Harvard Kennedy School

SECOND-YEAR POLICY PAPER

How to foster a venture capital industry in Turkey?

A Design for a Public Fund of Funds

Ussal Sahbaz

Candidate in Master’s in Public Administration and International Development (MPA/ID)

March 11, 2010

Advisor: Dani Rodrik

Section Leader:Lant Pritchett

ACKNOWLEDGEMENTS

I would like to thank my advisor Dani Rodrik, Rafiq Hariri Professor of International Political Economy; and my SYPA section leader Lant Pritchett, Professor of the Practice of International Development for their valuable advice.

This paper is part of a study about financing of young innovative ventures in Turkey run by Ant Bozkaya, fellow at MIT Sloan School of Management, in collaboration with Josh Lerner, professor at Harvard Business School. I thank Ant Bozkaya for his advice and continuous support to my project. I also acknowledge financial support from Turkcell to this project.

I would like to thank all of my interviewees for their contributions. For a full list of interviewees, please see Appendix I.

I appreciate Jose Romano (European Investment Fund), Mete Cakmakci (Turkish Technology Development Foundation), Ogeday Karahan (Eurasia Capital Partners), Cem Sertoglu (Golden Horn Ventures), Muge Inal (KOBI A.S.), Yener Yildirim (Turkiye Araci Kuruluslar Birligi), Murat Karaege (Garanti Securities), and Ozlem Denizmen (Dogus Group) for providing data and documents.

Alaattin Alpay (Turkcell), Guven Sak (TEPAV), Asli Kurul (Endeavor) and Avi Hasson (Gemini Ventures) supported my research by connecting me to their contacts. I thank them all.

I also would like to thank Orna Berry, Yigal Erlich and Gil Avnimelech for sharing their viewpoints about the Israeli experience. I acknowledge financial support from TEPAV for parts of my research trip to Israel.

I appreciate help from several colleagues at TEPAV, Sarp Kalkan, Ulkem Basdas, Ekrem Cunedioglu, Sinem Uluturk, and Mezenef Hatam for their support in data and logistical issues.

Finally, I thank my classmates at Harvard Kennedy School, in particular Tevfik Kinik, Dany Bahar, Ozan Acar, Michael Kransdorff, Frederico Meinberg, and Laila Kassis, for their help and insights.

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TABLE OF CONTENTS

Executive Summary iii

1. THE NEED FOR GOVERNMENT SUPPORT TO VENTURE CAPITAL 3

1.1. VENTURE AND INNOVATION 31.2. MARKET FAILURES THAT HINDER DEVELOPMENT OF VENTURE CAPITAL 41.2.1. COORDINATION EXTERNALITIES 41.2.2. INFORMATION ASYMMETRIES IN START-UP FINANCE 51.2.3. SPILLOVERS FROM INNOVATION 6

2. HISTORY AND CURRENT STATE OF PRIVATE EQUITY AND VENTURE CAPITAL IN TURKEY 7

2.1. PRIVATE EQUITY 72.2. VENTURE CAPITAL 82.3. THE RELATION BETWEEN PRIVATE EQUITY AND VENTURE CAPITAL10

3. OTHER POSSIBLE CONSTRAINTS OVER DEVELOPMENT OF VENTURE CAPITAL 12

3.1. DEAL-FLOW 123.2. LEGAL / REGULATORY ISSUES 143.1.1. LEGAL STATUS AND TAXATION OF THE VC FUNDS 143.1.2. LIMITED EXIT OPPORTUNITIES 163.1.3. PROTECTION OF MINORITY SHAREHOLDERS 17

4. INTERVENTIONS TO VENTURE CAPITAL INDUSTRY SO FAR 17

4.1. KOBI A.S. 174.2. ISTANBUL VENTURE CAPITAL INITIATIVE (IVCI) 184.3. TURKISH TECHNOLOGY DEVELOPMENT FOUNDATION (TTGV) 20

5. FUND OF FUNDS 20

5.1. MISSION 245.2. UPSIDE INCENTIVE: BUY-OUT OPTION 255.3. MANDATES OF THE FUNDS 265.4. ADMINISTRATIVE STRUCTURE 295.5. SELECTION OF LIMITED PARTNERS AND GENERAL PARTNERS 305.6. MANAGEMENT OF AND RELATIONS WITH FONFON FUNDS 325.7. CO-INVESTMENT 335.8. OWNERSHIP AND LEGAL STRUCTURE 345.9. EVALUATION 365.10. EUROPEAN UNION STATE AID REGIME 38

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EXECUTIVE SUMMARY

Venture capital (VC) financing, a crucial element of an innovation eco-system is very limited in Turkey. This paper attempts to discuss the reasons for the lack of VC significant financing in Turkey and offers a public fund of funds as an industrial policy intervention to foster the availability of and access to VC funds.

Development of venture capital requires government intervention

The social returns that is generated by the first movers to VC industry is higher than the private returns they get, as a result of three market failures:

Coordination externalities. The VC industry requires numerous elements of infrastructure to operate, such as intermediaries, investors, and entrepreneurs who know about VC investments, as well as an a network of VC funds for syndications.

Information asymmetries. High levels of information asymmetries make it costly to invest in early-stage firms. VC funds engage in expensive `due-diligence` processes to assess the potential of future businesses. VC due-diligence brings a `certification effect` to high-quality entrepreneurs.

Spill-overs from innovation. Innovative ideas are undersupplied than the socially desirable level, because they might easily be imitated once demonstrated by the entrepreneur. VC financing is a tool to increase the supply of innovative ideas.

This set of market failures constitutes binding constraint over development of VC industry. Cross-country evidence shows that at the level of R&D, Turkey has a significantly higher deal-flow potential than the current level of VC investment. Legal and regulatory issues also do not seem to bind, because a private equity (PE) industry has managed to flourish in the last decade, although these issues are as effective on PE as much as they are on VC.

A public fund of funds approach to foster venture capital industry

A government intervention to foster VC should provide a subsidy that compensates the investors of the first VC funds for the differential between the social returns that they generate and private returns they get.

A ten-year public fund of funds will be established with a clear mission of developing a self-sustainable Turkish venture capital industry. The fund of funds will invest in VC funds as a limited partner with a share of 50% or less. The private investors will have an option buy the public share after five years at a price of capital plus a pre-determined interest rate.

The program will take a pro-active approach for establishment of 5-10 funds that will have at least one Turkish and one international institutional investor, and hands-on management in Turkey. The funds will be privately managed with compensation structures that conform to international standards.

The investee funds will be directed to early-stage investments by smart incentives. The earlier-stage the investment is, the higher the rate of matching will be. The limits on the maximum contribution to a fund will also lower the subsidized amount to be invested.

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Venture capital (VC) financing is very limited in Turkey. For entrepreneurs, VC

financing is one of major instruments to finance start-up firms. VC funds also provide

entrepreneurs with business networks, mentorship and credibility. Therefore VC

financing is one of the crucial elements of an innovation eco-system. This paper attempts

to discuss the reasons for the lack of VC significant financing in Turkey and outlines an

industrial policy intervention to foster the availability of and access to VC funds.

United States is the cradle of the VC; but the importance of VC also is increasing in

emerging economies. Canada, China, India, Taiwan, Singapore, Nordic countries and

Latin America are also following the U.S. lead. In many of these geographies1, the

development of VC industry is initiated and / or supported by some government

intervention. The YOZMA program in Israel is a good example in this regard. Starting in

1993, YOZMA, a program of the Israeli government triggered emergence of a strong VC

industry, which now attracts the highest per capita VC investment in the world. Same is

true for the U.S: in the 1960s, the guarantees provided through the Small Business

Investment Companies program catalyzed nurturing of the VC activity in the U.S2. This

paper argues that a government intervention to develop VC is necessary and very timely

for Turkey.

For the last 3 years, with the implementation of the 9th Development Plan (2007-2013),

increase in R&D and SME supports has become a priority of the Turkish government.

Government targets increasing R&D spending to 2% of GDP in 2010 from its value of

0.8% in 20053. VC stands at the intersection of R&D and SME support policies. A

support scheme to VC industry is by its nature a different support tool than grant or tax-

break schemes related to SME and R&D supports. Despite the recent increase in both

SME and R&D supports, so far VC has stayed as a missing link between these two areas.

This paper argues that there is a necessity and opportunity to initiate a support program to

foster VC industry.

1 With possible exceptions of eastern Canada, which benefited from its geographic proximity to Northeastern USA, and to some extent China and India, where VC funds followed presence of Silicon Valley firms;2 see Lerner (2009, p. 37-39) for an overview of the Small Business Investment Companies program.3 OECD (2008)

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The Turkish government recently named development of VC as a priority in some recent

policy documents. The latest SME Action Plan (2007-2009) of the State Planning

Organization4 acknowledges that “given the number of venture-backed enterprises,

Turkey is still at the earliest stage of development of venture capital” (p. 38), and names

development of VC as a priority (Action Plan 4.7). Expansion of VC industry is also

taken as a priority in he State Planning Organization’s 2010 Annual Development

Program (Measures 26 & 91).

The paper is divided into five sections: In the first section, I explain why VC financing is

important is for innovation, and why market failures hinder its development. In the

second section, I provide a short history and overview of private equity5 (PE) and VC

industries in Turkey. In the third section, I provide some evidence to suggest that there is 4 SPO (2006)5 For the purposes of this study, `venture capital` refers to equity investments in less mature companies at the start-up, early development, or early expansion stages (see figure below). This definition excludes seed financing that precedes proof of concept in development of a business. In literature, the term `private equity` is used with two meanings. First, it refers to all equity investments in private companies, as opposed to equity investments in publicly trade companies on a stock exchange. With this definition, private equity includes different forms of financing, such as leveraged buyouts, venture capital, growth capital, distressed investments and mezzanine capital. A second definition of private equity refers to private equity transactions that are in later stages to venture capital. For the purpose of this study, the term private equity refers to its second definition, hence it excludes transactions in seed and VC categories.

