“The ones who underestimate experience, pay a high price for inexperience.”
May 2020

Private Capital Transactions in Turkey and Environs Going Forward | 13.05.2020

Online Brainstorming Session-4


Participants; Cenk Bayrakdar – Managing Director, Revo CapitalMete Çakmakcı, Secretary General, TTGVFadi Ghandour – CEO, Wamda CapitalErhan Kılıçözlü – Managing Partner, ACT Venture CapitalAltan Küçükçınar – Partner, Diffusion Capital PartnersCem Sertoğlu, Co-Founder and Managing Partner, Earlybird Venture Capital and Barış Öney  Founder and Managing Director, Globalturk Capital and EMPEA Turkey Representative.

Highlights of the Session

The VCs who have attended our Brainstorming Session have been investing in Turkey, Eastern Europe, Middle East and in the US and Europe for quite a long time, some since 2000 and some since 2015. They’ve invested in technology companies in a number of sectors, e-commerce and digitalization mostly on the software side among others to date. 


The funds they manage include DFIs as well as foreign and Turkish LPs from western markets to Middle East as investors. It was therefore a very informative fact and idea sharing session where we found it very useful and had a number of takeaways. 


A Snapshot of the Current Status:


The founder of Wamda Capital, has been investing privately in technology for many years, where many big names came out of those investments like “Maktoob.com” sold to Yahoo in 2009, then “souq.com”, which was sold to Amazon. He then launched a venture fund called Wamda Capital, which was anchored by the IFC, but he continues to be the largest investor in the fund. Wamda invests mostly in MENA region, Turkey and East Africa


Traditionally the GCC regional business community were either in retail, representing global brands, or in real estate, as well as in contracting working with government contracts. During this pandemic, with the retail market practically shut down, the business community felt the pain especially those that did not invest in building a digital presence. This has created a rush by the big brand retailers to either build their digital presence or to list their products on regional market places like noon.com or amazon.com. This will also push a lot of the big merchant families to start investing in the digital space which they have historically shied away from.


The COVID-19 crisis not only has accelerated such investments, but caused regulators to act upon it as well. They are now rushing to regulate, specifically the FinTech applications because in Saudi Arabia for example, the government issued a directive prohibiting last mile companies to accept cash on delivery, which is about 80% of the e-commerce deliveries in Saudi Arabia. 


The e-commerce companies are doing well, even the non-discretionary ones. These e-commerce companies in the past two months have recorded high growth and their customer acquisition costs gone down, because they didn't need to advertise as much. So, unit economics are improving tremendously. No major disasters in general have happened yet, but failures in the upcoming months are expected. The investment appetite is currently poor. Both the large family groups and the VCs are focused on their own portfolio companies. They are keeping their dry powder to themselves in case required for the current portfolios, despite the fact that there is a good pipeline with low valuations. 


There have been lockdowns in the Middle East similar to many countries in the World, but slowly the countries are opening up. However, with the slowdown of the economy, coupled with lower oil prices, serious challenges are ahead. Saudi Arabia for example just announced last week to triple its VAT from 5% to 15% starting 1 July. In the UAE though, it's been exactly the opposite, where they have announced big stimulus plans, specifically Abu Dhabi. 


Earlybird Venture Capital is observing different behaviors in their countries of operation. Their Eastern European portfolio companies are largely globally positioned, where many of them have moved their headquarters to the west. They are mostly B2B businesses, and looking at the last two months of operations, they seem to be doing fine as compared to the consumer facing impacts like the retail closings. So that part of their portfolio so far is showing resilience. However, two of their portfolio companies in the transport and travel industries, one in Turkey and the other in Romania, naturally got adversely affected primarily with the travel bans. Thankfully, the Turkish company serving the transportation sector had raised money in Q4 2019 and had a few cashflow positive quarters before that. So, they got caught into this with significant cash reserves in the bank. And it's a lean company, which is expected to do fine. Their Romanian portfolio company, that is serving the travel sector with their software as a service product. Their clients have been seriously struggling and the company is having hard time coping with the situation. 


Earlybird is more concerned with the unprecedented unemployment numbers coming from the US; 25 million or so newly unemployed people just in the month of April. This is a strong indicator of a recession not just from the supply side but also from the demand side, which could possibly take quite a long time to recover from. A new commercial world is expected with new types of budgets to include significant IT spending for digitalization of companies. Everything many technology practitioners were preaching for, all of a sudden is now getting materialized. However, they cautiously plan for many challenges ahead for their portfolio companies. 


