Index IntroductionObjectives of the studyDocument overviewChallenges faced by venture capitalists and equity funds in TurkeyImportance of equity funds and venture capitalMacroeconomic impacts of the venture capital sector in Turkey economyThe challenges in accessing venture capital and equity funds in TurkeyThe pros and cons of equity financing and venture capitalConclusionBibliographyIntroductionFor most entrepreneurs, access to credit is a big problem. The challenge is most pronounced in both emerging and developing economies, where the stringent requirements imposed by most lenders represent a major deterrent. This problem has seen the advent of new forms of creditors who place little importance on the entrepreneur's ability to repay a loan. Instead, the emphasis is primarily on the viability of the business, so that credit is given in exchange for shares or equity in the business. Among the emerging markets that have seen a surge in this type of investment is Turkey. The Turkish economy has gradually evolved to become a major investment destination in the European region. Say no to plagiarism. Get a tailor-made essay on "Why Violent Video Games Shouldn't Be Banned"? Get an original essay Today, evidence shows that private equity investments in the Turkish market have grown tremendously. As a result, the economy continued to experience steady GDP growth of around 8% annually until 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 in promoting economic growth and opportunity by turning ideas and basic science into products and services. It is through the efforts of equity funds and venture capitalists that markets are realized in most of the world and in Türkiye. 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 that these investments play in the Turkish economy. Given the growing number of these investments in Turkey, it is logical to determine whether their increased presence has had a significant impact on the economy, without forgetting the response of the Turkish market and the challenges faced by these investors. Overview of the document The main body of the document is divided into three sections, each addressing an important concept related to equity-based financing. In the first section, the contribution explores the history of venture capital and equity funds in Turkey, with a particular interest in the legal framework relating to their activities in the country. The second section explores the role played by venture capital and equity funds in the Turkish economy. The third section highlights the challenges startups face when seeking funding, including the pros and cons of this funding source. The article concludes with a brief discussion of established findings and highlights interesting areas for future research. The beginnings of venture capital in Türkiye, its structure and the attractiveness of the Turkish market The Turkish economy has suffered a series of economic recessions in the past. As a result, the history of the EP and VC is rather sparse and short compared to that of its European counterparts. PE and VC have evolved to become the go-to alternatives for companies seeking capital and credit injections when the economy hasstarted to show signs of recovery after 2000. One of the first attempts to explore PE opportunities in Turkey was made by Labx in 2006. was born with the aim of acting as a bridge between investors and entrepreneurs seeking financing to build your business ideas. However, due to the lack of relevant legislation to guide investment activities, there is an apparent lack of literature on investment success. It was only in 2012 that relevant legislation was enacted to allow VCs and PEs to officially operate in Türkiye. The Legal Environment Related to the Stock and Venture Capital Market in the Turkish Economy Any company operates in an environment characterized by external forces that influence its operations. The legal environment is an external force that determines the types of activities that can be practiced and those that cannot be practiced. After years of unrest and the need to stimulate economic growth, the Turkish government has stepped in to introduce the necessary legislation aimed at controlling the activities of private investors. The first official legislation was enacted in 2012 and consequently recognized the role played by private investors in the country. The legislation provided tax incentives aimed at encouraging the activities of equity investors registered with the Treasury. The government also provides guidelines to be followed by Turkish companies/individuals seeking to offer financing for business opportunities. According to the regulations, a Turkish company that intends to operate as an equity investor must be a joint-stock company as stipulated in the Turkish Commercial Code. Furthermore, the public company should not have participated in an initial public offering, or be under the control of another company. The attractiveness of the Turkish economy for venture capital funds and equity funds The attractiveness of an economy for investors depends on the extent to which the existing political and legal environment supports the activities of such investments. Countries often set up measures in the form of incentives aimed at encouraging the activities of such private investors. Common incentives include tax breaks and deductions. As of 2012, private investors have been assured a 75% tax deduction on annual incomes in Türkiye. Still interesting is the fact that an investor can be assured a 100% tax incentive if he invests in a project supported by the "Scientific Technological Research Council of Turkey". An investor has the opportunity to invest in up to 20 different Turkish companies, thus allowing him to diversify his risks. However, for companies to benefit from this incentive, the law requires that investors must obtain an “Angel Investor License” which outlines the criteria for taking advantage of these incentives and the specific categories of investors. Challenges Faced by Venture Capitalists and Equity Funds in TurkeyDespite the government's efforts to make the Turkish economy attractive to venture capitalists and equity funds, there are still a number of challenges that derail such investments. Musa and Karadağ reported that, compared to other nations in the broader European market, Turkey lags behind in terms of concentration of venture