INVESTOR CATCH-UP 2016

Annual survey aiming to gauge investor sentiment in

the Turkish venture capital space

Istanbul, 2016

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Table of content

Introduction ........................................................................................................................... 3

1. The respondent profile ............................................................................................... 4

2. Current market conditions ......................................................................................... 7

3. Future market expectations ..................................................................................... 10

4. Projects / niches .......................................................................................................... 12

5. Fundraising ................................................................................................................... 14

6. The role of state .......................................................................................................... 15

Conclusion ........................................................................................................................... 17

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Introduction

European VC fund Buran Venture Capital and Startups.Watch have conducted

the “Investment Catch-up” survey assessing investor attitudes towards the early

stage market in Turkey and related factors. This is our first survey aiming to

gauge investor sentiment in the Turkish venture capital space.

Respondents were asked six groups of questions to gain insight on the current

state of the early stage investment market, expectations for the future and

factors impacting the industry.

The level of investor confidence gives a glimpse of important trends that affect

startups, investors and anyone actively involved in the early-stage market. By

understanding market expectations of leading early stage investors, we hope

to develop an insight on future investment behavior and help founders and

investors make more informed decisions around fundraising, hiring and growth

strategies.

We would like thank our colleagues who have responded to our calling and

shared their valuable perspective. We hope to see more participation in the

next year’s “Investor Check-up Survey”, which we plan to conduct on a yearly

basis. We believe that this investor sentiment assessment of the Turkish venture

capital space, derived from the survey results, will not only be interesting to

you, but also be useful in your line of work.

Sincerely yours,

Buran VC team

Alexander Konoplyasty Managing Partner

Burkan Beyli Venture Partner

Alexey Sidorov Investment Analyst

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1.The respondent profile

We sent out our survey to more than 60 local players in the Turkish VC market.

We have collected data from 19 respondents acting under multiple roles

producing 32 data points.

For the purposes of further segmentation, the responders were divided into

two groups:

1. Seed stage Capital providers (Angels, Incubators, Accelerators, Seed

funds)

2. Growth stage Capital providers (Series A / Late stage VC)

12 responders are identified as seed stage capital, whereas 7 as growth stage

capital providers.

4 Incubators / accelerators took part in the survey, two of which are investing

at angel / seed stage as well and only one with follow-on interests in Round A

deals. It is worth noting that only 3 VC firms out of 19 respondents are looking

to invest in late stage opportunities.

In terms of geographical focus, 50% of the investors is covering other regions

besides Turkey. 6 seed investors and 1 growth stage investor are only focusing

on Turkey.

98

4

8

3

Angel Seed stage VC Incubator /

Accelerator

Round A VC Late stage VC

Breakdown of respondents by type (multiple choice)

Seed stage Growth stage

5

Angel investors have a particular interest in the US and Western European

markets – 9 out of 12 respondents are considering these markets, while there

are only 2 growth stage VC funds included these regions in their investment

strategy. As to CEE, the pattern is reversed - 3 growth stage VCs are interested

in the region. MENA is listed as 2nd most attractive region for both groups of

investors.

In 2015, the respondents closed 81 deals, of which 46 investments were done

by growth stage and 35 by seed stage investors.

In terms of median values, growth stage players are two times more active

compared to the latter. In the meantime, the conversion to portfolio companies

from a total number of reviewed opportunities differs slightly among two

12

35 4

7

31

1

3

Turkey MENA USA Western

Europe

CEE

Breakdown of respondents by

geographical focus (multiple choice)

Seed stage Growth stage

30

46

Breakdown of deals closed in 2015

Seed stage Growth stage

6

groups – 1.6% at seed investors as opposed to 1.4% at growth stage investors.

This means that in order to make one investment seed investors consider 63

opportunities on average whereas growth stage investors review 72 projects.

