Enter the World of Tech Start-Ups and Investments in Turkey
We hear exclusive insight into Figopara’s $11 million investment round and expertise surrounding Turkey’s latest tech start-ups and investments from those involved with the deal.
Görkem Gökçe, Founding & Managing Partner of Gökçe
The Turkish startup ecosystem has experienced a significant increase in the number of tech start-ups spearheaded by the gaming, finance, health and eCommerce sectors, which have attracted domestic and foreign investors and grabbed billion-dollar investments by reaching record valuations. At Gökçe Attorney Partnership, we provide legal expertise to a swath of tech start-ups at every stage of their journeys.
Figopara, a pioneer fintech Turkish company, is one of the start-ups to which Gökçe provides its key legal expertise. Figopara offers solutions for cash flow problems arising from the discrepancy between the payments and collections of companies, acting as an intermediary between financial institutions and suppliers with the Figopara online platform. Since Figopara’s establishment, Gökçe has been aiding Figopara and its founders in all legal and financial processes with its years of experience in the start-up ecosystem.
Figopara received an investment of $11 million at a valuation of $50 million in its latest investment round, which was closed in the last quarter of 2022. In this investment round, Figopara has secured investment from 11 local and international leading investors, including the International Finance Corporation, the private sector arm of the World Bank Group, and local and cross-border investment funds.
Görkem Gökçe, the founding and managing partner of Gökçe, aims to transfer his deep knowledge of the start-up ecosystem to Turkish start-ups and to contribute to their aim of becoming influential regional and global actors.
Investments in Turkey
Is there a particular sector in Turkey that has attracted significant investment in recent years?
It is easy for me to say that Turkey has risen to a new level and become a core investment area in many different sectors in recent years. In 2021, more than 300 start-ups were established, receiving a total investment of $1.5 billion from nearly a thousand investors.
In the last two years, eCommerce, gaming and data analytics in finance (i.e. AI and machine learning) became the emerging sectors, receiving the most investments. I would like to highlight that most of these investments were made in start-ups that had just received their first investments, while almost half of these start-ups were founded in the last 2 years.
As such, it is safe for me to state that eCommerce, gaming and data analytics have received significant investments and have shown greater development than in other areas in recent years, although their rankings (in terms of the number of transactions) vary. It is because conventional production ideas are being replaced by technology, software, and even blockchain-based applications in today’s world. I find these developments will have positive impacts and believe that the number of such initiatives will only increase in the upcoming years.
What are the reasons behind the recent surge in investment in Turkish companies?
Turkey is a regional hub. Having the potential to address a large market and having a young, dynamic, and educated population can be listed as the reasons for the recent increase in investments in Turkish companies. I believe, however, that the most important reason for the surge is the increasing number of creative start-up ideas.
As the world is moving away from conventionality towards a technology-centric understanding, the investments in Turkey are in line with this global trend if not faster. I can easily state that the large number of projects developed by Turkish entrepreneurs, especially in the past 5 years, and the number of incentives and support mechanisms provided by Turkish legislation for investments in start-ups, are the main driving forces behind the development of the start-up sector in Turkey.
How is the Turkish government acting to encourage this investment?
Turkish legislation provides many incentives and supporting mechanisms for all investments in Turkey, and in particular for investments in start-ups. For instance, if the share certificates related to the shares acquired through an investment in a joint stock company are held by the investor for at least two years, the income from the sale of such share certificates is completely exempt from tax for real persons and substantially exempt for legal entities. Further, the start-ups and companies carrying out R&D activities have more tax exemptions.
Turkey is a regional hub. Having the potential to address a large market and having a young, dynamic, and educated population can be listed as the reasons for the recent increase in investments in Turkish companies.
As for the venture capital market, the Turkish capital market legislation regulates various financial institutions such as venture capital investment trusts (VCITs) and venture capital investment funds (VCIFs) have many advantages over venture capital investments and, thus, over start-ups.
Firstly, the earnings of VCITs and VCIFs arising from their activities, including the purchase and sale of shares, are exempt from corporate and income tax.
Secondly, they can provide a mix of debt and equity financing to start-ups, which is a method provided only for the shareholders under Turkish legislation and VCITs and VCIFs.
Lastly, carried interest and management fees, which are remuneration incentive mechanisms for the managers, are introduced to enable start-ups to receive professional management support for investment processes from experts in their fields.
What do you perceive to be the main challenges for foreign investors looking to invest in Turkish tech start-ups?
It would be best to answer this question from a financial and a legal perspective.
One of the main challenges that foreign investors may face in Turkey is finding business partners with deep knowledge and expertise in the start-up sector and professionals who can provide brokerage and advisory services for the investment. Unlike traditional businesses, start-ups have their own set of dynamics and it is therefore critical to work with advisors who understand the structure, nature, functioning and basic motivations of start-ups, rather than with advisors having a conventional perspective. In this regard, as a firm that always aims to meet the needs of its clients, we provide legal support and expertise for foreign investors new to Turkey through our membership in international platforms and institutions operating in various countries around the world.
