Exits in Turkey

One of the most frequent questions I get from investors evaluating the attractiveness of investing in Turkey’s internet sector is about the health of the exit environment.

Going public and getting acquired are the two most common paths to exit for internet startups. The first hasn’t happened yet in Turkey, although I believe it will in the not too distant future. The second requires an acquirer, which can either be a local or an international company. Local companies don’t have a track record of acquiring successful internet companies, so this leaves international companies. Indeed, the two largest acquisitions in the Turkish internet sector to date have come from international acquirers, with Delivery Hero buying Yemeksepeti for $589M and EBay acquiring GittiGidiyor for $217M.

The range of potential exit options available to Turkish internet companies is indeed less than the range of options available for internet companies in markets like the US and Western Europe where going public and being acquired by a local company are more readily available options. However, as Yemeksepeti and GittiGidiyor show, great companies achieve great exits no matter where they’re located.

In thinking about our exit prospects at Aslanoba Capital in Turkey, I rely on the exit track record of my old fund Romulus Capital‘s first fund in the US. We launched the fund in 2008 and had invested in 17 companies by the time I left in 2013. During this 5 year period, 1 company, Crocodoc, had achieved an exit by being sold to Box in 2013. Another company, Gyft, was sold to First Data a year later in 2014. It’s now 2015, 7 years following the first fund’s launch, and 2 companies have been sold. This is 2/17=12% of the portfolio.

At Aslanoba Capital we invest at the similar seed and early stages as Romulus. We’ve invested in 39 companies in Turkey so far. If we use the same figures as Romulus, we would expect 12% * 39 = 4-5 exits in 7 years. Since we started investing in 2013, this means that we would expect 4-5 exits by 2020.

We also need to adjust for the different exit environments of the US and Turkey. It’s very rare for an internet company to go public, even in the US, so I’m not going to adjust for different IPO environments. This leaves acquisitions. Acquisitions are split between international buyers and local buyers, and since local buyers for successful internet companies have yet to emerge in Turkey, I’m going to apply a 40% discount to the number of exits that we would expect to see in Turkey. I recognize that the 40% figure is arbitrary. We can talk at length about whether the discount should be 30% or 60%, but for the purpose of this analysis what matters is the approximate directional effect.

Applying a 40% discount to the expected 4-5 exits in order take into account Turkey’s exit environment, I expect 2-3 of our startups to exit by 2020. While this may seem like a small number, we need to keep in mind that the companies that do exit are likely to be the best performers in our portfolio. And in a venture world where returns are driven by power laws, one exit alone has the potential to return multiple times a portfolio’s original investment amount. If we can get 2-3 very large exits by 2020, we’ll be in great shape.