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Role and Functions of Equity Funds and Venture Capital Companies in Turkey

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For most entrepreneurs, access to credit is a major problem. The challenge is more pronounced in both emerging and developing economies where the stringent requirements by most lenders is a major deterrent. This problem saw the advent of new forms of creditors who place little emphasis on the capacity of the entrepreneur to pay back a loan facility. Instead, the emphasis is mostly placed on the viability of the venture such that the credit is awarded in exchange of shares or equity in the venture. Among the emerging markets that have witnessed a surge in such form of investments is Turkey. The Turkish economy has gradually evolved to be a leading investment destination in the European region.

Today, evidence shows that private equity investments in the Turkish market have grown immensely. As a result, the economy has continued to record steady growth in GDP at around 8% per annum till 2016. Among the most dominant private equity firms in Turkey are venture capitalists and equity funds whose role in promoting entrepreneurial growth has not gone unnoticed. According to Bayar, Karaarslan, and Ozdeveci, these investors play a vital role of promoting economic growth and opportunities by turning ideas and basic science into products and services. It is through the efforts of equity funds and venture capitalists that markets in most parts of the world, and Turkey.

Objectives of the study

The paper explores the activities of venture capitalists and equity funds in the Turkish economy. The overall objective is to critically analyze the roles and functions of these investments play in the Turkish economy. Given the growing numbers of these investments in Turkey, it makes sense to determine whether their increased presence has had any significant impact on the economy, not forgetting the response of the Turkish market and the challenges faced by these investors.

Overview of the paper

The main body of the paper is divided into three sections each addressing an important concept related to equity-based financing. In the first section, the paper explores the history of venture capitals and equity funds in Turkey, with a particular interest given to the legal framework relating to their activities in the country. The second section explores the role played by venture capitals and equity funds at the Turkish economy. The third section highlights the challenges startups face when seeking funding, including the pros and cons of this source of finance. The paper concludes with a brief discussion of this he findings established, and highlights interesting areas for future research.

The beginnings of venture capitals in Turkey, their structure and the attractiveness of the turkish market

The Turkish economy has undergone a plethora of economic downturns in the past. As a result, the history of PE and VC is rather scanty and short compared to her European counterparts. PE and VC have evolved to be the go-to alternatives for businesses seeking capital injections and credit when the economy started showing signs of recovery after 2000. One of the earliest attempts to explore PE opportunities in Turkey was made by Labx in 2006. The PE came in with the objective of serving as a bridge between investors and entrepreneurs seeking funding to actualise their business ideas. However, due to the lack of relevant legislation to guide the activities of such investments, there is an apparent lack of literature on how successful the investment was. It was not until 2012 that the relevant legislation was enacted to allow VC and PE to officially operate in Turkey.

The legal environment pertaining to the venture and equity market in the turkish economy

Any business operates in an environment characterised by external forces that affect its operations. The legal environment is one external force that determines the type of activities that can be practised and those that cannot. After years of unrest and the need to spur economic growth, the Turkish government moved in to introduce the necessary legislation aimed at controlling the activities of private investors. The first official legislation was enacted in 2012 and consequently recognised the role private investors play in the country. The legislation provided for tax incentives designed to encourage the activities of equity-based investors registered with the treasury.

The government also provides guidelines to be followed by Turkish firms/persons seeking to offer funding to business opportunities. According to the regulations, a Turkish firm seeking to operate as an equity-based investor must be a joint stock company as provided for by the Turkish commercial code. Moreover, the joint stock company should not have participated in an initial public offering, or be under the control of another company.

The Attractiveness of the turkish economy to venture capitalists funds and equity funds

The attractiveness of an economy to investors is dependent on the extent to which the existing political and legal environment supports the activities of such investments. Countries often institute measures in the form of incentives aimed at encouraging the activities of such private investors. Among the common such incentives include tax rebates and deductions. Starting from 2012, private investors were assured a 75% corporate tax deduction on the annual incomes in Turkey. Even interesting is the fact that an investor can be assured 100% tax incentive if they invest in a project supported by the ‘Scientific Technological Research Council of Turkey. An investor is given the opportunity to invest in as much as 20 different Turkish businesses, thus enabling them to diversify their risks. However, for firms to benefit from this incentive, the law stipulates that investors have to secure an “Angel Investor Licence” which outlines the criteria for taking advantages of these incentives, and the specific categories of investors.

Challenges faced by venture capitalists and equity funds in Turkey

Despite efforts by the government to make the Turkish economy attractive to venture capitalists and equity funds, there still are a series of challenges that derail such investments. Musa and Karadağ reported that compared to other nations in the wider European market, Turkey lags behind in terms of venture capitalist concentration per capita. The study alluded the small number of PE and VC in the country to the limiting legal environment in the country. For instance, Turkish laws stipulate that VCs and PES are not to hold more than 50% shares of companies they seek to invest in Turkey. Even though this might act as an effective risk management tool for investors, it nonetheless tends to limit the interest of equity funds who are often geared towards acquiring more stake in ventures. Part of the limitation extends to board member composition, voting rights, and administrative functions. Turkish laws stipulate that equity-based investors cannot assign more than 50% of board members or partake in administrative functions.

