Startup Hubs Around The World: Istanbul

Istanbul has often been seen as the bridge between East and West. A cosmopolitan city with a culture dating back centuries, it is a mix of driven young professionals, and businesses that have been around for generations. More and more entrepreneurs are headed to Istanbul to setup their start-ups.

In this article about Istanbul, we look at six essential elements of a potential start-up location that must be considered: 1) location, 2) tax incentives, 3) legal incentives, 4) availability of investors, 5) local resources and workforce, and 6) specialization.

1. LOCATION

At the intersection of Asia and Europe is the country of Turkey. On the shore of the Bosphorus sits the largest city in the country: Instanbul. The rich history of this Turkish city gives an old-world feel to the streets, making it possible to imagine the city as it had been in ages past. Today, however, the streets are filled with a new vibrancy, and the start-up market is starting to take notice. Perched in between two markets that comprise a majority of the world’s population, the city of Istanbul is becoming a hub that is attracting global attention. Within a four hour flight’s reach from some of the world’s largest cities, Istanbul is an attractive to entrepreneurs who need to connect with the outside world, as well as to investors who are looking to have access to their vested interests.

2. TAX INCENTIVES

The government of Turkey has established incentive programs to encourage entrepreneurs to begin calling Istanbul home. The development of economic zones has led to technoparks where Research & Development (R&D) companies can apply to use office space. Low interest, government backed five year loans are available for R&D projects that the government approves of, in addition to funding of up to half of engineering costs through grants for government approved projects. For any product developed in the technopark, the company can receive tax exemption for up to ten years of corporate income tax. Payroll tax exemption is also given for engineers who work within the technopark, making it attractive to start-ups looking to maintain a workspace.

As enticing as the tax benefits sound, however, there are some strings attached to these governmental gifts. To begin with, the grants and funding provided by the government are based on projects that the government approves of – narrowing the field to ideas that are considered worthwhile or important by the Turkish government. In addition, loan money is only granted to start-ups who are able to acquire a bank guarantee. The catch-22 here? If a company could get a bank guarantee, they wouldn’t need the loan from the government.

Establishing technoparks and offering grants is beneficial to the growing entrepreneurial marketplace in Istanbul. Unfortunately, however, the government assistance seems to end there. While the government asserts that start-ups are vital, there are no real policies in place to support the start-up, nor are there established plans to encourage growth in this area. The government is beginning to slowly focus on assisting the fledgling start-up community, but change is measure in slow increments for this country that boasts of a history almost 2,000 years old. There is an indication that governmental support will grow in the years to come, which should help to further increase interest in the start-up community.

3. LEGAL INCENTIVES

The climate of Istanbul towards entrepreneurs is surprisingly welcoming. According to a survey done in 2012, Turkey ranked 13th as a hospitable destination for foreign businesses. As a foreigner wishing to establish a business within the Turkish city, the simple residence permit allows entrepreneurs to live in Turkey as well as establish a business. Ownership is easily established, with an easy to navigate system of paperwork. In contrast to other nations, Turkish law mandates that a business have at least two owners, but one may have as little as 0.5% ownership. This allows for start-ups to easily create an ownership structure that is functional and financially beneficial. Foreigners are also able to buy property in Istanbul and there are no limitations on ownership based on gender or nationality.

The framework for establishing a business within Istanbul is in place, but is not supported by a strong legal or judicial system. While recent developments have begun to change the governmental support of businesses, there is a lack of trust in the government to enforce legal policies. This may lead to a lack of willingness to both begin a start-up within Istanbul or to invest in a start-up. Both sides of a start-up are in a position to lose in a battle that comes down to legalities. Without enforcement of intellectual property, the investor can lose their money while the entrepreneur loses their company.

4. AVAILABILITY OF INVESTORS

Istanbul boasts of a thriving angel investor network. Galata Business Angels has a highly organized platform for investing in early-stage start-ups. These individuals with high net-worth are leading the way for people to discover the available investment opportunities that Turkey has to offer. In addition to the angel investors, there are a growing number of venture capital funds that are branching into the Turkish market. Investment firms from all over the globe are turning their attention, and their money, towards the small city of Istanbul in hopes that they will be on the cusp of the next big start-up.

The Istanbul Venture Capital Initiative reported earlier this year that a minimum of 50 active funds are looking for investment opportunities within the city. There are several incubators that attract attention from potential investors, and the growing number of technoparks has helped to establish the area as a viable market.

While the interest in Istanbul’s start-up market may be growing, the number of foreign investors in the marketplace is slow to catch up. This may be due to the challenges of getting Turkish companies to the forefront of the global stage and attracting the venture capitalist’s attention. A much needed infusion of Turkish investors who are willing to act as a source of venture capital will help to propel the start-up market place, but they have not been forthcoming in large numbers.

In addition to developing a larger pool of early investors, Istanbul must also seek to establish a network of growth investors for secondary stage investments. These investors are rare within the Istanbul tech marketplace, and are essential for the start-up community wishing to move beyond the magic three year time frame that most start-ups need to become successful.