The most popular company in Revo’s portfolio was “Getir” a challenger mobile only grocery retailer and delivery company. Their volumes tripled during the pandemic and they’ve been coping with this surge in demand extremely well. The management is scaling the company in a very uncomfortable environment very professionally. And this company has been getting a lot of attention and strong interest from the investors currently during its fundraising roadshow. The company is targeting to raise $100 million to go international.  


Another investee company, Logiwa who is in the warehouse automation and warehouse management business in the US, is doing well also, where their transactions increased more than 12 times during the pandemic. However, on the downside, the portfolio company in Germany, Zizoo who was the largest marketplace for boat rentals in Europe, almost stopped its operations. Even though Zizoo had a strong performance in the first 2 months of 2020, the negative impact of the travel bans and flight cancellations on the global travel industry, significantly affected their revenue. They went from €4.5 million of sales per month to €0.5-1.0 million levels. Revo, swiftly took action and closely worked with the portfolio companies to take necessary cost optimization measures to manage the cash flow and prepare them for the "new normal". 

The good thing for this German company was that the German Government implemented flexible solutions and allowances for employees, covering a good portion of the personnel costs for companies. The companies in the US also got supported by the government, through the Paycheck Protection Program. The program granted forgivable loans to SMEs to cover 3-months of essential expenses including rent and personnel expenses, with the main goal of reducing layoffs. In addition, every U.S. citizen received a paycheck ranging from $1,000 to $2,400.


The portfolio companies of Diffusion Capital Partners so far are doing well. One of their portfolio companies is in the food sector, producing bee products with propolis, which supports the immune system. They doubled their sales since the beginning of the crisis. On the other hand, their investee company jointly with Revo doing retail analytics is not really performing at all, since all the malls were closed for almost 2 months. 


This crisis is expected to change the status quo in Turkey. Hopefully, there will be more digitalized and more efficient businesses thriving out of this pandemic. People all of a sudden realized that investing in real estate and other non-industrial and non-technical sectors have suffered big time. Taking this into account, there probably will more interest in the B2C businesses in Turkey, both from the domestic and international investors. Though these are very tough times, Diffusion is optimistic for Turkey and for their investee companies.


ACT Venture Capital, who has deployed €23 million to 16 companies to date, is of the opinion that the investment appetite is better than expected. Though, all this unemployment in the world sounds very scary, funds and deals are getting closed. Perhaps all the money that was poured in by the governments, has generated comfort and cash for investors. Four of their portfolio companies are in investment discussions. These are deals in half a million to 1.5 million euros of transaction sizes. Two of these had started investment discussions prior to COVID-19 and investors haven’t pulled back. These two transactions are expected to close next month consecutively. The dry powder the private capital funds have is probably helping in attracting investments. 


Of course, there are poor performers in the portfolio as well but the sharp drop in sales are levelling off recently, now that the acute crisis period being eased up slowly.


Looking deeper into their portfolio, they have two medical devices companies, where one of them did very well since they produce a spirometer. The company entered the COVID-19 crisis with a small inventory and with the demand surge they had to make arrangements to produce more. So, this particular company benefited the most from this situation. Within their portfolio, only one is a B2C company based in Chicago. The rest are in the enterprise software, B2B and in the marketing and advertising sectors. 


Also, three of the portfolio companies thankfully had raised money right before Corona between December and January. As long as this pandemic doesn't get nastier, their companies will just do fine. 


ACT’s bigger concern would be that the markets have already been on a bull market rally for 12 years. So, there already was a blip in the market in 2018 and the FED already had started cutting interest rates. It would be interesting to understand if it can ever be that, whether all this market turmoil was only because of Corona, or was it about time that some correction came? Probably the two may have coincided. And that also is parallel with the drop on oil prices coupled with the poor performance of the emerging markets in the past five years in the first place. This indicated serious issues about growth globally, and COVID-19 came as a big blow on top of it.


According to TTGV, one of the largest Turkish LPs, their portfolio GPs are pretty much in control of their investee companies. It would be interesting to watch the temporary and permanent shifts in their funds’ strategies. Some of the winners picked would possibly be needing extra cash to manage their expansions down the road.