What role do you and your team play in helping investors overcome these challenges?
As Gökçe, we have deep knowledge and know-how gained from years of working with start-ups. Since our establishment, we have provided legal consultancy in all stages of a start-up journey, from their establishment to potentially their exits. Further, as we operate on a full-service basis, having Corporate, TMC&Privacy and Litigation departments, we can easily meet the needs of our start-up and tech clients.
One of the very unique features of the Gökçe team is having the ability to structure the legal deal in the most appropriate way for the financial outcome that the parties intend to reach. We always prioritise understanding the financial dynamics between the investor and the investee to design the legal relationship.
Last but not least, the long-established and high-quality network that Gökçe has developed in both legal and financial circles over the years plays an active role through its business partners competent in their respective fields, in providing the expertise that foreign investors and start-ups may need in different fields.
One of the very unique features of the Gökçe team is having the ability to structure the legal deal in the most appropriate way for the financial outcome that the parties intend to reach.
Are you seeing any notable trends in the way these tech companies operate and the impact they are having on the Turkish economy?
The main goal of tech companies is to provide products and services in a more practical, cost-effective and accessible way. Tech start-ups provide more accurate, faster, and more affordable solutions than conventional tools in areas in need of development ranging from the daily needs of people to the financial analysis necessities of the business world. It is much clearer what the core activities of tech start-ups are and how they can advance these activities through the lens of this determination. In this context, the main tendency of tech companies to provide more accurate, fast and affordable services and to automate these services is to collect more data. To achieve this objective, data analytics, artificial intelligence and machine learning activities may be listed as the main trends observed in the activities of tech companies.
The second issue that I can address at this point is ’confidentiality‘. In a globalising world, access to all kinds of information is becoming easier and easier day by day and this has disadvantages as well as advantages. Data analysis has reached the sophistication level to enable personality analysis, and personality analysis is a tool that can be used to direct masses. Consequently, even though data analysis is essential for the advancement of service industries these days, confidentiality and privacy concerns embedded in data analysis are more relevant than ever. However, the solution for these issues is, in turn, technology itself.
Whilst there have been several high-profile privacy violation cases and tracking of cryptocurrency transactions, blockchain-based solutions such as decentralised identity and zero-knowledge proof prove to be useful in allowing individuals to have control over their data and privacy. It is clear that this will be at the forefront of the considerations of most financial actors in the upcoming years.
Life at Gokce
Do you foresee your team working on other significant transactions in Turkey in the coming years?
Since our establishment, as Gökçe, we have played a key role in the investment rounds and exit transactions of our clients’ start-ups as well as the ongoing operational advisory services. Even in 2022 we were involved in several transactions of similar size to the investment round of Figopara or even larger, whether publicly announced or not. The number of investments we provide our legal expertise has been rapidly increasing in the past few years. It is no surprise that we continue to play a key role in transactions of such sizes considering the number of start-ups to which we have provided our expertise in the past, be it in the stage of establishment, pre-seed investment round or seed investment round.
Have you seen any shift in your practice in response to the global economic downturn?
Since our establishment, we always had a diverse client portfolio including both conventional companies and start-ups.
The ongoing worldwide crisis and manoeuvres of financial actors, including central banks, to curtail cash flows have made it difficult to access funds in many sectors. As a principle relevant to the markets and economy in general, every crisis contains the seed of an opportunity. In recent years, both the economic crisis and other crises, such as the pandemic, have led to a contraction in some conventional sectors, while paving the way for others. Figopara is a great embodiment of this principle. Figopara, as a fintech company mediating solutions for cash flow problems, has been able to bring in a solution to the cash flow problem faced by market actors. This idea was happily welcomed by investors as a solution to the current crisis and led to one of the largest investment rounds in Turkey in 2022.
Apart from this, the other start-ups that we provide consultancy have developed solutions to shift physical services to online mediums responding to a pressing necessity during the pandemic; therefore, they were able to grow fast amidst the crisis.
Finally, due to the impact of the economic crisis on investors’ risk perception and behavioural finance attitudes, many investors have shifted from traditional investment instruments to start-up investments.
Figopara, as a fintech company mediating solutions for cash flow problems, has been able to bring in a solution to the cash flow problem faced by market actors.
These realities have shown that shifting circumstances create new business areas with new challenges and opportunities for expansion within existing business areas. I would like to underline that, by providing consultancy services to our clients operating in various fields, we can easily adapt to the new conjuncture brought by the rapidly changing and sometimes shrinking market and, in the meantime, be affected minimally by the floating structure of the economy.
What are the most common challenges you encounter in advising start-ups on their investment rounds?
The fundamental challenge faced by all start-ups is the same as the basic assumption of economics: the demands of financial actors are unlimited; however, the resources are limited. This fundamental assumption is present in all aspects of everyday and commercial life. The situation of investors and start-ups participating in investment rounds can also be perceived through this assumption. At this point, the main challenge in all start-up investments is balancing the demands of the parties to the transaction. Considering multilateral and cross-border transactions, achieving a common consensus can be characterised as an objective challenge in any transaction.
