The Turkish Technology Ecosystem: An introduction
As technology is increasingly becoming the subject of global investment and regulation, with Turkey having emerged as a popular country for all kinds of technology investments in recent years, Norton Rose Fulbright, in collaboration with its Turkish alliance firm Pekin Bayar Mizrahi, is launching a series of articles relating to the Turkish technology ecosystem. The series will explore various aspects of the technology sector in Turkey, with a focus on the legal and regulatory framework, emerging trends, investment models, and recent developments.
Overview
In an article appearing in The Financial Times last year, Turkey was described as “a star of European tech,” which comes as no surprise. Turkey has a young and tech-savy population, with a median age of 32. It has one of the largest talent pools in Europe and the MENA region, with more than one million university graduates per year. Turks are also avid technology, and specifically, social media users: according to statistics from the Turkish government, Turkey is the sixth largest market for Instagram, the seventh largest market for Twitter, the ninth largest market for TikTok, and the 12th largest market for YouTube globally.
Furthermore, Turkey has recently become a significant hub for startups: the Turkish startup ecosystem produced a decacorn, Trendyol, and three unicorns, Peak Games, Dream Games, and Getir – all in less than two years. In the MENA region, Istanbul’s startup ecosystem is regarded as second only to Tel Aviv’s.
The COVID-19 pandemic fueled investment to the country’s technology companies, both domestically and internationally. The various quarantine and stay-at-home orders, currently lifted, shifted the focus to sectors including but not limited to, e-commerce, delivery services, digital transformation, and online and mobile gaming.
Turkey’s technology ecosystem also boasts a diverse array of players, which enables both stability and innovation. Key players include, in the main, (i) established local players, that is, Turkish companies and banks with considerable footprints in Turkey and the region more generally, who have been present in the technology sector for quite a while and who enjoy a “first-mover” advantage; (ii) established international players, that is, technology companies and investors who are and have been present in Turkey and other jurisdictions for a considerable time; and finally (iii) “newcomers” to the field, namely a number of breakthrough startup companies that have emerged from Turkey and some of which have already started to expand globally. These newcomer Turkish technology startups have successfully leveraged their entrepreneurial spirit as well as their young and engaged human capital to create rapid growth. They have also been helped by the fact that their chosen areas of investment have large target audiences and appeal both in Turkey and worldwide. As Thomas Vita, partner at Norton Rose Fulbright LLP’s London office, remarked at Harvard Business Review Turkey’s recent summit on “The New Era of Technology Investments,” technology investments in Turkey are predominantly in the cryptocurrency, delivery, e-commerce, fintech, and mobile gaming sectors.
Trending sectors
Delivery and e-commerce lie at the heart of Turkey’s recent success in the international markets. Getir (literally “bring” in Turkish), the Turkish e-grocer that boasts a disruptive and lucrative business model with its promise to deliver groceries in 10 minutes, is now among the world’s leading companies in the delivery business. Founded in 2015 as a small Turkish startup, Getir has offices with delivery capabilities across many Turkish cities, prominent European capitals such as London, Berlin, Paris, and Amsterdam, as well as more recently, select destinations in the US, including New York, Chicago, and Boston. Headquartered in Istanbul, Turkey, the company, now valued at approximately $11.8 billion, employs more than 30,000 people worldwide. Trendyol is another example of Turkey’s recent success in the delivery and e-commerce sector, becoming Turkey’s first decacorn. Backed by Alibaba, the Chinese multinational technology and e-delivery company, who also owns a majority stake in Trendyol, the Turkish startup is valued at approximately $16.5 billion, and has recently announced its intention to go through a dual IPO, with one arm at the Istanbul Stock Exchange and the second arm possibly in New York or London – the IPO will take place once the company’s revenue outside of Turkey rises to 30-35% of its overall revenue. Hepsiburada, another Turkish online retail company, has actually gone through an IPO and is now listed on Nasdaq under the ticker symbol HEPS, becoming the first Turkish company to ever do so.
Mobile gaming is another trending sector in Turkey’s technology ecosystem, enabled by Turkey’s strong telecommunications market: an overwhelming majority of Turks use smartphones – 90% by some estimates – and smartphone ownerships continues to increase rapidly. Peak Games, a mobile game developer founded in 2010 and described by The Wall Street Journal in 2012 as “[a]mong Turkey’s fledgling start-ups,” became Turkey’s first unicorn following its acquisition by Zynga in 2020 for $1.8 billion. Dream Games, another Turkish mobile game developer founded in 2019, is now valued at approximately $2.75 billion, and broke a record when it became the fastest Turkish startup to become a unicorn. In addition to these two companies, in 2021 alone, Turkey was host to 52 gaming sector transactions, with a total volume of $265 million.
