Co-investing with local investors

We invest in two markets, Turkey and the US. However, we’re located in Turkey and I spend 11 months of the year in Istanbul. As a result, our investment strategies in Turkey and the US are very different.

In Turkey, we are a local investor. This gives us the market knowledge, ability to perform extensive research, network, and access that are necessary to be a successful investor.

In the US, we have a weaker position along each of these dimensions. As a result, we co-invest with local investors who fill each of these gaps.

As I shared in an earlier post on the importance of performing fundamental research, this is a suboptimal strategy. The VC business is a local business and it’s much more difficult to perform the fundamental research you need to be very successful without having a local presence. However, we still invest in the US even though we know that our strategy won’t let us perform as well as the top 10% of US investors because, by co-investing with the top 10%, we believe we can be in the top 25%. And this is good enough.

Because of our experiences investing from Turkey into US startups, I had a different reaction than our entrepreneur when an international investor recently looked into investing in one of our Turkish startups. In order to participate, the international investor required that a local investor lead the round.

Our entrepreneur viewed the investor’s search for local social proof as a poor signal about the quality of the investor. He believed that the investor should be performing their own fundamental research and arriving at an independent investment decision.

If the investor were a local investor, I would have agreed. However, since it’s an international investor, I disagreed. I think that the international investor’s search for a local investor to lead the round sends a positive signal about the quality of the investor. Although this strategy won’t let the international investor perform at the level of the top 10% of local investors, it can land them in the top 25%. It’s exactly our approach in the US.

Also published on Medium.