Political and economic forces also present major drawbacks for potential investors. Evidence shows that despite efforts by president Erdogan to revamp economic growth in the country, failures to institute the necessary measures aimed at curbing the growing inflation and the devaluating currency means that investors are never sure of the state of economic stability. Much of these is linked to the regime’s tight hold on the Central Bank, which reduces its capacity to institute proper monetary policies. According to Bosut and Finance, high inflation, especially double-digit, tends to limit the degree to which investors can increase their long-term purchasing power. Hence, because the high inflation erodes the value of their principal on fixed income securities, most investors will either shy from investing or limit their investments to less risky ventures.

Importance of equity funds and venture capitals

As previously argued, the Turkish entrepreneurial ecosystem has witnessed a surge in investment in the recent past. Data from the Turkish market intelligence shows in 2018 alone, about 16 ventures secured investment deals amounting to over $8.5 million. The services offered by equity-based investors extends beyond the provision of funding. According to Zacharakis, most equity-based investors are increasingly extending their range of support to include services like offering education and consultancy services on entrepreneurship. Some investors work closely with educational institutions to enhance the importance of entrepreneurship in the curriculum. Also included in the range of services offered include activities such as contests and awards that are meant to spur entrepreneurial skills. A survey by Yang, Xia, and Wen meant to determine the reason for the success of the equity-based funding in Turkey noted that they are the most preferred amongst entrepreneurs because of the range of services they offer other than financial support. Wallmeroth, Wirtz, and Groh agree, noting that other than financial support, most entrepreneurs might require additional skills necessary to navigate the tough competitive landscape. As such, the incubation programs that are common amongst most equity-based investors extend beyond financial support. The fact that most equity-based investors have already established themselves in the market means that they help inculcate such knowledge into the young entrepreneurs seeking to enter the market.

The connection between equity funds, venture capitals, and entrepreneurial growth

Existing literature supports the existence of a relationship between equity-based investments and entrepreneurial growth. Even though the bulk of the literature is based on data collected from contexts of the developed world, it nonetheless proves the fact that equity-based investors are the catalyst of entrepreneurial growth. Yang et al. trace the activities of the venture capitalist in a developing economy, noting that the passage of laws to support the activities of venture capitals resulted in a significant increase in the number of entrepreneurial activities. For emerging markets as Turkey, the bulk of the people might not access credit due to the strict restrictions imposed by formal financial institutions as banks. What makes equity-based investors the lenders of choice are the fact that the support they offer is based on opportunity, and not on the creditworthiness of an individual. On their part, most financial institutions often impose requirements such as collateral that might not be accessible by budding entrepreneurs.

Other than financial support, budding entrepreneurs need important ingredients such as information about the market, networks and financial skills. Venture capitalists and private equity funds often help bridge this gap by engaging in activities such as the provision of financial education. According to Karadeniz and Ylmaz, financial support may not necessarily translate to business support. It is the financial skills offered by most investors that help business ward through the murky waters of the highly competitive business environment. Moreover, most of these investors can pull the right strings to help these budding investors land lucrative deals or access a certain segment of the market through their robust networks in both the business and political world. This is mostly the case in emerging markets where most business opportunities often land in the hands of the elite, who also double up as private investors.

Macroeconomic impacts of the venture capital industry in the turkish economy

In economics, credit opportunities are key drivers of entrepreneurial growth, which leads to economic growth. Through access to credit, businesses can expand their scales of operation, hire additional talent, venture into new markets or increase their production capacity. For SMEs and startups, credit is the key to entering the market and competing competitively.

Turkey is an upper-middle-class economy endowed with few natural resources. The Turkish economy is largely dependent on manufacturing, construction, and tourism revenues and currently ranks 17th globally in terms of GDP. However, following a series of political upheavals and military coups in 1960, and 1981, the country was set on a growth trajectory based on a new strategy of export-oriented growth. The government targeted an increase in the role the private sector plays in the new transitionary phase by reducing its involvement and its share of public sector in the economy. The resultant shift away from mixed capitalism to a market economy was designed to make the economy more competitive in the global market. Isiksal et al. mention that the effect was significant growth in the volume of exports, coupled with a corresponding increase in foreign trade volume.

However, even with these changes in place, the economy was still hit by a series of severe macroeconomic turbulences as from 1994. Most of these turbulences were brought about by currency substitution, open positions tendency in the banking system, the boom in demand through conjuncture and political instability. The resultant effect was a significant fall in GDP, a huge outflow of funds and increased inflation. Later turbulences that saw the interest rates reach an incredible height per annum forced the government to institute serious macroeconomic measures. One such measure was the introduction of incentives aimed at encouraging investors to invest in local entrepreneurs.