TTGV also does program investing, where they have been focusing on health and just recently on food safety and food security. And Government further has been inquiring for TTGV to expand into educational technologies. The Government seems to have fully recognized two important issues coming out of this crisis. One of them is that Turkey is a specialized manufacturing country. But unfortunately, there are lots of gaps in the value chain primarily in raw materials and intermediary products; most of which are imported, creating a barrier. Therefore, there could be new industrial policies to overcome such dependence. 


The other main area the Government is focusing on, is to make big ticket capital investments in the health and educationsectors especially on distant learning. There are discussions to secure external funding needs from the DFIs for those projects. 


The technology sector hasn’t seen much of the crisis effect yet, like other sectors where blue and grey collar employees are dominant; for them the times are tough. While many of the software companies are still in their comfort zones working from home, and most of their revenue streams are still intact, such businesses are suffering severely financially. Eventually some of the technology companies, especially software companies could start to suffer if the pandemic continues with its pace beyond summer. There could be strong ramifications for the technology companies, since they'll probably be losing most of their contracts and recurring revenues. 


DFIs are coming up with financial support packages. IFC acted fast in the beginning and committed to support their GPs. They expect to release a package in June. The plan is to give each fund €15 million but no management fees for that portion. Additionally, for every dollar invested from that portion by the fund, IFC could match that with 2 dollars. This is still yet to be finalized but the thinking seems favorable to GPs. EBRD on the other hand has announced a billion-euro worth of a solidarity package to put money into their existing funds mostly for their working capital needs. The German Government also is coming up with a new package, for the GPs who have EIB or KFW in their funds. They provide 50% of the investment amount when an investment is made. 


According to Wamdathe Middle East have two sets of investors other than VCs and angel networks; the family offices and the sovereign wealth funds. Family offices currently are not thinking much of new investments since they are heavily hit and still in a firefighting mode for their own businesses. On the sovereign wealth funds, each country has a different set of approach


Bahrain for example, has $100 million fund of funds and they've been funding up to $10 million per fund as long as a senior person is placed in that country physically. The sovereign wealth funds could get aggressive and they could start investing heavily in technology since it is very strategic. However, in the short term, there seems to be not much optimism. Many of the countries in the region, and specifically in the UAE it is a real estate and tourism-based economy and that has been completely obliterated. So, there are serious challenges that they need to work on to find ways to revive the economy.  


Transactions Online:


On another note, in the new era it seems like there will be more virtual transactions happening. Earlybird’s investment activities continued during the pandemic and they just signed a new term sheet, where the conversations started in Q4 2019 with the target company. This has been the first term sheet signed without having a face to face interaction with the management team. Also closed a transaction right before the pandemic, so they feel they are keeping the right pace. 


In addition, they have investments across a wide geography, where physical interaction with some of these companies is actually quite little. There already was a very limited physical interaction with many of their portfolio companies. Over time they expect to get better at these virtual meetings. Over the last two months, they felt their effectiveness level in some of these video conferences has improved.


ACT had one exit, which they managed to close when Corona was just starting. They sold a small company to Amazon. It was a US incorporated company but the team was based in Turkey. It was an interesting deal, where the company approached Amazon as a client, but instead Amazon made them an offer to acquire. 


With the accelerated developments in the FinTech area, security management and infrastructure, where players are quite well placed and well positioned to be able to innovate, such online interactions will improve. 


Revo and Diffusion also feel quite comfortable in running transactions online but note also that person to person interactions are not yet replaceable. One may not have to visit the premises initially, but at some point, physical interaction would be necessary. It would require more time to shift to a completely online experience of deal sourcing and transaction. 



Fund Raising Efforts:


According to Revo and Earlybirdnot much has changed as compared to pre-corona times as far as fund-raising was concerned. Apart from the DFIs, who support the VCs very highly, the interest levels from the private investors remained the same, being extremely low. This is expected to change with some major exits and new stories ahead. 


On the other hand, Turkish corporates have an interest to build corporate venture capital, but they are also on-hold for the time being. Revo, in its previous fund, has raised funds from two banks, one holding company and one energy company. One of them was also considering investing in the second fund but they froze their talks. Now they are opening up since there is a necessity for digitalization now. Everybody has seen the great necessity of FinTech investments for example. There is a great need for KYC and FinTech regulations. And Turkey may have a good chance there. Some of the very large Turkish groups are now interested.  


