In the past few years, Turkey has experienced a veritable tech miracle. A swath of start-ups, primarily in the gaming and e-commerce sectors, has attracted multi-billion-dollar investments and achieved record valuations. Two companies have even reached decacorn status – a valuation of over USD 10 billion.
Act 1 – The Origin Story
“Turkey finally ended its long wait for the first unicorn back in 2020 through the acquisition of Peak Games, a mobile gaming company with an estimated worth of USD 1.8 billion, by Zynga,” Solak begins. Following this success story, he says that the start-up ecosystem in Turkey blossomed, with “four more unicorns and a decacorn in just the past two years.”
These companies are mobile gaming company Dream Games (valued at USD 2.75 billion), e-commerce company Hepsiburada (USD 3.9 billion), software and AI company Insider (USD 1.2 billion), e-commerce shopping platform Trendyol (USD 16.5 billion) – the country’s first decacorn – as well as its most recent decacorn, grocery delivery company Getir (valued at USD 11.8 billion).
Such a strong presence of successful tech start-ups in Turkey was primarily proliferated by private equity, according to Esin Attorney Partnership Partner Orcun Solak, KP Law Managing Partner Onur Kucuk, and GKC Partners Partner Emre Ozsar. “Most were founded as ‘garage start-ups’ in the form of partnerships of friends where, in minor cases, pre-seed and seed periods were funded from friends and family, or angel investors,” Kucuk explains. In their later stages, these companies sought growth mostly via “local and international VC firms,” he says. “All of Turkey’s unicorns are PE driven,” Ozsar underlines, with Solak adding that “venture capital and private equity investors have acted as catalysts in the growth of the country’s first unicorns in most cases, with a few exceptions – where the growth has been advanced by internal resources and investments from the strategic investors.”
These investors included, among others, Hummingbird Ventures, Earlybird Venture Capital, Index Ventures, Makers Fund, BlackRock, Sequoia Capital, Tiger Global Management, Wamda Capital, Riverwood Capital, and Aslanoba Capital, as well as sovereign funds such as Mubadala and the Qatar Investment Authority.
Act 2 – Sequel Investments
Following their successful streak, these pioneer companies continued investing elsewhere. Of all the tech unicorns, Solak says that “Getir is definitely the most active company in terms of investing the funds received elsewhere, to enhance its services offerings and turn its app into a ‘super app’ that provides multiple services in addition to the delivery of groceries.” To this end, Solak reports that Getir has acquired interests in car rental company Moov, e-commerce platform n11.com, and taxi platform BiTaksi.
Additionally, Getir made “two strategic outbound investments last year, as part of its global expansion plan,” Solak adds. “It has acquired Blok, a Spain-based rapid grocery delivery company, to branch out into Spain, Italy, and Portugal, and Weezy, a UK-based rapid grocery delivery start-up, in order to consolidate the UK market.”
Similarly, “Trendyol acquired Dolap, a company facilitating the C2C sale of used clothing items, and integrated those services in its platform, resulting in increased growth for both Dolap and Trendyol itself,” Guleryuz Partners Partner Zahide Altunbas Sancak reports. Moreover, Trendyol is quite interlinked with another prominent Turkish tech unicorn. “The founder of Trendyol was an early investor in Peak Games, while one of the founders of Peak Games, Evren Ucok, is still acting as the Chairman of Trendyol,” Altunbas Sancak explains, adding that “another founder and the face of Peak Games, Sidar Sahin, has previously acted as an executive in several Trendyol departments.”
She reports that, while both Trendyol and Peak are still “mainly operating in their primary area, the founders have also been making separate investments. In this vein, Peak founder Sidar Sahin is now making VC investments with Earlybird Venture Capital and, reportedly, making angel investments in smaller gaming companies as well.”
To illustrate the ripple effect that tech investments in Turkey have had, Balcioglu Selcuk Ardiyok Keki Attorney Partnership Partner Okan Arican highlights another gaming company – Rollic. In 2020, Rollic was also acquired by Zynga, for USD 126 million. “Afterwards, Rollic acquired four local gaming companies: Uncosoft, Creasaur Entertainment, Bytetyper (Forgerhero), and Zerosum.”
Arican also points out that former Peak employees have formed a further “28 successful video game studios” and that Peak co-founder Rina Onur Sirinoglu has, “following her successful exit, become the founding partner of 500 Istanbul, which is an early-stage VC fund.” Sirinoglu has also co-founded Spyke Games, which Arican reports has “raised USD 50 million from Griffin Gaming Partners in its last investment round, with an approximate valuation of USD 250 million.”
Act 3 – Success, at Home and Abroad
Such vibrant tech sector activity has also produced benefits for the broader economy in Turkey. “The fact that Turkey has generated unicorns and decacorns recently can bolster the tech-savvy young population’s belief in the Turkish start-up ecosystem and avoid human capital flight out of Turkey,” Solak says. “Moreover, the birth of new start-ups by entrepreneurs who have gained experience under Turkey’s unicorns could generate more foreign direct investment.”
Given the fact that Turkey has had a “significant current account deficit,” according to Solak, attracting as much FDI as possible is critical. “In recent years, technology start-ups have boosted their shares in Turkish FDI inflow, and according to the Successful FDIs in Turkey in 2021 report published by the Presidency of the Republic of Turkey Investment Office, Turkey’s entrepreneurship ecosystem raised USD 1.6 billion of funding in 2021, while international investors were involved in 89% of the investment volume,” Solak says, explaining the impact.
Moreover, these investments have had a positive impact on employment rates. “For instance, in her press statement after Trendyol’s latest investment round, Trendyol CEO Demet Mutlu said that Trendyol, directly and indirectly, contributed to the employment of 1.1 million people,” Solak reports.