Source: adopted from del Valle (2009)

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a deal-flow potential and legal / regulatory issues are not binding constraints over the

development of VC industry. In the fourth section, I review the public interventions to the

industry so far, and discuss why they have been ineffective in alleviating market failures.

In the fifth section, I propose a public `fund of funds` approach to overcome the market

failures that hinder development of the a VC industry in Turkey.

This paper utilizes information from market actors and publicly available quantitative

information. The constraints over VC industry and idea of a public fund of funds were

discussed with different stakeholders in the Turkish innovation eco-system through

structured interviews. The YOZMA experience was also analyzed in detail with

interviews conducted in Israel. A full list of interviewees, including financiers, policy-

makers, entrepreneurs, business angels, and academicians can be found in Appendix I.

1. The need for government support to venture capital

1.1. Venture and innovation6

VC is believed to be an important tool specialized on the financing of young and small-

sized firms, and therefore crucial for start-ups7. In a typical VC fund, general partners

pool resources from limited partners, who are institutional and individual investors, and

invest in firms of high-growth potential. VC funds are established for a certain period,

generally as a closed-end fund of 10 years. The general partners manage the fund and are

compensated at a structure that aligns the interests of general partners with those of the

limited partners. This compensation structure in most cases entails a management fee

(typically at an annual rate of 2% of the fund size) and a carried interest (typically 20% of

the capital gains after liquidation of the investments). The investments are liquidated

through mergers and acquisitions (M&As) or initial public offerings (IPOs). VC is

regarded as a risky asset class with higher returns generally realized in long-term (5-10

year) horizons.

6 Unless otherwise noted, distilled from Lerner and Shephard (2009) Section 2.5 and 2.6, Da Rin, M. and Penas, M.F., (2007) and Kortum and Lerner (2000)7 See Bozkaya (2009) Chapter 1 for a detailed literature review on financing entrepreneurship and the role of VC.

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With the limited availability of VC, the innovative activities have to be financed mainly

through bank credits or intra-firm financing. Banks are generally not specialized in and

generally reluctant to provide credit for start-up firms. The screening mechanism that VC

funds pick their investments make it a more efficient tool financing innovative activities

compared to intra-firm financing within conglomerates. Venture capitalists decide to

invest if a particular business proposal has a sustainable competitive advantage, which in

the technology industries normally derived from intellectual property and / or innovative

ability. On the contrast, most mature corporations and their banks evaluate projects with

regards to their existing business lines, therefore not investing in many projects that

might have great potential but not fit into the firms’ core competencies.

For entrepreneurs, VC funds not only provide equity financing, but also networks,

mentorship and credibility. VC funds are likely to spot potential future applications of

technology better than large firms that generally have narrower market focus. In the case

of Turkey, VC funds also have potential to bring an international network, crucial in

connecting firm’s R&D, production and marketing strategies to the global economy. The

well-documented positive relation between VC financing and innovation makes VC is

one of the most important components of an entrepreneurial ecosystem.

1.2. Market failures that hinder development of venture capital8

1.2.1. Coordination externalities

The VC industry requires numerous elements of infrastructure to operate. Among them

are: (1) An institutional infrastructure that comprises of intermediaries such as lawyers,

accountants and business advisers who are aware of VC process, (2) investors who

believe that VC funds are viable and know how to back VC funds, as well as invest in

venture-backed IPOs, (3) entrepreneurs who are familiar with pros and cons of equity

financing.

VC funds also benefit from networks with other VC funds9. Access to other fund’s deal

flows through syndications is an important factor positively associated with the

8 Unless otherwise noted, summarized Lerner and Shephard (2009) Section 3.1 and Maula et al (2007) Section 2.19 Hochberg, Ljungqvist and Lu (2007).

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performance of the VC funds. Syndication provides the VC firms with both a second

opinion from the industry strengthening the screening, and opportunity to diversify to a

larger number of investments to reduce the firm-specific risk10.

The coordination problem in the infrastructure of the VC industry is one of the reasons

why there is a significant cluster effect in VC industry. Venture capitalists do not want to

invest in firms that are geographically far away from them. The cluster effect makes

development of a local VC industry, with offices and teams operating in Turkey crucial

for entrepreneurial finance, because access to VC funds in other geographies is very

limited.

Provision of international funding to Turkish VC is as crucial as the development of local

industry. Because, up to now, Turkish private institutional investors have not been

exposed to VC investments, whereas major international institutional investors have been

heavily investing in VC for decades. It is the certification effect of these international

investors that will attract Turkish institutional investors to invest in this new asset class.

Yet, institutional investors have a significant home-bias11, i.e., the international investors

would want more returns to invest in Turkish VC funds compared to investing in their

native VC funds, as a result of cross-border transaction costs, as well as additional costs

with different culture and language.

1.2.2. Information asymmetries in start-up finance

Problems of adverse selection and moral hazard limit the access of finance for innovative

start-up companies. Banks generally have limited information about the quality of

enterprises, and in Turkish context have little incentive to invest in obtaining information

if opportunities to grow in more straightforward areas like consumer finance are still

abundant12.

Venture capitalists, as opposed to banks, are specialized on early-stage financing, and

hence have developed strong, yet expensive and time-consuming `due-diligence` methods

10 Lerner (2009, p.53)11 Hursti and Maula (2006)12 This has been the the case in Turkey in the recent private credit expansion since 2005, see World Bank (2008).

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to assess the potential of future businesses13. As a result of this screening procedures, VC

backing brings a new enterprise not only finance, it also provides a `certification effect`14

about the quality of the enterprise. It provides signals to the banks as well, opening high-

quality entrepreneurs better access to financing channels.

1.2.3. Spillovers from innovation

A large body of literature documents existence of positive knowledge spill-overs from

R&D15. Although some of the innovations are patentable; in practice private returns are

far below social returns even in the patentable cases, because innovators as well as small

business owners fail to file or defend patents in an efficient and timely manner. Indeed,

this is why public supports to R&D are justified. As venture capitalists generally invest in

innovative firms, any support to VC can also be regarded in this line, as a part of a

support a larger innovation system.

Moreover, most of the innovations are simply unpatentable. They are just new ways of

doing things, improved or less costly methods of production, distribution or marketing.

The non-patentable ideas are undersupplied compared to socially desirable level, because

they are easily imitated once demonstrated by the entrepreneur. The profit expectation of

the potential entrepreneur is hence lower than the case he would have with a patentable-

idea, therefore the potential entrepreneur is less likely to innovate. This `self-discovery

externality` makes a public support to innovative activities desirable16.

The latter sort of innovation is more relevant to Turkish context. Innovative efforts in

Turkey take place more in the firms rather than in universities, hence the innovations are

more likely to be unpatentable. They also fail to be in the scope of public R&D supports.

In this case, a support to VC financing emerges as one of the few ways to incentivize

innovative activities.

13 Maula, M. at al (2007) 14 Lerner (1999)15 Among them, see Griliches (1992).16 Rodrik (2004). Rodrik explicity acknowdledges improving `developing mechanisms for higher risk capital` as an industrial policy to fix the self-discovery externality (p. 26).

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2. History and current state of private equity and venture capital in Turkey

This part summarizes the development of PE and VC markets in Turkey and reviews the

current state of the industry. Figure 1 depicts the number and amount of PE investments

in Turkey in the 1995-2008 period.

2.1. Private equity17

The first PE transactions are recorded in 1990s. Sparx Investment, a company backed by

Nomura Capital Investments introduced PE to Turkey in 1995. In 1996, Vakifbank, a

state-owned Turkish bank, established its own PE fund, Vakif Risk Sermayesi, and

invested in one company. The number of transactions until 1999 was very low.

The Turkish PE industry had its first surge in the years of 1999 and 2000. The IMF-

backed stabilization program combined with the “dot-com boom” in the international

markets paved the way for this surge. A number of foreign funds opened offices in

Istanbul. In 2000, two important Turkish funds were also established: TURKVEN was

started by 3 young Turkish fund managers, with the assistance of Advent, one of the

largest international funds, and managed to raise its first fund of 44 USD million from

five institutional investors, including International Financial Corporation, European

Investment Fund and Turkish Technology Development Foundation (TTGV18). Is Girisim

was started by Isbank, the largest private bank in Turkey, with a commitment of 30 USD

million.

This short-lived surge ended in 2001 as a result of the financial crisis in Turkey. Given

the burst of the dot-com boom and uncertainties associated with the region after 9/11,

many foreign funds lost their appetite with the Turkish market. There were almost no

investments until 2003 and very few between 2004 and 2005.

Since 2006, Turkish PE markets witnessed another and a larger surge. With improved

economic outlook for Turkish markets, large international players increased their activity

in Turkey. In 2006, Providence Capital acquired Digiturk, an online digital TV platform,

and Texas Pacific Fund acquired Mey Icki, the spirits conglomerate – the first three digit

17 Unless otherwise noted, this section is based on Deloitte (2007) and interviews.18 See Section 4.3 for more information about TTGV.

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PE deals in Turkey. Also in 2006, the two major Turkish funds, TURKVEN and Is

Girisim had their first exits. In 2007, two more Turkish players entered into market –

Antika Partners with a fund of USD 400 million and Dundas Unlu with a fund of USD

150 million. TURKVEN closed its second fund, all with international investors, in

200719. Recently, Turkey became an attractive location for the funds from the Gulf

Region; for instance, Abraaj Capital, the largest fund in the Gulf, committed a USD 500

million fund for Turkey20.