We also asked our respondents to give us a guidance on changes they are

planning in their investment strategy. Growth stage VCs prefer to keep their

strategy at the same level in terms of the number of target industries whereas

half of seed investors plan to a change in strategy by either extending or

narrowing down focus.

Survey question: Do you plan to change your industry focus?

Total Seed stage Growth stage

Remain the same 12 6 6

Extend industry coverage 3 2 1

Focus on fewer niches 4 4 0

As to the number of expected deals in 2016, the general picture has a similar

pattern. Unlike growth stage players who are keeping the same level of activity,

seed investors are willing to increase their activity.

Survey question: Do you plan to change your deal activity in 2016?

Total Seed stage Growth stage

Keep the same 9 4 5

Increase 7 6 1

Decrease 3 2 1

Almost all investors have no plans to change their ticket size and more than a

half of the investors do not plan to exit in 2016. The other portion of

respondents is evenly distributed between 1, 2 and 3 exits.

Survey question: How many exits are you planning in 2016?

Total Seed stage Growth stage

1 3 2 1

2 3 2 1

3 2 1 1

No plans to exit 10 6 4

The reason behind these results could be the fact that portfolio companies of

the respondents generally performed within their budgets in 2015 and

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investors expect further growth in their businesses. Thus, no investor has a

portfolio over 90% of underperforming companies. Moreover, every seed

investors claimed that at least 33% of their portfolio performed its 2015 revenue

budget. On the other hand, in 3 out of 7 cases, only 10-33% of portfolio

companies achieved budgeted sales when it comes to growth stage investors.

Survey question: How many of your portfolio companies met expectations

in terms of growth plan in 2015?

Total Seed stage Growth stage

less than 10% 0 0 0

10-33% 3 0 3

33-66% 5 4 1

more than 66% 9 6 3

2.Current market conditions

Despite the spectacular indicators of success in portfolio companies, the

investors are not too impressed about the performance of the Turkish VC

market. The results demonstrate the average performance is at 5.3 out of 10.

We asked the respondents to select the factors which most likely impacted

underwhelming performance in 2015.

3

1

5

6

2

1

1 2 3 4 5 6 7 8 9 10

Assessment results of the performance of

Turkish VC market in 2015

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Survey question (multiple choice): What are the main factors limiting the

growth of Turkish VC market?

Total Seed stage Growth stage

Weak exit environment 15 10 5

Weak entrepreneurial infrastructure 12 8 4

Weak entrepreneurial culture 10 5 5

Lack of capital 7 5 2

Difficulties with fundraising from LP 7 4 3

Low level of incoming projects 6 6 0

Imperfect legislation 3 2 1

General decline in investment activity 2 1 1

The most popular causes in both groups are due to weak exit environment,

weak entrepreneurial infrastructure and weak entrepreneurial culture.

Surprisingly, but no growth stage VC pointed out the low level of incoming

projects, though this seems to be a quite popular cause among seed investors.

However, we determined a list of factors that make Turkish VC market attractive

for both regional and international investors.

Survey question (multiple choice): What are the main drivers of Turkish VC

market?

Total Seed Growth

High potential of internet penetration 12 8 4

Large size of local market 10 5 5

Activity of local angel investors 8 5 3

Low cost of labor force 7 5 2

Funding by international funds 6 6 0

Large number of high-quality professionals in the market 3 2 1

Reduced traditional investment instruments for private investors

in the country 2 2 0

Highly developed infrastructure for early stage companies 1 1 0

The presence of large local Internet companies 1 1 0

Investors found the size of Turkish market and its growth potential as the main

drivers for the VC ecosystem. This line of reasoning is proven by a considerably

higher amount of startups focusing on local markets rather than internationally

oriented ones, which are mainly operating in B2B space. Besides, such factors

as an activity of local angel investors and low cost of labor force are popular

answers as well.

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Additionally, both groups of investors highly assess the contribution of local

angel investors as well as domestic VC funds. Seed investors also point out a

positive impact by foreign VC funds.

