Pando

Startup Risen: Istanbul and Its surprising neighbors

By Christopher M. Schroeder, Guest Contributor , written on November 9, 2015

From The Lessons from the Trenches Desk

Turkey has been featured regularly in the Western news of late.

Significant elections this month have the country on tenterhooks as it decides its political future. Being on the Syrian border, with hundreds of thousands of refugees in the country, it is a significant player in that impossible situation. A microcosm of it all tragically broke through last month, when a bomb ripped through a peaceful demonstration killing or maiming dozens in Ankara.

There is something else, however, happening in parallel, something not seen as clearly from America – it’s important and greatly hopeful and common to many nations navigating their way into the 21st century.

Recently I attended Startup Istanbul, a remarkable gathering of over 2,000 entrepreneurs, innovators and investors from across Turkey and Central Euro/Asia more broadly – the Middle East, North Africa, Africa, Indonesia; Bulgaria, Croatia, Hungary, Greece, Estonia, Russia and former Soviet Union generally. I personally counted over 50 entrepreneurs from Iran. For the first time, several entrepreneurs were from Gaza. I could not get over, though I say it often, how the reach and ramifications of technology are changing everything everywhere.  

As I reflected upon the first Arab world startup pitches I saw four years ago – impressive enough without my narrative bias at the time – I was astounded by the quality of cases laid out now. I sat through 56 separate pitches – of hundreds looking to receive recognition and cash – and must have met another 50 or so entrepreneurs independently. Certainly, not every company was great or even fundable. Some were dead on arrival. But the preparation, quality of pitch, thoughtfulness of answers was a night and day difference from my earliest experiences.

Regardless of where they were from, the entrepreneurs shared similar opportunities – rapidly growing mobile, broadband and smart device penetration; significant younger and wired populations who regularly see how the rest of the world lives; significant opportunities to solve problems in education, communications, health and more. Many complement their educations reading the same blogs, taking the same courses, gathering in similar start up communities on- and off-line as do their peers in the West. Angel investment is rising, talent in engineering and beyond is a tiny fraction of the cost of anywhere in the West.  All have a hustle to work around daily challenges unfathomable to most of us in the U.S., and a comradery –emerging market to emerging market – because of these shared experiences. There’s a common belief that these trends are in their earliest days with enormous tail winds.

At the same time, they express very similar frustrations. They are still a part of nascent efforts not yet fully accepted by their broader economic ecosystems. They face generational cultural issues resistant to startups and risk, and they confront difficult to navigate rule of law, corruption and dearth of experienced, world-class managerial and engineering talent (specifically with scaling skills). There are relatively few investors beyond the angel stage, and the ones who are there too often try to abuse them in absurd term sheet demands. There is virtually no growth capital. Payment systems are often limited (some countries use credit and debit cards online, others do not and rely on COD. Paypal is sometimes present but not dominant. New payment startups are interesting but still very early.  

A large proportion of companies are improvisations based on successful companies in the West – in eCommerce, last mile logistics, deliveries, local services, local language in particular.  I am convinced that these will offer some of the best opportunities in the short to medium term from an investment perspective across all growth markets.  When you sit and listen about the legal, logistical, and cultural uniqueness in each country/region, it is clear that the arrival of Rocket, Ali Baba, Amazon and the like are hardly assured, or will require them to buy some of these companies. I got an earful of what it is like to navigate the regulatory, payment and street setup challenges by a young man building an Uber of sorts in Bangladesh and another in Kyrgyzstan.  I loved a comment from the latter:  "Most in Kyrgyzstan have mobile devices, many have smart devices, and everyone needs to get to somewhere. Oh, and I don't think Uber is coming here any time soon..."  

The trajectory of a diapers.com and an ecommerce furniture platform in Turkey are impressive, supported by a leading Istanbul accelerator, Collective Spark, as much in how they navigate challenges in reliable delivery as their products themselves. The talent and companies of Pakistan were impressive, many locally focused but for sizable markets. One platform diagnoses potential car mechanical problems and, with terrible traffic and regular government-mandated service requirements, schedules fully loaded auto mechanic vans to arrive at people's homes to make repairs.  Another was building a security platform that hacks hackers back when they attack. That founder, by the way, is 17 years old.