“Currently, there are six Turkish unicorns, and four more are expected to come by the end of 2023,” Altunbas Sancak reports. “According to the Startup Watch 2021 Report, Turkish start-ups attract nine times more investment compared to the previous year.” She stresses that more and more international investments are being made in Turkish tech companies, “bringing liquidity to the country in a time of need.”
Kucuk agrees with both, adding that “it would not be misleading to comment that the financial resources created through the exits were somehow reinvested in the digital economy,” pointing again to the example of Peak. “The team who founded Peak Games then founded Dream Games and moved it to a success story as well,” he says. Such is the positive impact on the economy, Arican chimes in, that there is even a new term – Turcorn – created for Turkish unicorns. “The Turkish government has embarked on a mission to increase the number of Turcorns.”
And how wouldn’t it, given the numbers? “According to the Startup Watch Year in Review 2021 report, 15% (44 deals) of the 294 deals that were completed at the angel and venture capital level were joined by foreign investors and, in terms of the total investment amount, the share of foreign capital is 89%,” Solak outlines. Moreover, in the first half of 2022, he reports that foreign investors participated in 25% of angel investor and VC deals.
Kucuk builds on this and sheds light on the most attractive sectors for investors. “Turkey is an attractive platform for start-ups, especially in gaming, fintech, and e-commerce. Other hot verticals include SaaS, artificial intelligence, health technology, marketplace, and mobility,” he says. “These industries attract more attention because Turkey has great engineering talents with lower costs, has an attractive consumer market, and its population consists of young and tech-savvy generations.” Kucuk feels that the upwards momentum of the past few years is a good indicator of the “potential of the start-up ecosystem for the next decade.”
Focusing on a specific sector, both Solak and Arican agree that gaming in particular is thriving. “In the aftermath of successful investments in Peak Games, Dream Games, and Rollic, as well as the achievements of local game studios on the global stage with their products, 305 new gaming studios were set up from 2019 to 2021, and Turkey has become a vital gaming hub in Europe,” Solak says.
“Gaming is an interesting vertical in Turkey because the country has both a large population of users and qualified developers,” Arican adds. “Moreover, Turkish founders have proven themselves through many successful companies.” He too points to the Startup Watch Year in Review 2021 report, saying that the “gaming sector became the center of attraction, with 52 deals for a total of USD 265 million raised, and valuations increased by 80% in Turkey.”
Act 4 – Governmental Input
“The Turkish government supports the local venture capital and technology start-up ecosystem through a variety of public institutions and organizations, granting many types of support, including direct cash support, tax exemptions, consultancy services, and others,” Solak reports. He specifically highlights the beneficial effects of TUBITAK, the state-owned Scientific and Technological Research Council of Turkey, and KOSGEB, the Small and Medium Scaled Industry Development and Support Directorate. Moreover, Solak says that the Ministry of the Economy provides financial incentives, tax breaks, and other benefits for tech companies and start-ups and those investing in them.
Altunbas Sancak adds that the government provides particular support to companies located in special zones – technoparks. “There are income, stamp, and corporate tax exemptions for the enterprises located and operating in these zones, and tax exemptions for salaries of R&D employees working there,” she explains.
Altunbas Sancak and Kucuk both point to the additional structural incentives that venture capital investment companies and funds enjoy. These companies “operate under the regulation of the Capital Markets Board of Turkey but are also subject to many financial incentives,” Altunbas Sancak says, pointing primarily to tax breaks. “The revenues of VCICs and VCIFs are exempt from income tax, while dividends earned from VCIC and VCIF shares are also exempt from corporate tax,” Kucuk chimes in. “Companies that invest in VCICs or VCIFs also benefit from a variety of other tax incentives, to increase participation in venture capital investments.
Act 5 – Aftermath
Still, even the strong and continuous development of the Turkish start-up ecosystem is not impervious to global events. “The Turkish economy has been directly and indirectly affected by the unpredictability of the exchange rates, rising inflation, the COVID-19 pandemic, and the ongoing Russia-Ukraine war,” Arican says. “So, there is uncertainty in the Turkish market which may cause a decrease in the valuations of some technology companies,” he believes, and this “may result in down-rounds for some unicorns.”
Solak says that “the upcoming 2023 general elections to be held in Turkey create further uncertainty for investors.” This situation, “coupled with Turkey’s current account deficit and dependence on external energy sources, puts more pressure on the Turkish lira, which will eventually cause high volatility and inflation.” He feels that, on the one hand, tech start-ups must be mindful of such volatility; on the other hand, foreign investors might use this as an opportunity.
Altunbas Sancak agrees, adding that foreign investors are already stepping in to take advantage of the profitable currency exchange rate in Turkey. “After the devaluation, we have observed that the foreign companies either start a business or grow their businesses in Turkey, to take advantage of low salaries and expenses.” She believes that “every decline in the Turkish lira is a massive benefit for investors, because foreign buyers have access to foreign currency,” especially if investors move quickly, before prices in Turkey readjust.
Still, not to end on a gloomy note, Kucuk says that – despite all of the global turmoil – “record high investments were witnessed in the first quarter of 2022, and Turkish ventures are still ambitious to reach more funds, also spurred by the fading of the pandemic.” He further adds that the war in Ukraine has “led to some flow of capital to Turkey, as investors look for safe environments to channel their capital, in addition to Turkey being a great hub both for the East and the West, with tremendous potential.” Solak agrees with Kucuk, saying that “Turkey’s start-up ecosystem has maintained its momentum in the first half of 2022, with approximately USD 1.4 billion invested in seed, early, and later VC stages,” a new half-year record, and stresses “Turkey has still managed to present a new unicorn, Insider, and a new decacorn, Getir, in the first half of 2022.”
This Article was originally published in Issue 9.8 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.