In the survey, we asked the participants to identify any changes happened in

2015 compared to prior years. In general, both groups of investors noticed the

growth of the competitiveness to invest in early stage opportunities as well as

the strengthening of funding sources to some extent. 9 respondents found the

number of fundraising companies growing indicating that Turkish VC

ecosystem demonstrated further development in both supply and demand.

However, there is no general agreement on the how accommodating / flexible

entrepreneurs had become in 2015 – 5 participants found it easier to agree

with startups, while 3 investors think in a contrary way. 4 participants indicated

no changes in 2015.

Survey question (multiple choice): What are the main factors limiting the

growth of Turkish VC market?

Total Seed Growth

Number of fundraising companies increased 9 5 4

The quality of projects increased 6 4 2

Entrepreneurs became more accommodating / flexible 5 4 1

I didn’t observe any changes 4 2 2

Entrepreneurs became less accommodating / flexible 3 2 1

The quality of projects decreased 3 3 0

Number of fundraising companies decreased 2 1 1

96 5

3

5

6

1

1

Angel investors Domestic private

VC funds

Foreign VC

investors

State funds Development

institutions

Investors that have the greatest impact on the

development of the Turkish ecosystem (multiple choice)

Seed stage Growth stage

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3.Future market expectations

In addition to the question on the expected changes in own investment

strategies, we also asked the respondents about deal activity. In 2016, we

expect to see higher activity in seed stage compared to Series A and later

stages.

The majority of seed investors (ca. 60%) expect the number of transactions to

increase, whereas growth stage investors don’t anticipate any changes in 2016.

Dynamics of deal activity seem to be more deterministic. Almost all

respondents indicated that the deal numbers will increase by 2021; two-thirds

believe that the number of transactions is going to increase significantly and

about one-third expects it to grow slightly. However, there was one respondent

predicting no changes in the long run.

Almost none of the growth stage investors expect any changes in the exit

environment, though 4 seed investors think that it will improve slightly. 3

respondents anticipate a downward slope.

1

3

1

5

2

4

1

2

Will not change

Reduce slightly

Reduce significantly

Increase slightly

Increase significantly

Expectations on the number of transactions in 2016

Seed stage Growth stage

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In addition, almost all growth stage investors predict entry from new strategic

buyers. Seed stage investors have no common opinion on this point – half of

the think the same way as growth investors, the other half doesn’t expect new

strategic players in 2016.

Many respondents expect a growth in number of players. 12 investors predict

that investor competition in early stage opportunities will increase as new

funding sources become available.

Survey question (multiple choice): What are the main factors limiting the

growth of Turkish VC market?

Total Seed Growth

The number of Turkish startups with international potential will

increase significantly in the next few years 14 10 4

Turkish investors will prefer projects with clear international growth

strategies 13 9 4

The angel activity will increase 10 7 3

Valuation multiples will decrease 9 6 3

The number of Turkish startups with focus on local markets will

increase significantly in the next few years 4 1 3

Turkish investors will prefer projects focusing on local markets 3 2 1

Valuation multiples will increase 1 0 1

Only 3 respondents expect that projects with local market focus will attract

Turkish investors even though the size of Turkish local market and its growth

potential have been identified as the strongest driving factor of the ecosystem.

By contrast, companies with international growth potential seem to be the

4

1

1

5

1

6

Increase significantly

Increase slightly

Reduce significantly

Reduce slightly

Will not change

Expected developments in exit environment

Seed stage Growth stage

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center of attention for investors. This contradiction could be explained if

investors buy into international expansion plans in follow on rounds.

Another data point which is worth pointing out is that investors anticipate a

reduction in valuation multiples. This expectation is indicative of changing

attitude of the Turkish entrepreneurs towards company valuations. If this

becomes a reality, we should expect an increase in the number of signed term

sheets since valuation multiples is the most frequent reason for deals falling

through.