Two major public interventions to this market, KOBI A.S. and Istanbul Venture Capital

Initiative were also established in this last period, in 2006 and 2007 respectively (Section

4.1 and 4.2 provides a detailed discussion of these initiatives).

Figure 1. Combined PE and VC investments in Turkey (# of transactions and amounts,

1985-2008)

Source: TurkVCA, Cem Sertoglu

2.2. Venture capital

VC investments in Turkey have been very limited, both in number of transactions and

amount invested, albeit the surge in PE (Figure 2 & 3).

19 http://www.turkven.com/20 Bozkaya and Lerner (2009)

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The first VC investment, by TURKVEN, took place in 2006. Is Girisim had one VC

investment in 2007. Numerous foreign funds also took a limited number of VC positions.

There had been 9 VC deals so far that constitutes only less than 8% of the total

investment in the industry21.

Figure 2. Number of PE and VC transactions in Turkey (1985-2008)

Source: TurkVCA, Cem Sertoglu

Three Turkish funds are focused on VC investments. Teknoloji Yatirim A.S., established

in 2005, is a subsidiary of TTGV. Teknoloji Yatirim A.S. had 2 investments in biotech, 2

in software, and one in entertainment industries22. Two other players, Golden Horn and

iLab are focused on online ventures23. These three funds have invested around USD 20

million in 17 deals so far. Golden Horn is targeting to raise a larger fund in 2010. Yet,

these are very small figures both in the number and size of the deals compared to those of

PE deals.

21 Analysis from TurkVCA data.22 Interview with Haluk Zontul23 Interview with Cem Sertoglu

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Figure 3. Amounts PE and VC investments in Turkey (1985-2008)

Source: TurkVCA, Cem Sertoglu

2.3. The relation between private equity and venture capital

The domination of PE over VC is apparent from the number of funds focused on different

stages depicted in Figure 4. There are 29 funds operating in PE, compared to only 4 with

an explicit focus in VC. The buyout activity is dominated by the opportunistic takeovers

of international players with larger capital pools. On the other hand, the midmarket

(approximately USD 15-50 million) transactions constitute most of the PE deals, is

particularly crowded24. The industry players expect the market to extend to small-cap PE

transactions of around USD 10 million, but not to VC.

The fact that there is an established PE industry may be useful in igniting the

establishment of VC infrastructure, because some of the legal and accounting issues are

common between the two. However, PE and VC are two different in two major respects:

From the point of view of the fund managers, the skills sets required for PE and

VC are mostly different25. PE is based on evaluation of established companies

with a known history; while VC is based on evaluation of a business plan or a

24 Anecdotal evidence also supports the overwhelming demand for PE transactions. For iVCi, 80% of the requests it gets from funds is in mid-market PE segment (interview with Jose Romano).25 This point was emphasized by most of the interviewees in the financial sector as a major constraint.

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company so young that it is not possible base evaluations on history of the

company. Therefore, getting into VC will require costly investment in new skills

by the fund managers.

When PE and VC are compared, the information asymmetries are much larger in

VC, because the latter deals with business plans or young companies, while the

latter deals with established companies with long histories. This is why major

reason risk-averse institutional investors and fund managers focus on PE, rather

than VC26.

The cost of the expensive due-diligence process is generally independent of the

size of the transaction, making it relatively more costly for the funds in VC

category27. The early-stage investments require both more time and resources to

manage, and more time to recoup investments. Yet, the management fees in the

industry are generally a percentage of the size of the fund, hence again managing

smaller VC investments is costlier than larger PE funds28.

Figure 4. Number of funds in different categories

Source: author’s analysis form TurkVCA data

26 Dhingra (2007)27 Maula, M. at al (2007)28 Dhingra (2007)

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3. Other possible constraints over development of venture capital

In this section I present two hypothesis for the binding constraints other than the market

failures presented in Section 1.2, and discuss why they are not at the moment binding

over development of a VC industry in Turkey: (1) deal-flow, (2) legal / regulatory issues.

The evidence against these hypotheses suggests that the abovementioned market failures

play an important role in explaining the underdevelopment of VC industry in Turkey.

3.1. Deal-flow

The venture capitalists cannot profitably operate in geographies where they do not have

access to a critical mass of deal-flow, because they would not be able to cover the high

fixed-costs of their operations. Therefore absence of a critical mass of innovative

business ideas / companies would avoid development of VC industry. Is this the case in

Turkey? This section explores the answer to this question with the available data and

concludes that it is unlikely that in Turkey there is a shortage of innovative business

ideas. This conclusion is in line with the overwhelming anecdotal evidence that I have

gathered through most of the interviews.

The evidence presented below should be taken with a grain of salt and should not lead to

a misunderstanding for the policy-makers. First, the data availability problems limit our

ability to distinguish between demand and supply factors of the deal-flow. Second, VC

operates in a very complex innovation eco-system, and after a government intervention

triggers VC industry, one of the other elements in the eco-system may become a binding

constraint; and some of these elements also suffer from specific market failures and

require public intervention. Therefore, while our conclusion leads to an urgent focus on

the market failures on VC, it should not be regarded as an excuse for negligence on the

other innovation policies.

Research and development (R&D) firms and other public and private research institutions

are the major sources of VC deal-flow. In a cross-country sample, given a certain level of

R&D, if the level of VC investment for a country is lower than the cross-country average,

then this might be taken as evidence that deal-flow may not be a binding constraint. One-

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way to investigate whether deal-flow is a binding constraint is to see if to compare the

level of VC investment with indicators of R&D.

Figure 5. VC investment is low in Turkey given the level of gross R&D expenditures (2007)

Note: Turkey is represented by dot close southwest corner

Source: EVCA, OECD, national statistics authorities

Figures 5 and 6 compare level of VC investments with gross R&D expenditures (GERD,

both business and government R&D) and number of triadic patents29. All variables are

normalized with GDP. The sample of countries is restricted to OECD countries in

Europe, because these countries share similar levels of development as well as similar

legal / institutional structures with regards to VC (with the possible exception of the UK

that has common law). Turkey’s performance both in the VC investment and R&D are

low. However, given the level of Turkey’s R&D performance, the VC investment is

significantly below the cross-country regression line. To put it into different word, given

its current level of R&D, Turkey has a significantly higher potential of VC deals than the

current level.

29 Triadic patents are a series of corresponding patents filed at the European Patent Office (EPO), the United States Patent and Trademark Office (USPTO) and the Japan Patent Office (JPO), for the same invention, by the same applicant or inventor.

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Figure 6. VC investment is low in Turkey given the level of patents (2007)

Note: Turkey is represented by dot close southwest corner

Source: EVCA, OECD, national statistics authorities

3.2. Legal / regulatory issues

The constraints on VC regarding regulatory / legal issues can be categorized into three

categories: (1) issues regarding legal status and taxation of the VC funds, (2) limited exit

options, (3) problems with protection of minority shareholders. Below we analyze these

issues; and suggest that, while Turkey needs a modernization in the legal and regulatory

infrastructure, the lack thereof is not seem to be a binding constraint over the VC

industry. As such, the reforms in this area are not likely to foster the VC industry unless

they are accompanied by other measures to address the market failures.

3.1.1. Legal status and taxation of the VC funds30

In Turkey, the all PE and VC funds are regulated under Capital Markets Board (CMB)

regulations31. Funds under CMB regulation enjoy large tax advantages. They are exempt

from corporate tax as well as personal income tax for the partners. Under CMB

regulations, all VC funds have to get an operating license from the CMB, have

30 The analysis on regulatory constraints is mostly based on information compiled from Capital Markets Board (2009) and ISE (2008). 31 Communiqué Regarding Principles of Investment Funds, Series: VII No: 10

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independent audits every 6 months, and file certain reporting requirements to CMB. Up

until 2009, there was an additional requirement for the funds to be quoted in the Istanbul

Stock Exchange (IMKB). This requirement resulted in not only new reporting burdens,

but also created a distortion in the partnership structure of the VC firms. In 2009, this

requirement was practically waived32. Also, the current regulations only allow for open-

ended funds, but not for fixed duration closed-end funds that is the common practice in

the industry.

In many countries that has a developed VC industry, including the U.S. and Israel, the

key regulatory innovation that has been conducive to VC has been `tax flow-through.` In

these jurisdictions, a VC fund is legally a limited partnership, but for the tax purposes

only, it is transparent; all the tax is accrued directly to the partners in accordance with

their shares. Hence, if the partner is a non-profit tax-exempt entity, it doesn’t pay taxes.

In the absence of transparency for tax purposes, the VC fund would pay tax, but the non-

profit investor wouldn’t pay taxes for his dividend income, yet it would still be taxed.

Tax flow-through for VC funds boosted investment from non-profit funds to the VC

industry in the U.S.

The full exemption in Turkey, as opposed to tax flow-through, brought high regulatory

requirements for the VC/PE funds. The regulation is delegated to the CMB, whose

competence is regulating the capital markets and transactions related to publicly listed

companies. Regulation of PE transactions (in its large definition) is, in fact, merely

related with regulation of transactions related to publicly listed companies. A

modernization in the regulations should introduce tax flow-through and self-regulation to

the industry.

These said, evidence suggests that legal status and taxation issues do not bind

development of VC. These issues have the same effect on PE funds; but these funds

developed rapidly in the last 5 years. All of these funds are established in other

jurisdictions of favorable regulations, but operate in Turkey33. Because the income of the

fund is due to capital gains, not due to the operations of the investee firms; it is taxed in 32 The waiver is for the funds whose partners are `qualified investors.` The list of `qualified investors` quite large and encompasses virtually all sorts of financial institutions, public bodies and high net worth Turkish or foreign persons.

