipping point of major growth. In the last two years, noteworthy technology acquisitions have been completed (e.g., Germany-based online food delivery company Delivery Hero’s US$589 million acquisition of Turkey-based online food delivery company Yemeksepeti); Turkish entrepreneurs have shown success in Silicon Valley (e.g., Turkey-based online learning platform Udemy); and most importantly, a vibrant market economy has driven the emergence of new start-ups and helped them to create, on average, 10 to 20x enterprise value growth in Turkey, according to market analytics company Startups.watch.

Startups.watch also reports that approximately 400 new technology start-ups have been founded in Turkey—mainly in technoparks and business incubators—annually since 2011. About 70% of these start-ups are in the field of information and communications technology (ICT), 20% in life sciences and 10% in sustainable energy and other technologies. In addition, Turkish technology and scientific research agency TUBITAK, which provides financing to technology and innovation projects through grants, has invested nearly US$1 billion into more than 6,000 research and innovation projects in research centers and SMEs in Turkey in the last five years. Only a few of those have received VC investment due to the undercapitalized VC market. This government-backed support is increasingly continuing and fueling many technology start-ups.

International venture capital firms Tiger Global Management, Kleiner Perkins Caufield & Byers, Ribbit Capital, Intel Capital and STC Ventures have also started to invest in Turkey, typically at the Series B stage and in follow-on funding rounds. This has created a vibrant syndication environment for companies that have the potential to either be the market leader in Turkey or expand beyond Turkey.

According to EMPEA, the number of the VC deals completed in Turkey is also showing positive signs of growth, with seven completed in 1H 2015, compared to annual totals of three deals and two deals in 2013 and 2014, respectively. To match the current deal flow, a relatively significant amount of investment dry powder is becoming available. We estimate that the existing growth equity funds (about 15% to 20% of their allocations can be made to technology deals in the ICT and life sciences sectors), later stage VC funds and proof-of-concept stage Technology Transfer Accelerator funds, as well as the growing number of angel Investors and increasing global VC interest in Turkey will create an investable pool of capital of nearly US$500 million by 2019.

Our analysis proves that—in line with the overall market view—VC activity in Turkey will quadruple in terms of deal number and deal value within the next four years. In fact, this growth will also create a gap in the middle segment of the VC investment spectrum, i.e., early-stage and Series A rounds.

It is time for both fund managers and LPs to look more closely at the VC market in Turkey. Only a few teams are ready to tap into this opportunity, and LPs have the potential to attain 6x or higher returns. The VC market is young in Turkey, and LPs should be ready to work with first-time fund managers to access the opportunities in the country.

Research