Startups, investments, & role of the government

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Following decades of living in between Tokyo and New York and working at investment banks, I decided to move to Istanbul in 2010 to cultivate entrepreneurship and venture investments. The city, Turkey’s financial center, had started to emerge as a hub for tech startups, particularly in the e-commerce sector. Yet, there were no institutional investors — there was no Turkish venture capital.

Not long after I had landed in Istanbul did Kleiner Perkins, one of Silicon Valley’s top venture capital firms, invest along with Tiger Global a combined $26 million in Trendyol, a Turkish version of Gilt Group. In a separate deal, eBay purchased local company for over $200 million. Indeed, the ease with which my partners and I set up our firm, 212, and raised our first fund of $30 million confirmed my supposition that investing in Turkey had promise.

Turkey’s leaders had made entrepreneurship a government priority years earlier. That was important. Regarding startups, Turkish leaders went beyond rhetoric and took action. They not only encouraged Turkish men and women to start businesses but also supported them through various programs as well as financing mechanisms. Small and medium businesses, the Turkish government recognized — as have other emerging market countries — are a persuasive solution for unemployment. Indeed, the Turkish government laid the groundwork for an eventual Turkish venture capital scene.

Now is the time for the government to help ensure that that venture capital scene thrives. Transferring the responsibility of investing to investors and the private sector is an important step. In order to prove Turkey’s mettle on the startup landscape, the country’s investors — not the government — must lead the charge.

Beyond nurturing startups, a number of countries worldwide have laid the foundations for their country’s investor ecosystems. There are numerous examples in the Middle East alone. In Jordan, King Hussein’s government has backed a number of startup seed funds. In Lebanon, the central bank has rolled out a plan that includes interest-free credit to encourage commercial banks to invest in tech startups. Called Circular 331, the Lebanese Central Bank guarantees up to 75 percent of any investment in a startup.

In perhaps the best-known example, Yozma, a government initiative out of Israel, created Israeli venture capital industry. Yozma was a fund of funds that invested $8 million directly in nearly a dozen different funds. Yozma eased investors into the notion of risk. More importantly, it served as a model that other countries — such as Mexico, New Zealand, Singapore, and the United Kingdom, have replicated.

In Turkey there are several financial initiatives in support of startups. For the past four years, the Turkish Ministry of Industry and Technology has extended about $50,000 to 300 startups annually. The Turkish Treasury has created a $250 million fund to invest in a “fund of funds.” That is, the Turkish Treasury will put matching capital for other venture capital firms to use and divest.

Tubitak, the Scientific and Technological Research Council of Turkey, awards startups a number of grants for research and development. It has also allocated funds that it invests in tech companies directly. Last year, Tubitak announced a “Venture Capital Funding Program.” The program, targeted at venture capital firms, pledges to put up no more than 20 percent in a given fund (up to $7.5 million). Eight venture capital firms are on tap to participate. It is among the few programs in Turkey that focuses on developing venture capital rather than making investments in startups directly. That is significant.

Startups don’t succeed on their own. This is especially true in emerging markets. They thrive where there is a critical mass of talent and a community — an ecosystem that supports their efforts. Stanford is as critical to Silicon Valley’s ecosystem as much as Intel is. But so is Sand Hill Road. In fact, Silicon Valley would not be the mecca of startups without venture capital.

Investments, not merely capital, is necessary for an ecosystem to grow. Without the right conditions, money is just paper — a transactional note. Investors turn money into an asset that can be leveraged and invested. They do that by opening up networks, mentoring entrepreneurs, and investing their time into the success of the startups they invest in. That is what makes them vital.

Investments are what build roads, bridges, and phone lines. It is what fosters education and healthcare. Investors build the framework in which capital flows and community flourishes. Investments build trust and create value. That is what distinguishes startups in the United States from large parts of the rest of the world.

Turkey needs an investor community specifically focused on startups; it needs venture capital. Especially as the handful of startups that have received venture capital investments mature and work towards a “return.” It is important for Turkey’s startup scene to have successful exits.

The Turkish government can help. To begin, they can continue engaging with entrepreneurs and investors — listening to their challenges and working to help them overcome them. Providing business owners a forum to be heard is an enormous value-add.

Drawing up policies that provide them incentives is another. Government should represent business interests rather than take its place. Polices adopted and put forward today won’t necessarily be relevant or impactful years from now. Tech is a rapidly evolving sector, so to must the government bend to its pace. Early stage investors, especially venture capitalists are here to stay for the long term.

Finally, the government should allow Turkey’s nascent venture capital community to develop and implement programs to promote seed/early stage technology investments.

Especially in the face of many challenges before the Turkish government today, handing over the reigns of startup investments to investors is a necessary move. Institutional investors, not the government, have the experience, insight, networks, and track record that can get Turkey’s burgeoning entrepreneurial ecosystem to the next level.

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