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the jurisdiction where the fund is established. In this way, the PE funds currently operate

in Turkey are able to gain flow-through. If regulation and taxation issues were a binding

constraint they would hinder development of PE as well. The rapid rise in PE shows that,

regulation and taxation issues cannot be binding constraint on the development of VC.

All of our interviewees also agreed that it is possible to overcome current regulatory

restrictions by establishing the funds in foreign jurisdictions. Some even argued, funds

may prefer to stay in other jurisdictions even if the regulatory climate was better in

Turkey, because investors in the funds prefer to operate in jurisdictions that they have

been used to and Turkey is infamous for her regulatory uncertainty.

3.1.2. Limited exit opportunities

Another constraint on attracting investors to VC industry in Turkey is the limited exit

options. There is no secondary dynamic public equity market for young technology

companies with flexible IPO requirements, like NASDAQ. However, it is hard to argue

that non-existence of a secondary market will be a binding constraint over VC. Cross-

country evidence suggests that IPOs do not have significant effect in explaining

variations in VC activity (while has significant negative effects on PE)34.

In fact, rather than dealing with a secondary market with a very low market

capitalization, there might be more efficient exit options: First is the developing PE

industry35. In fact, international practice shows that acquisition by a PE fund or an

existing mature company is a very common exit option for VC funds. Second, although it

has significant transactions costs, there are no legal restrictions on IPOs abroad. Cross-

border public offerings hence constitute another option: Israel, for example, with its

developed VC industry, has the highest number of public offerings in NASDAQ after the

U.S. sales to PE firms and cross-border IPOs might constitute better options.

33 Only two funds are established under Turkish laws: KOBI A.S. is a public fund (Section 4.1), Is Girisim is a subsidiary of Isbank, the premiere private bank in Turkey, which is historically associated with the Turkish Republic, and has a broad public ownership structure. As confirmed in our interviews, establishment of these funds under Turkish law is a preference of these conditions, not of a suitable regulatory framework.34 Jeng and Wells (2000)35 Interview with Murat Ozgen

16

3.1.3. Protection of minority shareholders

Protection of minority shareholder rights is weak in Turkey. In an index to measure

performance of countries in protection of minority shareholder rights in World Bank’s

Doing Business indicators, Turkey currently ranks 60th among 160 countries – below

emerging market countries like Poland, Mexico and India. Turkey requires reform in

transparency of companies to their investors, rights of minority investors on director’s

conduct and enforcement of judicial decisions in this area.

However, while they might have detrimental effects on PE investments, issues with

minority shareholder rights are unlikely to avoid VC investments. The reason is the fact

that VC funds put hands-on management effort into companies and choose their portfolio

companies accordingly. For the investee firm also, the network and expertise of the

venture capitalist is generally as much valuable as the equity investment it gets. Because

of this nature of the deal, it is much more unlikely that minority shareholder issues will

be a problem for a VC fund.

4. Interventions to venture capital industry so far

4.1. KOBI A.S.

KOBI A.S. is established as a (semi) public VC fund to finance young SMEs in 200636.

The shareholders are the Union of Chambers (TOBB), Halkbank (a public bank focused

on SME financing), KOSGEB37, along with a few individual chambers of commerce /

industry. KOBI A.S. is a VC fund operating under Turkish law, hence 49% of its shares

are listed in Istanbul Stock Exchange. The ownership and administration is dominated by

TOBB, a semi-public institution38. The investment committee comprises of 4

representatives of TOBB, 2 representatives of Halkbank and one representative of

KOSGEB. KOBI A.S. started with a fund of a size of 40 million TLs (~25 million USD),

and has spent 28 million TLs in 4 investments so far39.

36 KOBI is literally the acronym for small and medium sized enterprise in Turkish.37 KOSGEB is the government agency for small- and medium-sized firm supports. Its board is comprised of directors of main economic policy-making agencies and chaired by the minister of industry and commerce. KOSGEB enjoys a large autonomous budget and relatively flexible administrative procedures.38 TOBB is established by law and chamber membership is compulsory. TOBB is one of the influential organizations in Turkey with very strong financial resources.39 Interview with Suleyman Sahin

17

KOBI A.S. played a great role in introducing VC finance to Turkish entrepreneurs.

Backed by the network of TOBB, it created awareness in emerging entrepreneurial

centers in Anatolia. However, the number of investments has been low for the period of

operation and none of these investments is early-stage. Numerous factors have resulted in

this outcome: First, KOBI A.S. compensation structure for fund managers is not in

accordance with industry practices, limiting prospects for aligning incentives for the best

performance of the fund. Second, although there is a professional VC team; the

investment committee does not include VC professionals, and regarded as conservative in

making investment decisions. Third, small size of the fund limited propensity to take risk,

particularly to invest in early-stage, because options for portfolio diversification stayed

limited. On top these; a (semi) public fund does not serve the purpose of developing a

venture capital industry; because it does not deal with the market failures in the VC

industry, but rather it attempts to provide direct finance to the start-up firms40.

4.2. Istanbul Venture Capital Initiative (iVCi)

Istanbul Venture Capital Initiative (iVCi) was established in 2007 as a fund of funds to

invest in PE and venture capital funds in Turkey. It is an initiative led by the European

Investment Fund (EIF). EIF is the European Union’s specialized financial body for Small

and Medium Enterprises (SMEs), fully owned by European Investment and EU

Commission. EIF has a mandate to support EU policies in entrepreneurship, technology,

innovation and regional development by making equity investment in SMEs; however it

also requires the generation of an appropriate return for our shareholders.

EIF expressed interest in establishing a VC fund of funds in Turkey in 2006, modeled

after her experience with Neotec, which had a considerable impact in developing early

stage financing in Spain. However, given the low level of PE activity in Turkey by then,

EIF set the purpose of the first fund to establish a PE backbone. Along with the 50

million euros it committed, EIF was able to secure 100 million euros commitment from

public institutions41. Private financial institutions were not eager to join; the private

40 Gilson (2003) documents and analyzes the failure of the German public VC funds experience of WFG. Also see OECD (1997).41 KOSGEB (50 million euros), TTGV (40 million euros), the Development Bank of Turkey (10 million euros)

18

participation has been limited to two actors and 10 million euros42.

There had been numerous regulatory difficulties in establishing iVCi under Turkish law.

These difficulties resulted in a delay in starting operations, and the fund of funds was

established in Luxembourg in 2007. iVCi does not have an office in Turkey yet (opening

of one is planned in 2010), and although there is a separate investment committee, the

due diligence process for the investee funds is undertaken by EIF. iVCi has a large

mandate encompassing all stages of firms, and investment in funds as well as direct

investment in firms. However, strategically, it is focused on investing funds of lower

mid-market PE funds (30 million euro average fund size). iVCi closed deals with two

funds in 200943, and more investments are in the pipeline for 2010. iVCi is expecting to

invest in a limited number of early-stage focused funds at the end of the first fund, and

envisioning a second fund of funds later with a more focus on early-stage44. Better

utilization of iVCi has recently been announced as an official priority of the

government45.

iVCi is bringing numerous contributions to the industry. First, iVCi leverages the

expertise and network of EIF, one of the world’s leading players in VC, thanks to the

large budget it got from the EU46. Second, the focus area of lower mid-market PE funds is

still an underdeveloped segment. Third, the public institutions that are involved in iVCi,

particularly KOSGEB, is gaining expertise as an institutional investor.

There are also criticisms: First, some stakeholders think EIF has a very bureaucratic and

conservative due-diligence process, which resulted in a low number of investments so far.

Second, lack of a hands-on office in Turkey is regarded as a short-coming. Third

criticism is the lack of focus on early-stage VC.

42 Garanti Bank and National Bank of Greece, each 5 million euros43 3TS Cisco, an expansion and buy-out fund with a regional focus of Central and Eastern Europe (www.3tscapital.com); and Eurasia Partners, a small-cap private equity fund focused on Turkey (interview with Ogeday Karahan).44 Interview with Jose Romano45 State Planning Organization’s 2010 Annual Development Program (Measure 26)46 `…in 2001, the European Commission provided more than two billion euros to the European investment Fund, making it overnight Europe’s largest venture investor. The amount is very significant relative to the roughly four billion euros that were invested by European venture funds in that year.` (Lerner, 2009, p. 122)

19

iVCi facilitates investments and relaxes the capital constraint of the general partners in

fundraising, however it does not involve a subsidy and hence it might have limited effect

in compensating for the market failures that hinder development of VC. Such an explicit

subsidy might be provided a public fund of funds, and maybe more conducive to the

mission of explicit mission of overcoming the market failures.

4.3. Turkish Technology Development Foundation (TTGV)

TTGV is an independent organization, operated under non-profit organizations law and

funded by initial World Bank grants and numerous government sources. TTGV has

grants in various areas of innovation policy. It also runs its own VC fund, Teknoloji

Yatirim A.S. (Section 2.2), and has invested in two PE funds, Is Girisim and TURKVEN.

It is also a shareholder in iVCi. However, TTGV is not a fund of funds (and does not

claim to be so), and engages in these activities as a part of its larger mission of supporting

innovation47. The efforts of TTGV to support financing of innovative enterprises has been

scattered in different initiatives so far, however this is due to fact that TTGV has a large

mandate and no expertise as a fund of funds. That said, as the leading intermediary in

Turkey in technology development and R&D areas, TTGV is one of the crucial actors to

benefit from in formulating a public intervention in VC industry.