The outcomes of the restructuring macroeconomic programs have been positive today. The Turkish economy presently reports robust levels of employment. Even though no national study has been carried out to determine the possible connection between the resultant positive levels of economic growth and the activities of equity-based investors, data from cross-sectional studies support this relationship. In Tiftik and Zincirkiran, it was noted that following the enactment of the legislation to permit the activities of venture capitals, the resultant increase in the number of SMEs and startups has positively contributed to the levels of unemployment. Indeed, starting in 2008, unemployment has been on a declining trend, starting from 11 to a low of 9% in 2017. According to Cetindamar et al.  With increased entrepreneurial activities in the Turkish economy, there has been a significant increase in the country’s balance of payment, reflecting an increase in overall exports. Turkey today has grown from merely being a manufacturing-based economy. There is an ambitious service industry that is built around technology firms that offer services such as web hosting, server services, and related services.

Challenges in accessing venture capitals and equity funds in Turkey

Despite the crucial role venture funding plays in shaping an entrepreneurial culture in an economy, access to venture funding remains low. As earlier observed, the overall concentration of venture capitalists and private equity firms remains low against the country’s 80 million people. In fact, statistics show that out of the over 80 million persons in Turkey, there are only 445 equity-based investors, compared to 12,000 in the UK whose population is about 60 million. This implies that relatively few businesses can access the services of private equity funds and venture capitalists. This challenge is compounded by the dearth of English skills among most start-ups seeking funding. With most investors drawn from the English-speaking segment of the world, most budding entrepreneurs find it hard to pitch their ideas to potential investors. Zacharakis mentions that most investors are always on the lookout for a business idea that is presented by an individual that understands not just the numbers, but also the business environment. This often necessitates the need to express oneself in English, a language not well used in Turkey.

A second challenge is the nature of business ideas pitched by most entrepreneurs. A survey carried out by Sancak noted that the bulk of the rejected proposals by venture capitalists and equity funds are those built around the concept of e-business. Even though e-business was at one time touted as the most promising path, the fact the country has not produced a single global success story makes such ideas a no-go zone for most investors. Given the high-risk nature associated with investing in a start-up, the priority for most investors is high financial return and a successful exist within the shortest time possible

The pros and cons of equity and venture capitalist funding

The high-risk nature of most start-ups implies that access to credit is mostly limited to venture capitalist and equity funds. As such, a primary advantage of venture capital and equity funds is that they extend funding to business ideas that might not otherwise be touched by debt-based financing. This is mostly the case of high-tech firms that often have large up-front capital requirements but lack the necessary collateral to be financed through debt. Also cited as an important aspect of venture funding is the valuable expertise, advice and industry connections that follow. Most venture capitalists and equity funds often require the inclusion of a venture capitalist or a member of the private equity on the start-ups board.

However, accessing venture funding through venture capitals and equity funds is not without its shortcoming. Foremost, securing a financing deal is often a rigorous undertaking due to the accounting and legal costs that have to be shouldered. Moreover, most investors always call for start-ups to give up some ownership stake in exchange for financial support. However, this often results in the loss of autonomy as the start-up might have to include the investor in decision-making processes. The loss of autonomy also stems from the stipulations often associated with venture funding. For instance, before agreeing to fund a start-up, an investor might want to have changes in the start-up’s management team, staff salary, and business ties.


Starting from 2012, Turkey consequently started to opening up the economy to venture capitalists and equity funds seeking to make a killing from the investment market. Venture capitals and equity funds were seen as the go-to vehicles given their capacity to offer funding even to the riskiest business ideas. To a large extent, it appears that the gamble has paid off as predicted. As observed in the discussion, Turkey is gradually emerging as an economic powerhouse in the wider European region. The policy change has had phenomenal impacts in the once sluggish economy. Today, Turkey has gradually transitioned into a middle-to-high income economy that is backed by a large population of over 80 million people, good ease of doing business index. Venture funding has helped in not only spurring an entrepreneurial culture, but also in reducing the country’s unemployment rate.

These findings seem to agree with those established in other markets. In the US, venture capitalists and equity funds played a vital role in the creation of Silicon Valley. Silicon Valley has since given birth to the likes of Atari, Apple, Oracle, Cisco, Sun Microsystems and Adobe founded. Today, Silicon Valley is regarded as a global center of technological innovation. The fact that there exists a connection between the activities of venture capitalists or equity funds and economic growth is thus not questionable. In markets such as the UK, the activities of venture capitalists in Silicon Fen have made the region the most important technology centres in Europe. The area is home to a large cluster of high-tech businesses focusing on software, electronics, and biotechnology that employ thousands of persons and contributing millions in taxes to the government.


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Role and Functions of Equity Funds and Venture Capital Companies in Turkey. (2022, May 24). GradesFixer. Retrieved June 27, 2022, from
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