There were dozens of platforms for people to share work and tasks from home.  There were local interactive media companies galore. The Wikipedia of the Arab world, reaching over 13 million, was founded by a young Palestinian. The BuzzFeed of Turkey does over $10mm in revenue and is growing rapidly. Edtech companies focusing on local language and localized curricula seemed to be everywhere, though nearly every kid I met had viewed countless YC videos, a16z podcasts or Coursera courses. Some of these enterprises will not grow beyond $20 mm; some clearly could be $100 mm or more. Some will exit earlier than they should. It was hard to discern the ever-craved "unicorns" among them, but I'm not sure why this matters in these markets at this stage of history. The market sizes, universal tech adoption, and per capita income increases across every one of these markets suggest large opportunities for those who especially dominate their own sizable markets and/or can span multiple countries. The recent Yemeksepeti exit (the Turkish Seamless food delivery bought by Rocket for $600 mm) is viewed as a "model" to many – hit your local market hard, own it, expand a bit in related markets, win.

This is not to say there weren’t many global ambitions. An ecommerce site for women that sells a host of hijabs, focused only on Turkey, does 15% of its business now in the US and Canada – without spending a dime to market there. The winner of the pitches was a mobile payments company from Kenya, utterly steeped in the unique experiences rendered by mPesa. An Indonesia startup that is a tech platform to connect local tiny farmers to a broader economic grid from their mobile devices fits the unique community needs of thousands of farmers around their islands – but the founders believe they share similar traits and needs and thus offers services that could have significant impact among small farmers across South East Asia and Africa.  A gaming company from Bulgaria has created a platform of competitions where lesser players have shots at not only winning awards but hard cash (hundreds of dollars) as the younger global players aspire to be like their millionaire gaming rockstars – the platform has users around the world. Turkey in particular has some superb platforms on social advertising – but like other software pure plays will run into the fast-paced competition in the West. There was plenty of talk about the regional applications of 3D printing, Bitcoin and the like – but no asset that jumped out yet.  

The venture capital industry in Turkey – as in most growth markets aside from China and India – is nascent. There is increased angel activity and some useful accelerators (which are more valuable in these regions than they are now in the US). Early Bird has raised over $150 mm for A rounds, but also invests in angel both for the opportunities they present but also to simply deploy capital. Some well-known families have venture arms (one of the pioneers has deployed $60 mm to date, though not only in tech startups). Goldman's local office is allegedly looking for startups to invest in, but it feels more like a way to support wealthier families whose private client services they covet. Several new funds for Turkey and related countries are being raised with the hopes of reaching $50 mm. I was surprised not only to see Naspars there, but to hear them say they would "go very early and small" as a way to build toe holds in these markets.  Beyond me, Dave McClure – who announced a new $15 million fund for Turkey – and guru Steve Blank as speakers, there were not more than a handful of other gringos in attendance.

The event was a created by Burak Buyukdemir, a respected leader of the ecosystem in Turkey and in other markets, along with a remarkable staff who ran it all meticulously. Buyukdemir founded Etohum, a leading accelerator and seed investor (to the tune of 80 startups) in Turkey.  He has no doubt that the future of the Turkish economy, and most growth markets, will be driven by innovation and software. He told me, "We aimed to build a country where angel investors believe in the startups and grow exponentially each day to help make entrepreneurship a serious career alternative, a popular university course and a prioritized item for governmental bodies in making prospective legislations that would leverage the current ecosystem deeply."

He has been pleased by how much has changed in Turkey over the past five to seven years, amid great uncertainty. "The situation now is really different. Not only are we seeing great acceleration of quantity and quality of startups, but also other investment networks, universities, NGOs and governmental bodies." The numbers are impressive – Buyukdemir and his team have received over 12,000 startup applications in recent years, interviewed 1,900 of them face-to-face, and hosted over 70,000 participants in person with another 400,000 online.

The takeaway is clear. The new century will not come without challenges and legacies from the last – and emerging markets have never been for the faint of heart.  But unprecedented and  near universal access to technology is unleashing a new generation to find their own voices – politically, culturally, and certainly in their economic ambitions.  They are quietly building a new and parallel future for themselves and their communities beyond the negative narratives favored in the Western press.

Western investors, take note.