5. Fund of Funds

Industrial policy interventions should target market failures. As such, an industrial policy

intervention to foster VC should focus on the market failures that avoid development of

VC. This section develops a subsidy to the first entrants into the VC industry to

compensate between these differences.

The subsidy will be provided through a 10-year public fund of funds that will invest in

VC funds as a limited partner with a share of 50% or less. A critical element of the

program will be a buy-out option given to the private partners at the investee funds: The

private investors will have an option buy the public share after five years at a pre-

determined price. This price will be the capital invested plus a pre-determined interest

47 interview with Mete Cakmakci and Altan Kucukcinar

20

rate (LIBOR + x). This option will provide a subsidy to the funds that have returns higher

than the pre-determined interest rate.

Figure 7. Fund of Funds

Arrows represent flow of investmentsSource: adopted from Lerner (2009, p.134)

I suggest the fund of funds to be named `The National Entrepreneurship Fund of Funds`

with an acronym FONFON48. I henceforth use FONFON instead of `fund of funds`. The

funds that FONFON invests in will be called FONFON funds.

I model this fund of funds idea from the YOZMA experience of Israel49 and New

Zealand50 that is modeled after YOZMA. I also factor in elements of Turkish institutional

structure, suggestions of stakeholders that I gathered through interviews51, and

experiences of previous interventions. I also utilize the conclusions of literature on public

48 Ulusal Girisimcilik Fonlarin Fonu49 The information about YOZMA is collected from Avnimelech (2009), Avnimelech and Teubal (2005). Senor and Singer (2009), and Lerner (2009); as well as through interviews with Gil Avnimelech, Yigal Erlich and Orna Berry50 Lerner and Shepherd (2009), Lerner, Moore and Shepherd (2005)51Among many other suggestions, I also utilize some elements of an unpublished memo by Mete Cakmakci on a fund of funds design.

21

interventions to foster VC and the general literature on industrial policy. Table 1 shows

how the elements of design fit into the principles that Josh Lerner52 offers for public

interventions to foster VC. Table 2 shows how they fit into the ten principles of industrial

policy interventions of Dani Rodrik53.

Table 1. Josh Lerner’s Rules of Thumb for Development of VC and Elements of FONFON

Rule of Thumb Element in FONFONRespect the need for conformity to global standards Fund of funds is a form of intervention that has been

implemented and accepted in international community.Funds with compensation structures in international standards

Let the market provide direction Investing along with private limited partners in VC funds, rather than direct investmentsDirect investments are limited to co-investments with FONFON funds.

Resist the temptation to over-engineer Independent majority in FONFON investment committeeAdvisory committee holds power to amend guidelines according to evaluation results

Recognize the long lead times, but also avoid programs getting too long

A fund lifetime of maximum 10 years. Options at the 5th year ensure the program will not get longer than necessary.

Avoid initiative that are too large or too small A USD 100 million size that will invest in 5-10 funds of the size of approximately USD 50 million

Understand the importance of global interconnections

Requirement of international financial partner in FONFON fundsInternationally networked leadership for FONFONPro-active approach in finding general partners and limited partners

Institutionalize careful evaluations of initiatives 3-year cycle evaluations to see how FONFON is contributing to developing a self-sustaining VC industry, annual action plans.Advisory committee has power to amend the guidelines according to evaluation results.

Source: Lerner (2009) and author’s analysis

The design I put forward requires a minimum number of regulatory changes. The

experience shows that the more regulatory change a program requires, it takes more time

to establish and lobbying through the process results in distortions in design. This is

especially true when legislative changes are required. This is why the design below

avoids any legislative change. Therefore, this design should be regarded as an

approximation to optimal given the current regulatory structure.52 Lerner (2009)53 Rodrik (2004)

22

That said, one of the purposes of the program would be to form and strengthen the

lobbying power of the VC firms. To this end, measures will be taken to make TurkVCA

operational and effective. The program will also be catalytic in lobbying for the measures

for a better functioning VC industry. Once a few funds are triggered through this

program, TurkVCA will become essential in identifying the further constraints, in

particular legal / regulatory obstacles, that may emerge and lobbying to remove them.

Table 2. Dani Rodrik’s Industrial Policy Principles and Elements of FONFON

Principle Element in FONFONIncentives should be provided only to “new” activities.

VC is currently nil in Turkey.

There should be clear benchmarks/criteria for success and failure.

Evaluations in 3-year cyclesWhether the buy-out options are exercised

There must be a built-in sunset clause. 5-year buy-out option ensures the program will not last more than necessary, 10-year fund lifetime ensures sunset.

Public support must target activities, not sectors. VC is a sector independent activity. By its nature, VC will be focused more on R&D intensive sectors; however these sectors are ones with most spillovers.

Activities that are subsidized must have the clear potential of providing spillovers and demonstration effects.

Spillovers to entrepreneurial activity by creating new financing opportunities. Spillover to other VC activities by initiating formation of VC infrastructure and demonstration effects.

The authority for carrying out industrial policies must be vested in agencies with demonstrated competence.

KOSGEB, TUBITAK, TTGV, TOBB

The implementing agencies must be monitored closely by a principal with a clear stake in the outcomes and who has political authority at the highest level.

Advisory committee chaired by State Minister for Treasury

The agencies carrying out promotion must maintain channels of communication with the private sector.

Flexibility in rules, quarterly general partner network meetings, monthly investment committee representative meetings

Optimally, mistakes that result in “picking the losers” will occur.

Some funds may have losses, the loss at these funds will be limited to commitment.

Promotion activities need to have the capacity to renew themselves, so that the cycle of discovery becomes an ongoing one.

Possibility of the second fund of funds.

Source: Rodrik (2004) and author’s analysis

5.1. Mission

FONFON should have a clear mission: developing a self-sustainable Turkish venture

capital industry in 10 years.

23

As I have argued in Section 1.1, a self-sustaining VC industry is expected to have

positive effects on innovation. Therefore, FONFON will serve increasing Turkish

innovation, through its accomplishing its mission. It is critical to understand that the

innovation eco-system has many variables, and an innovative economy requires many

other elements of policy interventions, such as R&D grants, angel capital, and training

programs. There already are a number of public support programs targeting different

segments of innovation eco-system (Appendix II) The positive effect of FONFON on

innovation will be dependent on interactions with these programs, hence it is not possible

to evaluate the effect of FONFON on a rather complex target of increasing innovation,

independent of the other variables. This is why I suggest a simple mission that is focused

on VC industry alone.

FONFON should not be used for supporting other development policies either. In many

instances, the policy-making and legislative process is likely to put many targets for a

program, creating a mission creep54. This is a very dangerous inclination for the success

of FONFON, because VC is a very specific tool in financing innovative start-ups.

Inclusion of other targets may significantly distort the incentives for the fund managers,

making the program impossible to serve its major mission. For example, forcing funds a

regional mandate will be a push against the cluster nature of VC funds and innovative

start-ups. Fostering entrepreneurship in poorer regions can be achieved using regional

development policies. In a similar vein, there are different tools for supporting

entrepreneurship in different segments, for which VC is not the best fit. For instance,

separate micro-credit programs can be used for supporting entrepreneurship among poor.

5.2. Upside incentive: buy-out option

The critical element in the design of FONFON is a buy-out option given to private

partners. The non-FONFON partners in the FONFON funds will have an option to buy,

partially or fully, the FONFON share at the end of fifth year. The exercise price of the

option will be calculated so as to provide FONFON the return of its capital invested less

any distributions plus a rate of return on that capital that is equal to a pre-determined

54 See Gompers and Lerner (2001) on how SBIC involved into an inefficient program with the incorporation of targets other than the original mission, such as regional development targets.

24

interest rate in the form of LIBOR + x. This rate might be determined by taking the rates

of government Eurobonds as a benchmark. The rational private investors will exercise

their buy-out options if, at year five, the underlying value of the investment portfolio (less

distributions made) is at a significant premium to the buy-out price.

In the first stage, the partners will have option to buy the FONFON shares in accordance

with their share among the non-FONFON shareholders. For instance, if an limited partner

has a 50% share in a FONFON fund of a matching rate of 1:2, it will have option to buy

25% more shares from the 33% that FONFON owns. If the options are not exercised in

full by all private partners, the partners who exercise their options will be given another

option to buy the remaining FONFON shares such that each partner will have option to

buy a ratio of the remaining shares equal to its share in the options exercised in the

previous round. This iteration will continue until all private partners declare that they no

longer want to buy FONFON shares. If there remain unexercised options, FONFON will

continue to share the risk and return with private investors. The option is an effective

subsidy to private limited and general partners who invested in high-performance funds,

because their returns will be multiplied.

The critical feature of the buy-out option is that it is a subsidy to the partners of high-

performance funds only. If the return on the investments of the FONFON fund is below

the pre-determined interest rate, then rational private investors will not exercise their

options. Hence, no subsidy will be given to the investors of the bad-performing funds.

Therefore upside incentive is likely to attract better-performing managers compared to

mediocre-performance ones. Also, upside incentive will limit the downside risk that

FONFON takes. Israel, just two years before implementing YOZMA program with an

upside incentive, had an experience with a guarantee program. INBAL program, which

provided 70% guarantee to VC investors, is not regarded as a great success – four funds

established merged into larger investment / holding companies. INBAL experience is a

showcase about outcomes of different incentives in a very similar environment55.

