How much activity is through government support of VCs – being investing through them – versus directly?
The Turkish private equity and VC scene has been pretty sparse until recently. Only few small and mid-cap investors with local fundraising activities were in place back in 2006. This picture changed dramatically in the past five years, with many international firms, including large-cap firms, entering into market either directly or through backing a local GP [general partner, or fund manager]. A few of them established their regional offices to cover eastern Europe, the Middle East and north Africa based out of Istanbul. From 2011 to 2014, we have observed double-digit growth rates in deal sizes. The majority of funds raised by local GPs have achieved top-quartile returns and recognised by industry leaders in Europe.
However, the total volume of private equity and VC deals in Turkey is still around a third of the European average when compared with its GDP, so the country is an untapped market with a valid absorption capacity for VC and it offers huge potential for private, corporate as well as government venturing.
Tubitak established a VC support programme soas to back local enterprises for early-stage and seed capital as a government venturing initiative.The investment can be backed up to 20% of the funds raised, the tenure is 12 years, and the grace period is five years.
The number of accredited angel investors in the country reached 272 in a year after framing associated legislation.The licensed angels can benefit tax breaks of up to 75% of their investment not exceeding L1m per year. If investmentis supported by any Tubitak programme, this break can increase up to 100%. According to the European Angel Investor Network, Turkey and the UK offer the best framework for angel investors. Accredited angel networks, platforms of collaborative investment opportunities, are also providing investors with selected opportunities and entrepreneurs with funds and mentoring. There are 10 angel networks, six of which have already been accredited by the Treasury.
With its corporate-minded reform agenda, the Turkish government will continue its efforts to make the business climate more and more VC-friendly, not only for enriching the financing options for local entrepreneurs but also exploiting the positive spillover effects. Such investments flowing into technology-focused ventures will also support export-driven economic development mandate through contributing to the competitiveness of Turkish goods and services. As a clear signal of government’s dedicated support for innovation, one of the earlier legislations to enhance the entrepreneurship ecosystem in the country is the Research and Innovation Support Law passed by the parliament in 2006, which may match up to 220% of R&D expenditures, including new product development projects through different forms of fiscal benefits such as tax deductions, exemptions, credits and grants.
The Ministry of Science, Technology and Industry offers grants and tax allowances. Since 2009, the ministry has been offering around $50,000 of direct grant as a “techno-entrepreneurship grant”, and by the end of 2014 the total number of grantees had reached 1,303. Moreover, the Treasury has recently introduced a new legislation to support business angels in 2013. Now Treasury-licensed angel investors are able to benefit from lucrative incentives.
What role has the eIF played to complement the excellent work of your government?
The EIF has been very active in the Turkish private equity and VC market. They have been directly supporting various projects in Turkey. The list below includes all equity investments by the EIF in Turkey.
Given the 2023 vision plan to expand Gdp 2.4-times through an increase in exports – is there a sense of whatrole new startups versus expansion of existing companies will play and how VC and private equity will help both?
In order to achieve such ambitious targets all parties will contribute to Turkey’s growth trajectory regardless of their organisational structure, capital or entrepreneurial background. Obviously, startups with transformative and disruptive technologies always present much more potential for emerging economies. All sorts of VC at different stages of startup lifecycle is key for them to grow. However, in order to develop a critical mass for an entrepreneurship ecosystem, early-stage funding and mentoring are the most critical instruments.
Have any VCIFs been set up yet to use the latest tax breaks?
The legislation has been active since July 2014, hence it is very new. According to the Capital Markets Board, some investors are preparing to set up a local VCIF. We do know from our private investor meetings that a couple of groups are actively working to establish VCIFs and we expect to see outcomes in coming years.
What further changes or funding are planned by the government?
As the frame legislations are brand new for priate equity and VC ecosystem, there is room for improvement and we expect practical amendments based on implementation experiences of the Treasury. For instance, white-collar executives are not filing income tax returns as their income taxes are deducted by the employer based on their payrolls and deposited to the tax authority on a monthly basis. This has been an issue as many experienced professionals with sufficient income and mentoring potential are not incentivised to become angel investors unless they have significant non-payroll incomes from other assets. The Treasury is now planning to expand tax breaks and credits to cover such professionals, allowing them to claim tax returns associated with their angel investment on an annual basis.
Developing the entrepreneurship culture and strengthening the ecosystem are among priorities in the government’s reform agenda. We, as the agency, do not foresee any deficiency in terms of VC inflows to the country. If the ecosystemis sustained with an increasing number of quality ventures mentored by seasoned angels, supported by government programmes at state-of-the art incubators and technoparks, international as well as domestic capital will compete for them. The Turkish ecosystem is still in its infancy, and recent regulatory changes will have transformative effects on its development.