4.Projects / niches

Among the most promising niches, FinTech, B2B SaaS, mobile tech and e-

services seem to be leading the charts. Looking at the past market activity,

these sectors were popular especially back in 2015. FinTech is the leader among

seed stage investors, whereas growth stage investors assess the attractiveness

of e-services and marketplaces higher in comparison to the other sectors. E-

commerce of physical goods, online media and gaming ventures seem to be

least interesting to both investor groups.

Survey question (multiple choice): What are the most promising niches?

Total Seed Growth

Fin-Tech 11 9 2

B2B SaaS 10 6 4

Mobile Tech 8 5 3

e-services / marketplaces 7 2 5

Big Data 5 4 1

Internet of Things 5 4 1

Security 4 3 1

Online media 2 2 0

Gaming 2 2 0

e-commerce of physical goods 1 0 1

Since venture capital investors provide additional services to their portfolio

companies besides monetary injection, we asked the participants which key

areas of value creation are the most important for startups.

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Survey question (multiple choice): Which area do you think early stage

companies need most help on?

Total Seed Growth

Growth strategy 17 10 7

Funding 9 6 3

Operational processes 8 5 3

Financial reporting / legal support 8 5 3

HR 6 3 3

Both groups indicated the growth strategy as the main area where early stage

companies need most help on. The other areas are also considered important

but to a lesser extent.

Assistance in a fundraising process is the second most popular answer among

value creation activities. It appears to be that the later stage the opportunity is,

harder it is to raise funds.

Survey question (multiple choice): At which stage do you think funding is

scarcer for early stage companies?

The results are actually proven by retrospective data on fundraising rounds in

2015 represented by Startups.Watch. 75 out of 80 VC deals on the Turkish

market in 2015 fall on rounds within Series B / C capital. However, the reason

behind could be just that a fewer number of companies look for such

opportunities. In total, seed stage deals happened 4 times more frequently

than growth stage deals, including Series A / B / C.

75

3 2

3

4

11

Round A Late stage Seed Angel

Seed stage Growth stage

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5.Fundraising

11 out of 18 respondents raised money in 2015. 4 out of 9 respondents indicated

that there were no changes in fund raising in 2015 compared to prior years.

In 2016, fewer investors are going to raise money compared to 2015, 8 instead

of 11 respectively. 5 of them are seed investors and they would like to raise up

to USD10 mln, while 3 growth stage investors plan to raise as little as USD 10 m

and as much as over USD50 mln.

The most promising sources of capital for VC firms are international funds

and development institutions as well as individual investors and their family

1

2

2

2

2

Attracting new investors (LP) became more difficult

The number of potential investors in funds decreased

Attracting new investors (LP) became easier

The number of potential investors in funds increased

I don’t see any changes

Investors' attitude towards changes in the fundraising process

for investing in early stage companies (multiple choice)

Seed stage Growth stage

7

4

1

4

1

1

1

We don't plan to raise money

USD1-5m

USD5-10m

USD30-50m

USD10-30m

Over USD50m

Investors' attitude towards changes in the fundraising

process for investing in early stage companies

Seed stage Growth stage

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offices. Besides that, 9 respondents pointed out that local former and existing

entrepreneurs in TMT sector are capable to be potential LPs. It’s noteworthy

that far fewer respondents expect an investment interest from large Turkish

organizations, private or state-owned.

Survey question (multiple choice): What are the most promising groups of

potential LPs in VC funds?

Total Seed Growth

International funds and development institutions (EBRD, World Bank,

etc.) 12 7 5

High net worth individuals and family offices 10 6 4

Former and current entrepreneurs in the field of Technology / Media /

Telecom 9 5 4

State programs 6 4 2

Turkish private companies (including banks) 4 3 1

International private companies 1 0 1

Turkish state-owned companies and companies with state

participation 0 0 0

6.The role of state

While the government programs weren’t the most popular answer for the

question on potential LP candidates, some of the respondents mainly from the

group of seed investors found the strength of government funding for early

stage companies in Turkey increased in 2015, but more slightly rather than

significantly. Growth stage investors did not indicate any improvements and

have not observed any changes.