The FONFON contribution to the funds is an effective subsidy to the general partners –

time independent of their performance. At a matching rate of 1:1, the general partners

55 Avnimelech (2009).

25

will get twice management fee and carried-interest as they would get without

contribution. The subsidy to general partners is not conditional on high performance

(although the size of the carried interest is proportional to performance), because of two

reasons: First, unconditional subsidy will be more effective in directing fund managers to

early-stage. Second, the structure of the incentive to limited partners will ensure that they

screen the teams they invest in better.

5.3. Mandates of FONFON funds

The purpose of FONFON is to improve early-stage VC financing. Therefore, the

FONFON funds are expected to mostly engage in early-stage investments. Since the

FONFON funds will be learning Turkish market with this program, smart and flexible

incentives might work better than strict criteria. Given the incentives, the funds will still

be able to invest in later stage opportunities, if they see it in their best interest at that

moment. There will be two smart incentives:

Incentive 1: Increasing matching rate for earlier stage

FONFON will match the private investors according to the mandate of the fund in terms

of the stage of the investment. The ratio of public share will decrease, as the investment is

later stage; so that the subsidy will get higher in stages that have been affected by larger

degrees of market failure. This matching structure will ensure that the investors in more

risky early-stage investments will get more upside incentives.

I suggest the following matching ratios: start-up: 1:1, early expansion: 1:2, expansion:

1:4, late expansion: 1:5. The FONFON funds might usually have investments at different

stages. In this case, the matching ratio will be calculated as a weighted average. For a

fund that has 40% start-up, 40% early expansion and 20% expansion mandate, the

matching ratio will be 0.4 x 1 + 0.4 X (1/2) + 0.2 x (1/4) = 0.7, i.e., 65:100. In this

scheme, since the calls to draw up the FONFON commitments will take place when the

investments take place, FONFON’s share in an individual fund will change in time if the

fund has investments in different stages.

Incentive 2: Maximum Investment and Fund Size

26

There will be two rules that limit the size of investments of FONFON funds. Since later-

stage investments typically require a larger amount of capital, this will also direct the

funds to earlier-stage:

FONFON will invest a maximum of 20 million USD, and a maximum of 20% of

its funds in an individual fund.

Each FONFON fund will not be able to allocate more than 10% of its fund to one

investment.

Given these rules, a fund that has half early-stage and half early-expansion mandate will

get 40% matching, and attain a size of 50 million USD (with a maximum rate of upside

incentive). Hence, the maximum size of investment this fund can make is 5 million USD.

This size will be a good check to keep the fund operations in its mandate.

So what is the optimal size for FONFON? The size is critical for the success of the

program -- a too large fund of funds size may crowd out private capital56, while a too

small fund of funds size may result in funds of sizes below a critical threshold to sustain

operations. FONFON should target matching at least 5 funds, and a maximum of 10.

Since the decision to invest in a fund is dependent on numerous factors (Section 5.5), and

matching rates vary; there should not be a strict number of funds to be matched.

However, the size of FONFON will to some extent determine the number of funds

invested. The minimum number of 5 is required to ensure there is a network of VC funds

for syndications, create a certain competition in the industry, and pave the way for

sectoral specialization of the funds. A number larger than 10 does not seem viable within

the scope of the program. If we assume a minimum fund size of 50 million USD is

required to provide enough compensation to attract good quality investors; given 20%

maximum fund allocation rule, FONFON at a size of 100 million USD can invest in 5

funds with early-stage / early-expansion mandate (40% matching). Matching rate in

some funds that include expansion and later-expansion will be lower, so a 100 million

USD size might allow for 7-8 funds to be matched. Hence a fund size around 100 million

56 See Cumming and Macintosh (2006) for how large size of a co-investment program in Quebec (Canada) has led to a crowding out private investors.

27

USD seems to a good benchmark. If there will be direct co-investment (Section 5.7), this

size should be increased by a margin of 10-20%.

Avoid strict criteria about firms

It is also possible to put some explicit criteria such as age (3 or younger), asset size, or

the number of employees (maximum 50) to ensure that the investee companies are not

later stage. However, this is not preferable, because of two reasons: First, these criteria

are strict and may limit flexibility of fund managers to optimize their portfolios. Second,

it is easy to fool these criteria by splitting companies, establishing new ones, etc.

Should there be an industry or technology criteria? For industries, letting the funds to

evolve into certain focus areas is a better strategy than increasing the risk of that funds

face by dictating them certain funds. A criteria for the firm being innovative is a good

option, because it will ensure avoid leaking of the funds to unrelated industries. However,

such a condition does not seem to be administratively feasible. While it is possible to use

criteria that other public bodies use for their evaluations57 (eg. TUBITAK’s R&D grant

criteria), these conditions are prepared to screen firms for a different set of policy targets.

Setting new conditions, on the other, will require administrative capacity to monitor

them. Since there is no prior application, new conditions will also bring ambiguity, which

is very detrimental for the investment decisions of VC funds. All in all, an assessment for

innovativeness of investee firms does not seem feasible. The monitoring over the

FONFON funds should take place not with explicit conditions, but with smart incentives

and representation in the investment committees.

5.4. Administrative structure

It is of utmost importance that the administration of the FONFON will be professional,

free of bureaucratic burdens and political interference. FONFON is to be a lean

institution with a general manager, a few senior and junior investment professionals, and

enough support staff. FONFON’s management office will be located in Istanbul, where

most of the FONFON funds are expected to be located in, and the easiest city to connect

with international investors. The management office will have the following functions:

57 Interview with Gil Avnimelech

28

1. Doing initial screening to the requests from potential FONFON funds. The due-

diligence of the selected proposals will be outsourced to a professional consultancy

firm. Outside consultants will also be used for specific issues, like certain

technologies, and for evaluation purposes.

2. Sitting in the investment committees of the FONFON funds. By sitting investment

committees of and by getting regular information from FONFON funds, monitoring

how the VC industry is evolving, and formulating new strategies for better evolution.

3. Preparing annual reports. Advising government on VC issues and other concerns

regarding entrepreneurial environment.

If FONFON invests in ten funds, four senior investment officers is likely to be enough to

sit in the boards (2-3 each), and monitor these funds. The workload of screening

investment proposals will be replaced by monitoring as investments take place. One

junior investment professional will work with each senior professional. The general

manager will oversee all the work, and take significant role in communicating with the

government. S/he should be a networked Turkish person with international experience

who has close contacts with international and national financial institutions and venture

capitalists, close knowledge of VC, and exposure to dynamics of Turkish public

administration. The general manager will be appointed by the relevant minister (see

below) and will make the other recruitment decisions. The recruitment of senior officials

is very critical, since they will sit in the investment committees of FONFON funds.

The commitment to the FONFON will be paid in advance, and the 10 year budget will be

financed through interest income accrued before the all the amount are drawn to investee

funds58. This is to overcome complexities of public finance rules and assure an

independent operating budget to FONFON. Several rules regarding salaries of public

employees, as well as political considerations, may avoid investment officers to be

remunerated as competitive rates. However, this will at least be partly compensated by

the fees they will get from the investment committees they sit in; as well as their future

income expectations due to the experience and network that they will gain through

FONFON.

58 Interview with Mete Cakmakci

29

There will two decision-making committees:

Investment committee will make the decisions choose FONFON funds. It will

comprise of the general manager, undersecretary of the relevant minister, and

three independent members that will be appointed by the relevant minister upon

the proposal of the general manager. Each member, except the general manager,

will have a proxy to attend the meetings in order to ensure that the committee can

have meetings on time. The decisions will be taken by the majority vote.

Advisory committee will supervise the investment committee. It will have power

to change the guidelines and strategic priorities. Depending on the periodic

evaluations, it will approve annual and 3-year action plans. It will comprise of the

representatives of the shareholder institutions. The relevant minister will be the

chair of the advisory committee

The political ownership of the relevant minister is critical for the success of the program.

I suggest the relevant minister to be the Minister of State responsible for Treasury,

because it is a coordinator post that fits better into the crosscutting nature of FONFON,

and it has a higher political visibility. An alternative is the Ministry of Trade and

Industry, which is also relevant, but lacks the two properties above.

5.5. Selection of limited partners and general partners

Within two months of establishment of FONFON, the general manager will prepare

guidelines for the framework for the selection FONFON funds and Advisory Committee

will approve it. The guidelines should be formulated in line with the general principles

below59:

The general partners should have a clear fundraising strategy based on already

established contacts. The strategy should include names and information about

potential limited partners and documentation of their interests. The general

partners will have 6 months to get commitment for at least 75% of the funds from

private limited partners. After 75% of the funds are committed, FONFON will

59 Some of these elements are designed in lines of discussions with Ogeday Karahan, Mete Cakmakci, Jose Romano, Selin Ozkan, Yilmaz Arguden.

30

commit its funds. If general partners will fail to secure commitment of 75% of the

funds in 6 months, FONFON’s investment decision will be waived. The

investment committee may extend this period for 3 more months.

In order to ensure local skill building in VC and learning from international

experience, FONFON funds will have an office and hands-on management in

Turkey (the fund might be established in another jurisdiction). They will also

have at least one international financial institution as a limited partner and at least

one Turkish qualified investor60 as an limited partner.

The guidelines should not involve strict conditions for general partners because

different funds with different investment strategies will require different talents.

However, proven track record demonstrated with successful exits and / or

entrepreneurial experience will be pluses. The management team should be

composed of complementary skills and backgrounds.

The investment strategy should be clear on the targeting stages and focus markets,

and how these fit into the competitive landscape. The stages and markets should

aligned with the skills and backgrounds of the management team.

The interest from limited partners should also be regarded as a signal; if general

partners already got commitment from prestigious institutional investors, it is a

positive signal about their quality.

