Considering the capacity of start-ups to quickly do business in the international arena, we can tell that start-up diplomacy contributes more and more to commercial diplomacy.
As the world entered a new period with the effect of the pandemic in 2020, the business world, education, and social life have begun to reshape. We can easily observe that the supply and demand of new products and services blended with technology have increased during this period in which ground-breaking circumstances are experienced. It seems that the habits of technology usage, which have increased during the pandemic period that has been going on for more than a year, will continue even after the pandemic.
Start-ups are structures that can take quick actions and be scaled fast with new business models by using technology. Especially in recent years, we have heard, seen, and used more start-ups. Facilitating the business and social life, and offering quick and innovative solutions, the start-up ecosystem has now become areas where one can not only use its technologies and solutions but can also invest. We can see that the popularity of start-ups, their rate of use, and their speed of attracting investments have increased a lot during the pandemic process.
In the entrepreneurship ecosystem, we can classify investments in two main areas, one of which is Angel Investors, and the other is Venture Capitals, in short, VCs. When we consider the most developed entrepreneurship ecosystem in the world, namely the Silicon Valley, we can see that the ideal investment process that a venture idea goes through while transforming into a large company proceeds as follows: When a business idea or a start-up first sets out, it attempts to transform the idea into a company by getting support from “family & friends”. Following the process of transformation in a company, when concrete outputs or MVP (Minimum Viable Product) related to your idea is acquired, an experienced individual who believes in the idea starts the process of becoming an angel investor by investing in the company in return for a share, allowing the idea to grow quickly.
In Silicon Valley, intermediate processes such as super angel and mini VC, which we do not encounter frequently in Turkey, may also take place. These processes, which we call investment tours, proceed with Series A and Series B, involving VCs, and Series C and D, involving PEs (Private Equity). And the last stage is realized by the sale of the company or going public (IPO-Initial Public Offering). Through “Individual Participation Capital”, the licensed form of angel investment, which gained a legal basis in our country in 2013,
Accredited Angel Investment Networks in which many angel investors come together and take advantage of co-investment opportunities have started to form. Entrepreneurs come together with angel investors at incubation centres, acceleration programs, demo days, competitions, and various events and have negotiations to get investments.
We can tell that the number of angel investors in Turkey and the investment tours they attend is increasing every year. In order for the cycle in the entrepreneurship ecosystem to function well, every link in the chain must work efficiently. In an ecosystem, the presence of angel investors in sufficient numbers with good capabilities and qualified VCs in the next stages is as important as the presence of creative ideas, business models, successful entrepreneurs. If start-ups are qualified, angel investors see the opportunities and then, they provide support and investment. Thereafter, the value of the shares of the angel investors grows with the company when the start-up grows rapidly through this support, and seeing this increase in value, VC opens the door to a new process by investing in the start-up.
VCs are after start-ups, which can develop products that may grow very quickly. In other words, they are focused on performing “product finance” rather than “project finance”. The products may change over time and may differ from the product that originally received investment. At this point, the fact that the start-up team involves more than one founder (founder & co-founder) with technical and commercial features complementing each other and that it has a structure, which makes a difference with its technology in the competition, plays an important role for the start-ups to enter the investment radar of VCs. Of course, when the time for VCs to invest comes, they will want to sell their shares in the start-ups to a larger company or an investment group with a high increase in value.
For this reason, it also supports the presence of the start-ups they invest in within the global markets by taking into account the “exit” process. Let us also mention that Turkish start-ups have performed an “exit” of approximately $3.5 billion from the beginning of 2018 to the beginning of 2021, in return for a total investment of $850 million. Even in ecosystems such as Silicon Valley that have functioned well for 50 years and have created a culture, 90-95% of the start-ups invested by VCs may have little or no value at the end of their VC funds. Therefore, VCs aim to find startups whose funds can take place in the remaining 5%, realize the investments of an entire fund, and provide yields to “LP”, i.e., “limited partners” who invest in the fund. As the name suggests, there is a risk of losing the capital for the Venture Capitals.
VCs guide and inform their “limited partners” in a proper way and record the investment commitments of LPs with contracts. Funds created by VCs basically consist of fundraising, investment, and exit stages, and the duration of the funding varies between 7 to 12 years. VC structures and operations differ according to the rules set by the regulatory institutions of the countries in this field. VCs differ in strategy, theme, and size. While some VCs invest in talented start-up teams with proven business models as in Japan, South Korea, and Middle East countries, other VCs invest in start-ups that prioritize talent arbitrage and succeed in the local value chain as in Baltic countries, Estonia, Denmark, and Israel, and by enabling them to be included in the global value chain, VC can then plan the turnover of those start-ups, sales and marketing activities, and the next investment tours to be carried out in majör markets such as the USA and Europe.
Unlike other industries, the increase in investment actors and appetite in the entrepreneurship ecosystem is not a “zero sum game”. Rather, in the event that there are more investors, especially at an early stage, it provides the opportunity to turn people with entrepreneurial potential into an entrepreneur because the entrepreneur can feel the assurance that they can easily access financing. If the size of the pie in the ecosystem grows and investors increase, the number of quality entrepreneurs also gets higher, resulting in an increase in the quality of products and services as well. “Coopetition” is a concept that should be well understood and evaluated at this point.
The total investment in start-ups in Turkey in the first three quarters (nine months) of 2020 exceeded all investments made in start-ups in 2019, reaching an amount of around $115 million. In the first quarter of 2021 (three months), the total investment in start-ups exceeded $500 million, leaving behind the total investment in start-ups in 2020. Thus, in 2021, Turkey rose to 2nd place in the MENA (the Middle East and North Africa) region and took its place among the top 10 countries in the European region. While describing this success, we should also emphasize the importance of the impact of TURCORNs.
Start-ups reaching a value of $1 billion in the global entrepreneurship ecosystem are called “UNICORN”. “TURCORN”, on the other hand, the name given to Turkish start-ups reaching a value of $1 billion, inspired by this word. In 2020, with the sale of the Turkish game company Peak Games, which has a history of about 10 years, to Zynga, one of the world’s largest game companies, for $1.8 billion, the Turkey entrepreneurship ecosystem released its first Unicorn. In March 2021, “Getir”, a 5,5-year-old company, reached a value of $2.6 billion, with an investment of $300 million shortly after it started serving in London and became our second Unicorn, i.e., our Turcorn.The news that Trendyol reached a value of $9.35 billion by receiving an investment of $350 million from its current partner Alibaba was shared with the entrepreneurship ecosystem in April 2021.
Established with a capital of $300 thousand, Trendyol reached a value of $9.35 billion after about 11 years from its establishment and became the most valuable company in Turkey. The increase of Unicorns originating from our country is a sign that our ecosystem is on the right path. The pandemic has provided populations with a kind of digital acceleration in business and daily life. Games, fintech, IoT (Internet of Things), cybersecurity, and healthbio technologies are foreseen as fields where valuable start-ups will occur in the upcoming period in Turkey.
We can perceive this period as a breaking period in which very good opportunities may arise for start-ups. When we looked at exits before 2020, we saw exits for the global player to come and take their competitor in the local market. We now see that global organizations from both the west and the east are coming for Turkish products of superior and different technology and the start-up team that released the product in Turkey. We can tell that programs, incentives, and policies for both entrepreneurs and investors reflect positively on the ecosystem through institutions such as the Ministry of Trade, TÜBİTAK, KOSGEB, and Development Agencies.
Founder of ENTREN (Entrepreneurship Expert Network) Erdem Dereli