In general, there are similar expectations regarding further developments on

this matter. Mainly seed stage investors anticipate growth on state activity,

whereas growth stage investors aren’t expecting any changes.

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Additionally, we asked the respondents on what areas the government should

be focusing on. There are different opinions among seed and growth stage

investors. Seed stage investors believe that the technology entrepreneurs and

investors should obtain further tax exemptions and the legislation should be

improved. On the other end, growth stage investors picked recapitalization of

existing VC funds and education / promotion in the field of innovative

entrepreneurship and IT as the main areas in need of improvement.

Survey question (multiple choice): Which areas should the government

focus on?

Total Seed Growth

Preferences and tax exemptions for technology entrepreneurs and

investors 11 8 3

Improvement of legislation 9 6 3

Grant funding for projects at early stages 5 3 2

Recapitalization of existing VC funds 8 3 5

Education in the field of innovative entrepreneurship and IT 7 3 4

Concessional lending to late stage technology projects 6 3 3

Direct investment in projects at an early stage 3 3 0

Promotion of entrepreneurship and VC business 9 5 4

1

5

6

2

5

Reduce significantly

Reduce slightly

Increase significantly

Increase slightly

Will not change

Investors' expectations on the goverment funding for

early stage companies in Turkey to change in 2016

Seed stage Growth stage

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Conclusion

The Turkish VC market resulted in 80 deals accounting for USD56 mln in 2015,

indicating 80% growth compared to total investment amount in 2014 and 3%

reduction compared to total investment amount in 2013.

2015 investment distribution by round type

Source: Startups.Watch

Investors assess the performance of the Turkish market to be mediocre (at 5.3

out of 10) while pointing out the lack of capital for late stage opportunities.

According to Startups.Watch, out of total capital raised in 2015 only 6% had

ticket size of more than USD2.5 mln. The most popular causes seem to be weak

exit environment, weak entrepreneurial infrastructure and weak

entrepreneurial culture.

Based on gathered results, we expect to encounter increased activity in seed

sector compared to deals at Series A and later stages. The expectations are

higher on the dynamics of deal activity by 2021 – almost all respondents

indicated that it will increase.

In order to boost investment activity, industry players identified following

measures to be helpful:

● tax exemptions and other preferences for entrepreneurs and investors

will likely increase activity at seed stage

● recapitalization of VC funds focusing on growth stage

● education / promotion in the field of innovative entrepreneurship and IT

as the main areas needing further improvement.

About Buran Venture Capital

Buran Venture Capital is a Central and Eastern European venture fund founded

in 2012 targeting to invest US$75m over the course of the next 4-5 years in

Central and Eastern Europe, Turkey, Israel and CIS. Headquartered in Budapest,

the fund has offices in Istanbul and Moscow, as well as active presence in Tel-

Aviv and Warsaw.

Our target sectors are E-commerce Services, B2B SaaS, Mobile technologies

and Internet of Things.

We invest from US$500k up to US$5m in a single portfolio company.

We know how to build a successful company and contribute significant

energy/attention to each project. Key areas of value creation includes strategy,

M&A / fundraising, HR, financial controls and leveraging our relationship

network.

Current portfolio companies:

To learn more about BVC, visit our website or feel free to get in touch with us:

Budapest office:

Ponty u. 6

Budapest, 1011

+36 (30) 859-0475

Istanbul office:

T. Huseyin Sofu Sok

No:4, Karakoy 34420,

Beyoglu

+90 444 1 855

Moscow office:

Khlebny Lane 8

Moscow, 121069

+7 (495) 540-4842

e-mail: info@buranvc.com