Other important factors for ensuring political supportability are:

o No general partner should dominate the carry or decision-making

structure.

o The should not be a significant non-alignment in the interests of partners

(limited partner and general partner.

o FONFON will partner one limited partner in only one fund.

FONFON will publish a tender in a week after the guidelines are approved. It is expected

to potential general partners to approach FONFON after the tender. However, the

establishment of first fund(s) will most probably not be based solely on the general

partners approached after the tender, but also require networking in international and

60 Same definition with that in CMB Communiqué Regarding Principles of Investment Funds, Series: VII No: 10

31

Turkish investors. The general manager should not hesitate to work together with

potential general partners to look for high-quality limited partners and / or convince

potential limited partners to invest. Likewise, he should not hesitate to approach potential

general partners in his network before they approach FONFON. The performance, hence

selection of the first is very critical to demonstrate the success of the program. The first

selections is likely to based more on the quality of general partners and fundraising plan,

while the fit of investment strategies into the general strategy of FONFON will have

increasing weight in the later selections.

The proposals will be referred to due-diligence after a first screening by a team of

investment professionals. At this stage, staff will actively work together with general

partners of high potential to make their proposals more attractive. The due diligence

report will be presented to the investment committee. The investment committee may

invite the general partners for an interview with the general manager and investment

officers. The investment committee will vote based on the views of the investment

officers, due-diligence report and the interview. All this process should take no longer

than 3 months.

5.6. Management of and relations with FONFON Funds

The FONFON funds will have management and compensation structures will be framed

with an agreement between general partners and FONFON after selection. The

compensation structure is essential for aligning incentives of limited partners and general

partners in a VC funds, hence it should approximate the international standards of 2%

management fee and 20% carried interest.

The FONFON funds will also have investment and advisory committees. The

composition of investment committee will provide collective learning in Turkish VC

industry, while ensuring the general partners will have the power to manage their funds:

It will comprise of general partners, one representative of international limited partner,

one representative of the Turkish limited partner, and one representative of FONFON

(one of senior investment professionals). The general partners will also have right to

appoint independent members. The committee will decide by majority vote.

32

Generally, institutional investors like EIF and IFC do not sit in investment committees. In

the usual structure the investment committees include general partners and independent

members only. Many of the interviewees also emphasized that public representatives

should be in advisory committees, not in investment committees. Although this is another

alternative, I believe the structure outlined above will be more conducive to collective

learning in the industry. It will also impose government’s observation over the funds

activities, while it will not be possible to motivate the investment committee politically,

because of the majority vote rule. Giving FONFON representative an observatory role is

also an option, however in this case his contribution and learning is likely to stay limited.

There will also be a monitoring and reporting framework that will be a part of the

agreement with FONFON and the fund. FONFON will get economic and financial data in

regular period of 6 months. These reports will be evaluated by FONFON and will provide

basis of its evaluation and strategy formulation.

5.7. Co-investment

FONFON is designed as a fund of funds, but it is also possible to give a limited mandate

for co-investments with the other FONFON funds. These co-investment may stimulate

first investments by the funds, and with this demonstration effect may pave the way for

more funds to come.

The part of FONFON that is allocated for co-investments should be limited to 5% of

FONFON and to the first 2 years, so that it will really be for demonstration effects only.

Further, the investments will be possible only to the investee firms of FONFON funds,

not direct investment to other firms. This will keep the market selection procedure that

the fund of funds model brings (as opposed to a public VC fund that engages in direct

investments). It will also avoid conflict of interest between FONFON and FONFON

funds, since they will not be in competition. Third, it will ease the administrative

procedure: Due-diligence will be done by the FONFON fund, and it will be up to the

FONFON investment committee to co-invest or not based on this due-diligence.

FONFON is expected to exit from these investments at the end of 10 years, preferably

together with the exits of the FONFON funds.

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5.8. Ownership and Legal Structure

Whatever the legal structure is, it is of critical importance to establish FONFON under

Turkish law, because this will show the importance of this initiative for the Turkish

government. There are two major alternative ownership structures for FONFON, and

variations of legal structures within them: (1) a public – private partnership with a mutual

fund structure, (2) a public fund of funds under limited company or a mutual fund legal

structure. I believe the second alternative is superior to the first one in terms of

overcoming the market failures and administrative feasibility. Table 3 shows how these

two alternatives and a public venture capital fund alternative compare in terms of

technical correctness, administrative feasibility and political supportability.

Alternative 1: Public – Private Partnership

A private-public partnership with Turkish financial institutions and blue-chip companies

as well as international institutional investors (EIF, IFC, etc.) will bring two advantages:

First it will be possible to leverage networks, experiences and credibility of these

institutions. Second, the risk and cost will be shared. Such a closed-end fund can be

established under Turkish law, under the newly added hedge fund61 alternative in the

mutual funds communiqué of the CMB. Mutual funds are tax-exempt; therefore tax-flow

through will not be an issue for institutional investors.

However getting private partners to FONFON has significant disadvantages that is likely

to limit its role to overcome the market failures in the VC industry: First, given the higher

information asymmetries, private investors may hesitate to involve in a highly early-stage

oriented fund of funds. In this case, government may need to provide certain guarantees

to convince the private partners to join FONFON. If the guarantees are large, the

advantage of sharing cost and risk will mostly disappear. Second, the private incentives

will ask for returns that beat the government bond rate, therefore they are very unlikely to

agree with the buy-back option. Yet, buy-out option is the most critical element in the

design outlined so far. The role of a private-public partnership may stay limited to

facilitation – iVCi is already doing this (Section 4.2) Therefore, the private-public

61 serbest fon

34

partnership should take place at the level of FONFON funds, not at the level of fund of

funds.

Table 3. Comparison of FONFON with other alternative interventions

Technically correct Administratively feasible Politically supportablePublic VC fund(KOBI A.S.)

(-) It does not foster a VC industry, it just provides funding

(-) Risks associated with VC investments are too high to take for public officials

(-) 2-20 compensation structure is very hard to justify

Private-public Fund of Funds (iVCi)

(-) Hard to give the upside incentive with private money

(-) There are legal impediments in Turkish law

(+) Risk is shared with private investors

Public Fund of Funds(FONFON)

(+) Correct set of incentives

(+) No requirement for change in any law

(-) Selection of VC funds and risks associated with them can be a political problem, but if the due-diligence is strong this problem will be minimal.

Source: Author’s analysis

Alternative 2: A public fund of funds

A public fund of funds will have all the advantages that I have elaborated in the earlier

parts of Section 5. The only potential disadvantage will be the fact that risk not be shared

by private agents. However, failures are inherent to the nature of the VC activity, and

these risks will be minimized by regular evaluations and adjustments in the FONFON

program.

Should the public fund of funds be established under one public agency or with

participation of a number relevant agencies? Establishing under one agency of a large

budget (eg. KOSGEB) is administratively easier, because there will not a need for inter-

agency protocols, establishment of a company or a mutual fund. However, this alternative

also has disadvantages: First, FONFON will be under control of one agency that reports

to a certain ministry. It will be harder to limit political influence through the checks that a

multi-agency structure brings. Second, it will also not be possible to leverage expertise of

different agencies. Third, the agencies kept out may lobby against the program that may

result in stop, misdirection or slow-down in the program.

35

A structure that involves a number of public agencies will enjoy the advantage of

bringing different institutional experiences, checks and balances, and will also avoid

negative lobbying of agencies that do not participate. KOSGEB, with its experience in

SME supports and large financial resources with a relatively easy mechanism to spend, is

one of the key stakeholders. TUBITAK, with its experience in R&D supports, is also

very relevant. The shareholders should also include some relevant non-profit

organizations: TTGV has financial resources and has been the primary technology

support and public-private intermediary for years. TOBB also has large financial

resources and enterprise network all over the country.

Under this alternative, FONFON can be established as a joint-stock company (A.S.) or as

a hedge fund (serbest fon) under the mutual funds regulations of the CMB. A mutual fund

structure will enjoy a more flexible tax structure. All of the agencies mentioned below

have a qualified investor status and hence can join mutual funds.

5.9. Evaluation

The regular evaluations of FONFON should assess if FONFON is working well towards

achieving is mission of developing a self-sustainable Turkish venture capital industry in

10 years. Given short-termism is prevalent in Turkey62, it is critical to acknowledge and

also create public awareness about the fact that development of VC industry takes time,

so it is crucial to avoid short-termism.

Table 4. Targets of 3-year cycles and questions for evaluations

Target VC funds Capital supply Industry 3rd year Establishment of 5-10

FONFON fundsHow many FONFON / non-FONFON funds are established? How many are branches of international funds?

How many local institutional investors invested in VC funds? In what amounts?

What is the VC investment / GDP ratio?

Is TurkVCA active?

What is the level of awareness about VC among entrepreneurs?

6rd year Exercise of the options by the successful funds

How many FONFON / non-FONFON funds are established?

How many are branches of international funds?

To what extent the

How many local institutional investors invested in VC funds? In what amounts?

What is the VC investment / GDP ratio?

Is TurkVCA a successful lobbying organization?

What is the level of awareness about VC among entrepreneurs?

Is there reliable data on

62 This point was emphasized by many interviewees, particularly by Jose Romano

36

FONFON options were exercised?

Are there second fund-raising?

How many exits?

the performance of investee firms?

9th year Administration of the remaining funds

To what extent the FONFON options were exercised?

Is there entry without FONFON support?

Are there second fund-raising?

How many exits?

How many local institutional investors invested in VC funds? In what amounts?

What is the VC investment / GDP ratio?

Is there need for a second fund of funds?

Are there specific industries that should be targeted with FONFON II?

Source: author’s analysis

Given the long-run nature of the target, evaluations should be done in three-year cycles.