capitalists per capita. The study alluded to the limited number of PEs and VCs in the country and the country's limiting legal environment. For example, Turkish laws state that VCs and PESs must not hold more than 50% of the shares of companies seeking to invest in Türkiye. While this could represent an effective risk management tool for investors, it tends to limit the interest of equity funds which are often oriented towards acquiring larger shares ofparticipation in businesses. Part of the limitation extends to the composition of board members, voting rights and administrative duties. Turkish laws state that equity investors cannot allocate more than 50% of board members or participate in administrative functions. Political and economic forces also present major drawbacks for potential investors. Facts show that despite President Erdogan's efforts to revive the country's economic growth, failure to institute the necessary measures aimed at curbing rising inflation and currency devaluation means that investors are never sure of the state of the economy. stability. Much of this is related to the regime's tight grip on the Central Bank, which reduces its ability to institute appropriate monetary policies. According to Bosut and Finance, high inflation, especially double-digit inflation, tends to limit the extent to which investors can increase their long-term purchasing power. Therefore, as high inflation erodes the value of capital invested in fixed income securities, most investors will avoid investing or limit their investments to less risky ventures. Importance of Equity Funds and Venture Capital As stated earlier, the Turkish entrepreneurial ecosystem has witnessed an increase in investments in the recent past. Turkish market intelligence data shows that in 2018 alone, around 16 firms secured investment deals worth more than $8.5 million. The services offered by equity investors go beyond providing financing. According to Zacharakis, most equity investors are increasingly extending their range of support to include services such as offering entrepreneurship training and consultancy services. Some investors work closely with educational institutions to reinforce the importance of entrepreneurship in the curriculum. The range of services offered also includes activities such as competitions and prizes which aim to stimulate entrepreneurial skills. A survey conducted by Yang, Xia and Wen aimed at determining the reasons for the success of equity financing in Turkey found that they are the most preferred among entrepreneurs due to the range of services they offer in addition to financial support. Wallmeroth, Wirtz and Groh agree, pointing out that in addition to financial support, most entrepreneurs may need additional skills needed to navigate the challenging competitive landscape. Therefore, the incubation programs common to most equity investors go beyond financial support. The fact that most equity investors have already established themselves in the market means that they help inculcate that knowledge in young entrepreneurs looking to enter the market. The connection between equity funds, venture capital and entrepreneurial growth Existing literature supports the existence of a relationship between equity investments and entrepreneurial growth. Although most of the literature is based on data collected in developed world contexts, it still demonstrates the fact that equity investors are the catalyst for entrepreneurial growth. Yang et al. track venture capitalist activities in a developing economy, noting that the passing of laws to support venture capitalists' activities has resulted in a significant increase in the number of entrepreneurial activities. For emerging markets such as Turkey, most people may not access credit due to strict restrictions imposed by formal financial institutions such as banks. What makes equity investors financiersfavorites is the fact that the support they offer is based on opportunities and not on an individual's creditworthiness. For their part, most financial institutions often impose requirements such as guarantees that may not be accessible to budding entrepreneurs. In addition to financial support, budding entrepreneurs need important ingredients such as market information, networks and financial expertise. Venture capitalists and private equity funds often help fill this gap by engaging in activities such as financial education. According to Karadeniz and Ylmaz, financial support cannot necessarily translate into business support. It is the financial expertise offered by most investors that helps businesses navigate the murky waters of a highly competitive business environment. Furthermore, most of these investors can pull the right strings to help these budding investors close lucrative deals or access a certain segment of the market through their strong networks in both the business and political worlds. This is especially the case of emerging markets, where most business opportunities often end up in the hands of elites, who also act as private investors. Macroeconomic impacts of the venture capital sector 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 operational reach, 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 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 export-oriented growth strategy. The government aimed to increase the role played by the private sector in the new transitional phase, reducing its involvement and share of the public sector in the economy. The resulting shift from mixed capitalism to the market economy was designed to make the economy more competitive in the global marketplace. Isiksal et al. mention that the effect was a significant growth in the volume of exports, together with a corresponding increase in the volume of foreign trade. However, even with these changes taking place, the economy was still hit by a series of severe macroeconomic turbulences starting in 1994. Most of these turbulences were caused by currency substitution, the trend of open positions in the banking system, the boom in demand due to the economic situation and political instability. The resulting effect was a significant decline in GDP, a huge outflow of funds and an increase in inflation. Subsequent turmoil that saw interest rates reach incredible levels every year 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 results of the macroeconomic