As Gökçe, we also analyse the financial demands of the parties to the transaction and strive to ensure that the demands of the parties are reasonable and in line with market conditions and that the transaction is carried out in accordance with the joint and mutual will of all parties. With the expertise we have accumulated over the years, we try to reflect the economic demands of the transaction parties to the legal realm, both through the tools already regulated in the legislation and through new legal fiction to the extent permitted by the legal order. Therefore, this situation, which can be characterised as an objective difficulty, is subjectively manifested as an added value for us when considered together with Gökçe’s depth of experience.
Ayse Ülkü Yalaz and Nilay Goker Duran, partners at NAZALI
NAZALI is an international full-service law firm that provides a broad spectrum of advisory services to its clients with a qualified team of lawyers and other experts in different practice areas. These practice areas comprise tax, competition lawantitrust, IP, finance, privacy, customs, social security and audit. The Corporate and M&A team at NAZALI is co-led by partners Nilay Göker Duran and Ayşe Ülkü Yalaz. With more than 15 years of combined experience, the team provides advisory services to its international and local clients on all stages of buy-side and sell-side M&A transactions and represents investors, entrepreneurs, and start-ups in growth finance deals as well as fund raising and structuring. Considering highly interdisciplinary processes, such deals are evaluated by a wide range of other experts led by highly reputable partners, making NAZALI the best fit for such transactions. NAZALI reflects its deep sectoral knowledge in sector-specific M&A transactions in the healthcare, energy, fintech and automotive sectors, along with others.
NAZALI’s core objective is to establish a long-term and trust-based relation with its clients. What distinguishes NAZALI is its ability to evaluate matters from all related aspects under one roof to create comprehensive solutions and to develop solid strategies by virtue of interdepartmental communication.
Can you tell us more about the work performed by yourself and your team during this investment round?
We represented the leading investor, L2G Ventures, who was referred to us by our existing client and one of the investors of this deal, ScaleX. We always feel privileged to work with highly reputable and experienced clients. We conducted a thorough legal and tax due diligence and advised L2G Ventures on drafting and negotiating the deal documents. We also assisted our client during the signing, closing and post-closing stages.
What obstacles did you overcome in the course of the round, if any?
This was an in-depth legal due diligence process that required analysing numerous regulations entangled with one another, including banking and finance, eCommerce and privacy. Yet there are some non-regulated aspects to markets supported by fintech and technology. In that respect, legal due diligence was quite challenging as it also involved certain unregulated matters. To refrain from disrupting the innovative and dynamic nature of this sector and to overcome problems encountered, we liaised on such issues with the Figopara team to systemise and understand their operations, which allowed us to identify advantages and risks accurately with a business-minded approach. Thanks to our client, we also adopted an entrepreneur-friendly approach with an open dialogue by sharing our due diligence findings with the Figopara team, allowing them to clarify such issues in a prompt manner ahead of closing. With the valuable cooperation of Figopara and their legal counsels, we were able to run such a complex process swiftly. We believe that such an approach provided significant benefits for the other investors as well.
Finalisation of the SHA was quite intricate considering Figopara’s relatively complicated shareholder structure and complex clauses accustomed to growth finance deals including liquidation preference, anti-dilution and others. Since SHA was subject to English law, we had to prevent conflicts to make it compatible with directly applicable rules under Turkish law. Finding a balance and reaching a viable SHA and articles of incorporation was vital and challenging. We overcame these challenges and tailored the SHA by working together with the counsels of all parties, making invaluable contributions.
Furthermore, tech M&As are under scrutiny in Türkiye. The Turkish Competition Authority, which has amended its communiqué concerning mergers and acquisitions recently, is particularly interested in such deals. We established that obtaining approval from the Authority was also vital for this deal. Accordingly, the deal was tailored to allow certain control change clauses to be enforced following such approval and hence those were dealt with, designed and tailored separately in a way that could be legally enforced.
How did you work with Gökçe Attorney Partnership and other firms to ensure a satisfactory outcome for all parties involved?
Representatives of Figopara and Gökçe Attorney Partnership as well as other parties’ counsels made invaluable contributions to the process with their cooperative, constructive and open approach. We had previously worked with our colleagues on different transactions, which allowed us to overcome challenges in a more amicable and prompt manner. Such a big deal with so many parties involved would not have been possible without the support of all parties involved with great harmony and teamwork.
Are there any other comments that you would like to make about the operation?
Growth finance deals are not short-term transactions. Processes following the closing are also vital as ensuring stability is imperative. We also prepare a ’closing bible‘ that outlines what needs to be considered after a deal is sealed. Accordingly, we continue to assist and support our clients for the post-closing actions.
Last but not least, we also observe that sometimes the legislation falls behind emerging technology-related markets. As legal practitioners we are keen to understand the dynamics of these technologies, be a little less conservative by finding a balance, and determine an appropriate perspective for innovative and dynamic sectors with a solution-oriented approach.