FONFON should formulate 3-year and 1-year action plans along with the results of these

evaluations. The action plans will be approved by the advisory committee. The advisory

committee will also have power to change the regulations that govern FONFON in order

to achieve the targets more efficiently. FONFON administration will present its

performance to the advisory committee and the general public with annual reports. At the

end of the third cycle, the advisory committee will also advise the government about a

decision to establish a second fund of funds, FONFON II, and its possible size. This

second fund of funds may particularly target sectors that has potential, but has not

attracted enough VC investment so far. Table 4 provides targets for the consecutive

cycles of reviews together with a set of questions to be investigated concerning different

aspects of the program.

The evaluation should mainly be concerned with the self-sustaining VC industry.

There are difficulties in making this assessment quantitatively because it is hard to find a

benchmark. However, investigating evolution of different stages of VC investment / GDP

can be useful. Quantitative assessment may also involve comparison of the performance

of FONFON funds with non-FONFON funds. The difficulty in this assessment is that

there may not be enough number of non-FONFON funds to make this comparison,

especially in the first 3-year cycle. The non-random selection of FONFON funds may

also complicate the comparison.

37

Another component of evaluations will involve the performance of the investee firms.

This is not directly related to FONFON’s mission, but the insights might point other

shortcomings in the evolution of the innovation eco-system. FONFON will utilize this

information set to advise for reforms and interventions in other areas. When evaluation

the performance of investee firms, a comparison can be made with the investee firms who

were just above the decision threshold and just below. Another strategy is comparing the

performance of investee firms of FONFON funds with the performance of the investee

firms of the non-FONFON funds. A shortcoming of this approach is the non-random

nature of FONFON fund selection. In addition, both approaches may have problems of

data-gathering from non-investee firms and investee firms of non-FONFON funds63.

5.10. European Union State Aid Regime

FONFON should be in line with the European Union (EU) state aids rules, because

Turkey has committed to these rules with the Customs Union agreement in 1995. No

institutional structure to assure this commitment has been put into place yet, however it is

crucial to take these rules into account, because an institutional convergence to the EU is

likely to take place in the lifetime of FONFON.

The EU Commission has so far had a lenient approach to state aids to foster VC activity.

Community Risk Capital Guidelines provide a framework for the evaluation of these

support programs by the Commission. If the investment decisions are taken under a

commercial logic and equity investments are used to finance areas where market failures

exist, the guidelines provide a safe heaven for public investments below 1.5 million euros

per year, and procedures that are lighter than those of the regular investigations for

investments over this amount64. The Enterprise Investment Scheme of the UK, which has

similar characteristics to FONFON has recently got an exemption from the Commission

under these Guidelines65.

The state support provided to most of the investments by the FONFON funds will be in

the safe harbor. The amount of state support in the largest likely investment presented in

63 Some of these suggestions about evaluations are based on Lerner (2009, p. 142-152)64 Guidelines numbered: 2006/C 194/0265 Commission decisions numbered: NN 42a/2007 and NN42b/2007

38

Section 5.3 is 2 million USD (40% of 5 million USD) – an amount slightly above the

threshold in the current exchange rate. The fact that the equity investment is provided for

multiple years makes the annual potion even lower.

39

REFERENCES

Avnimelech, G. and M. Teubal 2005. Evolutionary Innovation and High Tech Policies: What can we learn from the Israel's targeting of Venture Capital?. Science, Technology and Economy Program (STE) Working Paper Series WP-25-2005, Neaman Institute, Technion-Israel Institute of Technology.

Avnimelech, Gil (2009). VC policy: YOZMA Program 15-Years Perspective. Paper presented in summer conference at Copenhagen Business School.

Bozkaya, Ant (2009). Entreprenurial Finance: Financing of Young Innovative Ventures. VMD Verlag: Saatbrucken.

Bozkaya, Ant and Josh Lerner (2009). Abraaj Capital. HBS Case No: 9-809-008.

Capital Markets Board (2009) Girisim Sermayesi Yatirim Ortakliklari, SPK Yatirimci Bilgilendirme Kitapciklari 4. Sermaye Piyasasi Kurulu. Ankara

Cummings, Douglas and Jeffrey MacIntosh (2006). “Crowding out private equity: Canadian Evidence” Journal of Business Venturing 21, 569-609.

Da Rin, M. and Penas, M.F., (2007). "The Effect of Venture Capital on Innovation Strategies," NBER Working Papers.

Del Velle, Clemente (2009). Closing the Private Equity Gap: The Role of Policy in Developing Private Equity. Presentation at the World Bank.

Deloitte (2007). Private Equity in Turkey: A Practical Guide for Turkish Companies and Investors. Istanbul

Dhingra, Inderbir Singh (2007). Enhancing Innovation in Mark Dutz, ed., Unleashing India’a Innovation: Toward Sustainable and Inclusive Growth. World Bank.

Gompers, Paul and Josh Lerner (2001). The Money of Invention: How Venture Capital Creates New Wealth. Boston. Harvard Business School Press.

Hochberg, Y.V., Ljungqvist, A. & Lu, Y., (2007). “Whom You Know Matters: Venture Capital Networks and Investment Performance,” Journal of Finance, 62(1).

ISE (2008). Yatirim Ortakliklari ve Yatirim Fonlari. Istanbul Menkul Kiymetler Borsasi. Ankara.

Kortum, S.S. and Lerner, J., (2000). "Assessing the Contribution of Venture Capital to Innovation," RAND Journal of Economics, 31(4).

Lerner, J., (1999). “The Government as Venture Capitalist: The Long-Run Impact of the SBIR Program,” Journal of Finance, 63.

Lerner, Josh (2009). Boulevard of Broken Dreams: Why public efforts to Boost Entrepreneurship and Venture Capital Have Failed and What to Do About It. Princeton University Press.

Lerner, Josh and Stuart Shephard (2009). Venture Capital and its Development in New Zealand. LECG, Wellington.

Lerner, Josh, David Moore and Stuart Shepherd (2005). A study of New Zealand’s venture capital market and implications for public policy. LECG. Wellington.

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Leslie A. Jeng and Philippe C. Wells (2000). “The Determinants of Venture Capital Funding: Evidence Across Countries,” Journal of Corporate Finance 6, pp. 241-289.

Maula, Markku, Gordon Murray and Mikko Jaaskelainen. 2007. Public Financing of Young Innovative Ventures in Finland. MIT Publications.

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Rodrik, Dani (2004). Industrial policy for the Twenty-First Century. Paper prepared for UNIDO.

Senor,  Dan  and  Saul Singer (2009). Start-up Nation: The Story of Israel’s Economic Miracle. Twelve Books: Boston.

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APPENDIX I

List of Inverviewees

Interviewee Institution Date CityAksel Sahin TURKVEN January 15, 2010 IstanbulAsli Kurul Endavour Turkey December 17, 2009 IstanbulCem Sertoglu Golden Horn December 30, 2009 IstanbulGamze Cizreli CEO, Bigchefs December 24, 2009 AnkaraGil Avnimelech Faculty member, Ono Academic

CollegeJanuary 8, 2010 Tel-Aviv

Haluk Zontul CEO, Teknoloji Yatirim A.S. December 29, 2009 IstanbulJose Romano EIF, iVCi January 14, 2010 AthensMete Cakmakci Secretary-General, TTGV December 22, 2009 AnkaraAltan Kucukcinar TTGV December 22, 2009 AnkaraMurat Ozgen CEO, Is Yatirim December 29, 2009 IstanbulOgeday Karahan Partner, Eurasia Partners December 30, 2009 IstanbulOrna Berry Venture Partner, Gemini Funds,

former chief scientist of IsraelJanuary 4, 2010 Tel-Aviv

Selin Ozkan Garanti Yatirim December 18, 2009 IstanbulSuleyman Yildiz CEO, KOBI A.S. December 23, 2009 AnkaraTacettin Ileri Principal, Makimsan (an investee

firm of KOBI A.S.December 24, 2009 Ankara

Tuna Sahin Vice-chairman, KOSGEB January 21, 2010 AnkaraYener Yildirim Turkiye Araci Kuruluslar Birligi December 30, 2009 IstanbulYigal Erlich Founder and CEO of YOZMA January 7, 2010 Tel-AvivYilmaz Arguden Turkey Representative, Rotchild December 18, 2009 IstanbulZiya boyacigiller angel investor December 29, 2009 IstanbulClemente del Velle head of Securities Markets Unit,

IFC/World BankJanuary 24, 2010 Washington D.C.

References to interviews reflect the views of the interviewees and not necessarily the institutions they are affiliated to.

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APPENDIX II

The programs for Turkish government targeted in various parts of innovation ecosystem

Area Name Agency TypeR&D SANTEZ Ministry of Industry

and TradeGrant

R&D TEKNOGISM, ISBAB TUBITAK GrantIncubators TEKMER, IGEM KOSGEB ServiceIncubators Technology Development

ZonesMinistry of Industry and Trade

Tax exemption, credit for construction

Seed capital Incentives for Start-ups KOSGEB Seed capital up to 10k euros

Investment support

Investment allowances Treasury Grant up to 40% of fixed investment value

Credit support Subsidy to interest payments from public banks

KOSGEB Grant

Credit support Credit guarantees Credit guarantee Fund (KGF)

Guarantee

Entrepreneurship training

KOSGEB Centre for Entrepreneurship, university entrepreneurship center

KOSGEB, universities Service

Networking TOBB entrepreneur networks, Istanbul Fashion and Textile Cluster, KOBINET

TOBB, ITKIB, KOSGEB, Endavor

Service

Source: Author’s analysis

43