Cryptocurrency remains an attractive sector for many Turkish businesses, especially for emerging Turkish startups. According to analysts, as of 2021, Turkey had 40 cryptocurrency exchange platforms and around five million investors, making it the number one host of all cryptocurrency transactions in the Middle East. Turks’ interest in crypto assets stems partly from the loss of value of the Turkish Lira in recent months, with Turkish investors wanting to save their savings from devaluation. Another major reason behind the popularity of cryptocurrencies in Turkey is the relative regulatory freedom investors and providers enjoy: barring a number of generally applicable anti-money laundering rules and the prohibition on using crypto assets as a means of payment for goods and services, the regulatory framework governing cryptocurrency-related transactions is fairly non-prohibitive. There have been talks at various government institutions to regulate cryptocurrencies more closely, but no solid outcome has been reached yet.
Established sectors
The Turkish technology market is, of course, larger than the trending sectors described above. Yet, these trending sectors can be expected to continue to lead much of the growth and innovation in the market in the foreseeable future. That being said, the Turkish technology ecosystem is also comprised of more “traditional” sectors with established players.
Telecommunications is one such sector, which continues to demonstrate keen growth. Turkey’s ambition to switch to 5G, which is likely to happen in the near future, is among the leading reasons why telecommunications is and will continue to be a key sector for investors. Among the key players leading Turkey’s inevitable 5G transformation is Turkcell, the leading mobile operator in Turkey as well as the only Turkish company listed on the NYSE under the ticker symbol TKC. In addition to being listed on the NYSE since 2000, Turkcell is also listed on the Istanbul Stock Exchange. According to a Global Monitor report, the COVID-19 pandemic has had a “negligible impact on the Turkey telecom industry,” as people staying at home under lockdown increasingly turned to live viewing and video-on-demand. Relatively unaffected by the pandemic, the sector can be predicted to continue to grow.
The banking and finance sector in Turkey, another well-established sector, has become increasingly reliant on innovative technologies, a move that has been accelerated in response to the pandemic. FinTech-based solutions adopted by a multitude of banks and financial institutions in the country include, but are not limited to, pre-paid cards, digital wallets, invoice and accounting technology, credit scoring, cash withdrawals using QR codes, and innovative money transfer technologies.
The automotive sector, too, has kept growing both before and during the pandemic. According to official figures from the Turkish government, since 2000, the total investment volume of global brands in the Turkish automotive sector has reached $16 billion. By some estimates, Turkey is the world’s 14th and Europe’s 4th largest automotive manufacturer, nearly 74% of its vehicle production targeting international markets. Further, Turkey aims to develop its own high-tech, electric vehicles and offer them to the market in the very near future.
Turkey has also witnessed an uptick in activity in its defense sector, which is highly dependent on technological innovation, software development, and R&D activity more generally. Turkey consistently ranks in the top 20 countries with the highest defense spending, and has made headlines with its recent investments and developments in military airfare, including drone production in particular.
Investment models
Investing in the Turkish technology ecosystem can take several forms. Private equity (“PE”) and venture capital (“VC”) firms have been popular investors in Turkish technology companies. PE investments are typically structured as buyouts where the investor acquires a certain shareholding percentage of the target technology company, subject to a shareholding and share subscription agreement. In 2021 alone, Turkey was home to 390 M&A transactions, a record high not witnessed before, at least since 2012. Of these 390 deals, 22 were PE transactions, with a total deal volume of $2,272 million, significantly surpassing 2020’s figure of $1,032 million.
Venture capital (“VC”) activity has similarly witnessed an uptick or rather a boom: in 2021, 217 of the total number of M&A transactions were VC deals, with a total volume of $1,891 million – a more than 800% increase in VC deal volume compared to 2020’s figure of $201 million. Traditionally, PE activity in Turkey has focused on a broad range of sectors such as manufacturing, energy, financial services, and more recently, technology. VC activity has traditionally been somewhat more focused on technology, gaming, and e-commerce.
Securities offerings are an alternative route to structure technology investments. An initial public offering (“IPO”) on Borsa Istanbul, Turkey’s sole exchange, is a process that is very similar to listing on many of its international counterparts: companies must produce a prospectus that includes financial information about the company and other material disclosures, and comply with other requirements set out by Turkey’s capital markets regulator, the Capital Markets Board of Turkey. Also, private placements under Regulation S and Rule 144A, exempt from many of the listing rules and regulations, are increasingly attracting both Turkish and non-Turkish businesses wishing to enter into offshore offers and sales of securities.
Special purpose acquisition vehicles or SPACs, a popular alternative to a traditional IPOs, are yet to take hold in the Turkish market. SPACs offer various advantages to investors over IPOs, including a potentially faster timeline, more certainty of execution, and a potentially larger infusion of capital. Despite the current volatility in the current markets and the declining prices of technology stocks, Turkish technology companies who have traditionally looked to PE or VC financing, and who wish to list on foreign stock exchanges, could consider SPAC transactions as a viable alternative.
Conclusion
Turkey has long been regarded as an investment site for energy and infrastructure companies. While that still holds true, over the years, Turkey’s technology ecosystem has proven to be as attractive to both domestic and international players. Recent developments in Turkey’s startup ecosystem has only strengthened investors’ conviction that Turkey is a major hub in the global technology market, who should and no doubt will avail themselves of the significant growth potential Turkey has to offer.