The successful hosting of events that draw potential investors from around the globe is serving to not only jumpstart interest in the start-up fields, but also works to provide foreigners and locals the opportunity to preview the developments coming out of Istanbul. A collective organizational group that works to promote such events, as well as provide training and collaboration between existing start-ups would be beneficial.

Turkey’s Startups Climb Steep Learning Curve

5. AVAILABILITY OF LOCAL RESOURCES AND WORKFORCE

There is a dichotomy between the growing start-up culture and the traditional Turkish way of life. With a vibrant, young workforce, the available employees are more educated than ever before in Turkish history. Overall, 70% of the country’s population is under 35 – giving the country a wide market of consumers and workforce potential. With a large rising generation of people who are tech savvy, there are multiple opportunities for start-ups to attract attention. In addition, of the population’s 78 million people, almost half are connected to the internet giving Turkey one of the internet’s fifth largest audiences. Economically, the Turkish way of life is thriving and the average worker is earning double their wages from just a decade ago. The government structure is steady, which lends stability to the country as it struggles to re-invent itself as a modern day hub for the changing world.

Within Istanbul, the city has access to some of the brightest minds in Turkey. Well-educated nationals who studied abroad have been returning to their native land and are bringing a renewed interest in entrepreneurial efforts within the country.  Building a potential workforce with the higher skills necessary within the tech market has great potential for the future of Istanbul’s ability to be competitive on the world’s stage.

Despite the availability of investors, the relatively easy regulations for entrepreneurs and the large available workforce, there are areas of concern within Istanbul that may influence the future start-up market. Governmental policies tend to lean toward Islamic ideologies. Recent protests indicate that there is unrest simmering beneath the surface of the residents of the country. An indication of unrest makes investors uneasy, especially in a market that has not yet proven itself as a successful start-up hub. Current indications of government bribery, coercion and corruption have created an environment that is not conducive to trust – a vital element of the start-up market. The Istanbul entrepreneur market is trying to regain some of the advances they had previously made, but only time will tell how successful they will be.

In addition to the governmental hurdles, the infrastructure of the country is a huge challenge. Availability of dependable power and water supplies is a problem for companies running high powered computer systems and networks. For a tech-based start-up, power outages can spell disaster, and they happen with regularity. Logistically, foreigners (and even locals) can have a hard time navigating the winding roads of the ancient city. Large amounts of traffic congest the roads, making stop and go traffic the norm – not the exception.

The negative side of the start-up market in Istanbul can be daunting. One can argue, however, that for any entrepreneur wading into the start-up industry, there will always be a downside. There will always be obstacles that keep people from taking the leap into entrepreneurship; in a way it is a self-selecting process that weeds out the weaker candidates. For the entrepreneur in Istanbul, there needs to be more than a sense of adventure behind the drive for a start-up: the road is long, bumpy and difficult. The payoff, however, can be enormous in a place that is waiting for their first big exit.

6. SPECIALIZATION

The trends in Istanbul seem to be leaning towards e-commerce industries, followed by commerce and service industries. While there are a large number of tech industries starting, and the number is growing daily, a majority of the start-ups in Istanbul are focused on localized, e-commerce solutions. The push towards tech industries is being helped by the addition of technically advanced classes at the university level, and the growing interest in the global marketplace. Entrepreneurs need to be cautious that they are developing new and innovative methodologies – not simply copying existing platforms. Out of five of the largest start-up investments in a recent year, only one was in the tech industry. While the e-commerce industry is important, if Istanbul wants to be a global player, they must turn their attention towards global initiatives.

Notable start-ups that have come out of Istanbul:

Trendyol. Trendyol is an e-commerce site that offers users access to fashion items, home textiles, home electronics and more. Boasting a “new way to shop”, Trendyol has brought some of the world’s fashions to Turkey, and has opened the door for Turkish consumers to experience global outreach.

Yemeksepeti. Driving the home based food ordering system in Turkey is Yemeksepeti. The company has a network of restaurants that users can order from, without the addition of extra fees. The listing of participating restaurants includes local and global chains. The company has expanded to include several other Arab countries, but is primarily a locally centered company.

Grupanya. A namesake of global Groupon, the cost-saving group offers discounted rates on a variety of items and services.

GittiGidiyor. A clone of shopping giant eBay, the GittiGidiyor is another example of how Istanbul’s start-up market is focusing on commerce opportunities. The online auction provider is making in-roads into the Turkish marketplace and is growing in use.

CitusDB. The database analytics start-up that is going head to head with Oracle, the open-source tool is one of the tech based start-ups to watch from Istanbul. Developers claim that the CituDB processes will increase database performance with faster queries and more efficient optimizations.

The start-up market in Istanbul is filled with complexities. The pieces for a successful launch into the tech market are all in place, but they are surrounded by a tenuous landscape that threatens to overtake any potential success. As the world watches, Istanbul (and Turkey) is wrestling with issues and ideologies that have ramifications for personal freedoms, creative thinking, global perspectives and more. As they establish their position regarding these issues, they will be, in effect, establishing the future for their start-up market. Without entrepreneurship, there is no start-up potential. Finding the balance between the past ideologies and modern ideals is essential to the growth of Istanbul as a start-up hub.

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