Raising a VC fund in Turkey

Since we decided to start a Venture Capital fund to invest in early stage companies in Turkey, we’ve been working around the clock to raise money and create a strong deal flow. My last post was about our deal pipeline and we are happy to say that we have a solid list of companies on our potential deal list getting stronger every day.

Fund raising is also moving forward albeit with some challenges due to being pioneers.  We want to make sure that we are doing things in the right way. I must say it is extremely pleasing to meet people who share the same vision with us want to join us as Limited Partners. We are just at the beginning of this long journey. Despite some negative feedbacks such as “not possible” or “won’t happen here,” we are confident and committed.  We already received some commitments from some LPs and will continue to do so, until we reach the number we would like to raise.

European Investment Fund (EIF) has a matching program to invest PE/VC funds in Europe. We already initiated our application to have them as LP to our fund. If we receive matching fund, we will be the first VC fund in Turkey to receive fund from EIF. 

Return for the Jedi

With every new meeting I get more impressed with Turkish entrepreneurs’ grasp of the valuation concepts. I assume this is due to the widely available material on the web.

One notion they do not seem to think about, however, is the return an investor will require from any cash outlay.

If a pencil is worth TL1, I, with the investor hat on, will not pay 1TL for it…

While this might have to do with my idolizing of Scrooge McDuck at an early age (…), it actually has its roots in my ‘quest’ for a return. I need to put my money where I will get a profit, so I can satisfy my investors and feed myself. The return I might seek tends to differ between a company and a BK whopper, yet it is still the same concept:

I need to profit from the trade, which can only happen if the return I get at the exit (OK – stop thinking about the whopper here…) exceeds the one I can get on a similar investment with comparable risk characteristics.

And how do you calculate the return an investor will get at the point of exit. I like the clear explanation in Wikipedia, so please take a look there:

http://en.wikipedia.org/wiki/Internal_rate_of_return

And what kind of an IRR do I have in mind when I invest? Now, that will be the topic of a later post.

Startup Company Valuations and the Offers We Encounter

To my surprise, the valuation expectations of start ups are at reasonable levels. This might be due to the cash squeeze that is still affecting the market, especially for illiquid investments. The discount rates used across most sectors, no matter how mature, are still high, due to the last decade full with fluctuations and daily crises.
 
On the other hand, it is somewhat disturbing to hear about the number of predatory offers investors make on solid teams of entrepreneurs with good ideas.
It is one thing to discount a candidate heavily, to compensate for the risks & to guarantee a return.
But it’s quite an other to demand +50% equity stakes in 1st rounds of investments, limiting the upside potential for the entrepreneurs severely, not to mention the ‘ceilings’ imposed on follow on rounds.

Building deal-pipeline & some news

While we are meeting with potential LPs (Limited Partners) to raise 212VC fund, we are constantly adding startups to our deal-pipeline. So far it has been very encouraging to see quality entrepreneurs starting businesses in Turkey despite the global turbulence in economy. Last week alone, we were introduced to six new startups.

Building a pipeline is not a simple task. Talking with entrepreneurs, understanding their approach, seeing the values and risks, and most importantly working together with entrepreneurs to help them achieve their goals  take a lot of time and effort. Nevertheless, I am confident that things will be easier as the market evolves.

There are some good news in Turkey I would like to share. First, investments: Vistek received an investment from Isra Vision AG and changed its name to Vistek-IsraVision. I’m guessing it is an exit to founders and investors.  In addition, Artesis received an investment from GE.  Last but certainly not least, e-tohum, an incubation house in Istanbul, raised $170,000 to invest in e-tohum companies in 2011. I’m very happy to see incubation houses and seed funds are starting to happen. This will only help grow the ecosystem.

212 Venture Capital is started

It has been over eight months since I moved to Istanbul from New York. My initial goal was to start an incubation program to help first-time entrepreneurs and early stage technology companies. Program was going to be similar to Y-Combinator model in USA. However after spending some time in Istanbul, meeting key players, and some extensive networking, I decided to initiate an Early Stage Venture Capital Fund. That’s how Ali Karabey and I decided to establish 212 Venture Capital.

212 Venture Capital fund will not only invest in startups but at the same time will continue to mentor and advise portfolio companies after the investments. Our goal is to work side by side with entrepreneurs to keep the momentum and become enablers for their growth. Our investment targets will be mostly early stage companies and some late stage businesses that can use our value-added services.

We will be working together with main players in the market such as incubation centers, Teknokents (technology parks in Turkey), Universities, R&D centers and angel networks. Our goal is to expand the eco-system and bring new startups to market together where they can generate successful businesses. Our strong core team and broad network provide global reach to portfolio companies.

We are very optimistic about Turkish market and believe the timing is right. Currently we are at funding stage and looking for investors around the globe. If you would like to receive further information about the market or become investor, please feel free to contact me.