Earlybird has now have a fresh new fund, which they raised almost just before the pandemic in December 2019. It is €136 million today and targeted to reach €175 million with the additional investors signing up, where the leading one is expected to be EBRD. This vintage could just be at the right moment in time for significant returns down the road, where valuations of companies have seriously dropped with the pandemic. Similarly, the 2000-2001 and 2008-2009 recessionary period vintages have brought great returns for their investors.  However, they are taking it slow and cautiously in order not to jump to any premature conclusions. 


Revo completed the first  close of their second fund with €41 million with EBRD and EIF on board. With IFC possibly joining by the end of this month, they are targeting to reach €54 million. During the lockdown, Revo also invested in an augmented reality company, CYVision providing 3D head up displays for next generation vehicles, from their second fund. 


Diffusion has been conducting negotiations with two strategic investors from the UK and US for rounds into portfolio companies, where both started during the crisis. But no matter what type of a portfolio one has or how well it is managed or how much attention the companies get, fund-raising for a fund from international players is extremely difficult. However, they expect their next fund to be closed during summer. The Turkish Treasury is expected to be an anchor investor together with EIF and more DFIs coming on board in the coming months. The fund will have several leading universities as LPs, as well. 



New Opportunities Ahead:


Diffusion is of the opinion that one other factor, where the VC opportunities may arise is due to the increased importance of local manufacturing. Countries realized that having manufacturing capabilities locally for strategically important goods is paramount that they should not rely on other countries such as ventilators for example. Turkey, having one of the highest proportion of GDP coming from manufacturing among European countries, is likely to benefit from this shift as a manufacturing country, which will bring many opportunities for the VCs as well. 


ACT’s observations on the 2013 hype of investors investing in IoT related businesses was poor and such a surge did not materialize back then. With the current changes, it could become a bigger part of the VC investment agenda. And actually, such approaches are being seen. 


Revo, decided to allocate 10% of their new fund for health IT investments, mainly on telemedicine diagnosis, but always on the software side. Though they have two hardware companies in their first fund, their observation is that such companies are very capital intensive. It is first of all very hard to become a brand in hardware. They probably have one of the best IoT companies in Turkey, which is producing smart thermostats. Cosa Smart Termostat decreases gas bills by 30% when installed. It was integrated to Arçelik and the Japanese Daikin, but still a lot more money is needed to keep it going further. It is needed to handhold the company for so long until it is EBITDA positive and the valuations are based on EBITDA multiples, where private equity or strategic players get attracted. 


On the contrary, software companies are valued over revenue multiples. Private equity funds at best are looking into such companies at 1.5 to 2 times revenues. This means one needs to increase the revenue so much that, first it recovers for the revenue multiple gap, say 10 times, then it could make money. So, the private equity fund and the VC mentalities are so way off


According to TTGV, the Development Bank of Turkey could play a catalytic role to bridge this gap. A “venture-equity” product is needed. They could carry this important mission to bridge the funding gap between the VC funded companies to carry them forward to private equity funds and bridge this gap. In lieu of the new industrial strategy, Turkey’s Wealth Fund may further assume a more active role supporting expansion and acquisition of strategic Turkish technology firms to grow those firms to international scales. Such investments could be done directly by the Turkish development banks or via the private equity or VC funds investing in Turkey.





VCs in Turkey and in the region in general are doing well both in terms of coping with their current portfolios and their exits. They have been also looking selectively into investment opportunities. DFIs have been supportive in searching for ways to support them for their extra cash needs as well as during their fund closings. Not only DFIs but in few cases new private investors considering investing, is encouraging. 


Turkish corporate VC players, who were on-hold in their investments also slowly started looing back again. The portfolio companies who positioned themselves globally in e-commerce are doing well but the ones in the retail, real estate, travel and transportation businesses got hit hard. The pandemic hit the Middle Eastern investors very seriously since traditionally they’ve been investing in oil, retail and real estate, all of which have been suffering. Major countries in the region are increasing taxes to cope with the situation, where others are supporting their corporates and employees. Germany and the US on the other hand, where many participants have investments are two main countries supporting their companies and employees by providing substantial salary contributions to employees. 


The VC initiatives inclusive of Turkey with fresh new fund raisings collectively get closed and soon to be closed, over €250 million could enjoy a great vintage like the ones which coincided with the previous major global recessions. Not only that, but the huge efforts of corporates and entrepreneurs on digitalization and technology investments, will pave the way for a great future ahead once the pandemic gets eased up.

Back To News