restructuring programs were positive today. The Turkish economy currently has robust levels of employment. While no national study has been conducted to determine the possible connection between the resulting positive levels of economic growth and the activities of equity investors, data fromCross-sectional studies support this relationship. In Tiftik and Zincirkiran it was observed that, following the entry into force of legislation to allow venture capital activities, the resulting increase in the number of SMEs and start-ups contributed positively to unemployment levels. Indeed, since 2008, unemployment has seen a decreasing trend, starting from 11 to a low of 9% in 2017. According to Cetindamar et al. With the increase in business activities in the Turkish economy, there has been a significant increase in the country's balance of payments, reflecting an increase in overall exports. Turkey today has grown from an economy based simply on the manufacturing sector. There is an ambitious service sector built around technology companies offering services such as web hosting, server services and related services. Challenges in accessing venture capital and equity funding in Turkey Despite the crucial role that venture funding plays in shaping an entrepreneurial culture in an economy, access to venture capital funding remains low. As noted above, the overall concentration of venture capitalists and private equity firms remains low relative to the country's 80 million population. In fact, statistics show that of the more than 80 million people in Turkey, there are only 445 equity investors, compared to 12,000 in the UK, whose population is around 60 million. This implies that relatively few companies can access the services of private equity venture capitalist funds. This challenge is compounded by the dearth of English skills among most start-ups seeking funding. Since most investors come from the English-speaking segment of the world, most budding entrepreneurs find it difficult to present their ideas to potential investors. Zacharakis says most investors are always looking for a business idea presented by an individual who understands not only the numbers, but also the business environment. This often involves the need to express oneself in English, a language not widely used in Türkiye. A second challenge is the nature of the business ideas launched by most entrepreneurs. A survey conducted by Sancak found that the majority of proposals rejected by venture capitalists and equity funds are those built around the concept of e-business. While e-business was once touted as the most promising avenue, the fact that the country has not produced a single global success story makes such ideas an inaccessible area for most investors. Given the high-risk nature associated with investing in a start-up, the priority for most investors is a high financial return and a successful existence in the shortest possible time. The pros and cons of equity and venture capital financing. The high-risk nature of most startups. up implies that access to credit is mostly limited to venture capitalists and equity funds. Therefore, a main advantage of venture capital and equity funds is that they extend funding to business ideas that otherwise might not be touched by debt-based financing. This is especially the case for high-tech companies which often have large initial capital requirements but lack the collateral needed to be financed through debt. The valuable expertise, advice and industry connections that come with it are also mentioned among the important aspects of venture capital financing. Most venture capitalists and equity funds often require the inclusion of a venture capitalist ora private equity member on the start-up board of directors. However, accessing venture capital funding through venture capital and equity funds is not without its flaws. First, securing a financing agreement is often a rigorous undertaking due to the accounting and legal costs that must be incurred. Furthermore, most investors always ask startups to give up some ownership stakes in exchange for financial support. However, this often results in a loss of autonomy as the start-up may have to include the investor in decision-making processes. The loss of autonomy also arises from the clauses often associated with venture financing. For example, before agreeing to finance a start-up, an investor may want to make changes to the start-up's management team, staff salary and business ties. Conclusion As of 2012, Turkey has therefore begun to open the economy to venture capitalists and equity funds seeking to profit from the investment market. Venture capital and equity funds were seen as the vehicles of choice given their ability to offer financing to even the riskiest business ideas. To a large extent, it appears the gamble has paid off as expected. As noted throughout the discussion, Turkey is gradually emerging as an economic power in the broader European region. The policy change has had phenomenal impacts on a once stagnant economy. Today, Turkey has gradually transitioned to an upper-middle income economy, supported by a population of over 80 million people, indicative of good ease of doing business. Venture financing has helped not only stimulate an entrepreneurial culture, but also reduce the country's unemployment rate. Please note: this is just an example. Get a custom paper from our expert writers now. Get a custom essay These findings appear to agree with those established in other markets. In the United States, venture capitalists and equity funds played a critical role in the creation of Silicon Valley. Since then, Silicon Valley has given birth to companies such as Atari, Apple, Oracle, Cisco, Sun Microsystems and Adobefounded. Today, Silicon Valley is considered a global center of technological innovation. It is therefore not questionable that there is a link between the activities of venture capitalists or equity funds and economic growth. In markets such as the UK, the activities of venture capitalists in Silicon Fen have made the region one of Europe's most important technology hubs. The area is home to a large cluster of high-tech businesses focused on software, electronics and biotechnology that employ thousands of people and contribute millions in taxes to the government. Bibliography Ankara, (2018). 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