The World Is Not So Flat in Istanbul...

Putting the Angel back into Angel Investing...

The concept of angel investment groups has evolved much over the past seven years. It used to be that these organizations were semi-formal groups of high-net-worth individuals being able to discuss and invest into (primarily local) novel ideas and entrepreneurs. An added bonus offered to members of these groups was (and continues to be) the social aspect of being surrounded by like-minded and like-demographic ‘rich friends’. 

The method for investing into new ideas and entrepreneurs was relatively easy and un-intimidating. General group discussions took the place of more formal due diligence exercises and there was a very distinct difference (some refer to it as an invisible wall) between angel investments and venture capital.

The times have certainly changed.

Many angel investment groups (including the one I’m involved in: Icon Angels) have internationalized and formalized the angel investment process to a point where deals are fashioned together the same way as in any venture capital fund.

I’m a firsthand witness to a very real phenomenon within these groups: the impact of group think.

Due primarily to this new formal environment (investment process) of the angel groups, many ‘creative ideas’ are no longer being considered as investment grade and when they are actually presented to these organizations, they are often rejected by the very processes that were so essential to the development of new ideas only less than a decade ago.

I’m finding that entrepreneurs with projects still in the ‘idea’ phase are no longer the projects angels are keen to explore. The novelty (and the adventure) of investing into a seed idea that could possibly bloom into the next Google or Apple is no longer a risk many angel groups are able to digest during their regular ‘round-table’ discussions and unfortunately the main culprit is the phenomenon of ‘group think’.  I often tell these daring entrepreneurs that their only real chance of finding the capital to launch their project is by identifying the lowest hanging fruit – their family and close friends.

There is a way to beat the group think phenomenon.

I believe it is now time for angel groups to focus on specific sectors where its members are well versed in the details, trends and strategies of identifying the right idea ready to blossom. Such an organization will remove that ‘one’ angel that may know just enough to be dangerous about a certain subject to derail a potentially brilliant idea within a group of angels who may not fully understand the subject matter.

If given the time, I hope to explore more focused angel groups with investors who are subject matter experts and are able to conduct detailed round-table discussions on novel ideas. This is all in the hopes that we can push through more deals and bring back adventure into angel investing once again!

In order to stay true to the angel investing principle: Is there anyone out there who is adventurous enough to help me put it together? ;)))

Investment Ecosystem in Turkey

I believe the title of this blog – “The World Is Not So Flat In Istanbul” – is an accurate description of the investment ecosystem in Turkey. The entire sector is comprised of a curious mélange of angel investors, venture capitalists, private equity firms, and investment banks; practically vying for the same deals at the same time, within the same network.

The notion of size or focus seems not to have developed in the same way as it has in the US market for investments. It does not really matter what type of investment categorization your firm is a part of because chances are, it will invest in any deal starting from $500k to, well… pretty much anything. There seems to be nothing these Turkish investment houses are not willing to sink their teeth into. As is the general case for many developing nations across the world, the market could easily be summarized in one word: chaotic.

If you’re wondering, this peculiar ecosystem did not simply evolve out of thin air. There are multiple (and sometimes complex) factors that are at play here. If we can figure out the underlying fundamentals of this type of market behavior, then I strongly believe it would be that much easier for international investors to make wiser acquisitions in Turkey. The following are the factors that (in my opinion) are at play within this particular market space:

- Size. Although the Turkish economy is securely in the top 20 economies of the world, it is still rather small in size. There are only a limited number of players within each industry that are actually eligible (in terms of risk and growth potential) for investment. Approximately 95% of the Turkish economy consists of small ‘mom and pop’ entities and most of these ‘shops’ are not ready (in terms of managerial know-how, organizational structure, financial structure, and technology) to take the next step alongside a formal investor. This does not leave much room to maneuver for formal and institutional investors.

- Undefined investment market. Institutional funding is relatively a new industry in Turkey. Until 2006, FDI hovered around $1billion per annum here. Upon radical reforms, this figure suddenly increased to $22billion+ per annum and therefore the industry has not yet reached maturity. Many of the mid-sized firms are only now beginning to understand the elemental value that a formal investor can bring to the table.

- The markets in Turkey are based on relationships. There is, in fact a very well established angel investment practice in the country – however it is not one that we are familiar with in the US. The system here is based on the degree of your relationship and the reach of your network. In addition, one of the side-effects of the market being relatively small is that word (gossip) can get around the business community very quickly. Anyone who has been through an acquisition will know that rumors can be deadly to a potential deal – and this is certainly the case here in Turkey. Since most of the business community is separated by no more than two degrees, it can be tricky to make the right deal.