This document summarizes the state of innovation and entrepreneurship in Turkey. It finds that while Turkey has strong potential due to its large population of educated youth and emerging middle class, it has fallen behind globally in innovation and remains overly reliant on traditional industries. Barriers to greater innovation include lack of funding, risk aversion, weak intellectual property protections, and an unstable political climate that hinders reforms. However, recent government initiatives and growing private sector interest in venture capital have the potential to help Turkey become a global leader in innovation if these barriers can be addressed.

1. Is Innovation a Turks' Game to Create New Wealth? A. Mete Çakmakcı J.P. Morgan Asset Management Breakfast Meeting June 7th, 2011 - İstanbul

2. Making Sense of Turkey “… After a glass or two, what at first seemed clear becomes obscure. By the time the bottle is empty, everything appears murky and confused. Yet through this evocative haze, truths about Turkey may be most profoundly understood … … Rakiled me to wonder why so much of its potential remains unrealized. Turkey is undoubtedly the country of the future, but will it always be? … … By the time they drain their final glasses and step out into the darkness, they have often concluded that their country is either the “golden nation” destined to shape world history or a hopeless mess certain to remain mired in wretched mediocrity…” Reference: Stephen Kinzer, “Crescent and Star: Turkey between two Worlds", Farrar, Strauss and Girous, 2001. 2

3. Source : Sak (2009) “KüreselleşmeninTürkKOBİ’lerineetkileri”, TEPAV Innovation Mercenaries 3

4. A future mutual partnership? A place of limitless exotic fun? A curious tease? An economic partner from a safe distance? Where is the Brand Equity? 4

5. Catching up or Lagging Behind? Turkey is labeled under “catching up with moderate growth” Source : European Innovation Scoreboard 2008 5

8. Many return with business ideas.The Story : Demographics 6

9. Emerging Middle Class Source: ODD, TURKBESD, DHYMI, TBB 7

10. Innovation Dynamics Knowledge is GLOBAL, value is LOCAL 8

12. BUT, in 2010 edition of Booz Allen’s «The Global Innovation 1000» list, there are only 3! 9

15. Culture very similar to East Asian examples.10

17. Thin capital positions to support indigenous growth11

18. European Benchmarking Source : European Innovation Scoreboard 2008 12

19. Global Benchmarking Source : www.worldbank.org/kam 13

20. A Regional Production Specialist Source : The World Bank 14

21. Country’s share in total manufacturing exports of the region (%) Share of manufacturing in Country’s total exports (%) Source: TEPAV, UN Comtrade data Largest Manufacturer in the Region 15

22. Rising sectors Star sectors Traditional sectors Failing sectors Market share in 2009 No «Star» Export Industries Source: UN COMTRADE, TEPAV calculations 16

24. Bad news is, still high exposure to troubled regions and markets, not much exposure to Far East and South America 17

25. Number of product groups with above $ 500 million exports (HS4 classification, 2 digit, 2008) Source: TEPAV, UN Comtrade data Export Diversification 18

26. DiversificationvsSophistication Export Sophistication Index (EXPY) Turkey and selected countries (1995-2009) Source: COMTRADE, TEPAV analysis 19

28. Factor-driven economy Efficiency-driven economy Innovation-driven economy low-cost inputs productivity unique-value Source: WEF Where does Turkey stand? Turkey was a transition economy from efficiency-driven to innovation-driven in 2009. In 2010, WEF downgraded Turkeyto efficiency-driven. Upgrade to an innovation-driven economy? Need for a large set of reforms in a wide set of areas Education, judiciary, public administration, infrastructure investments Risk: no-reform political climate The period ahead will be even less conducive for reforms: elections in 2011, 2012, 2013, 2014, 2015 …. Mid-Income Trap 21

31. 28 active TDZs support 1515 firms employing 13,000 R&D staff generating 540 Million USD in exports. (mostly software companies)

32. 76 R&D centers facilitated 1,9 Billion TL in R&D spending by the private sectorSource : OECD STI Scoreboard, 2008 23

34. EuropeanCountriesShare of PrivateEquityInvestments in GDP (2009) Source: EVCA A “Virgin” Market 25

35. Funding for Innovation : VC Turkey has an open capital regime, for most sophisticated institutional investors local context is irrelevant. But, with no historic data it is impossible to wager for risk of investing in Turkey... INVESTORS Local dept is non-existant No tax incentives to investors Mostly international institutions MANAGEMENT REGULATORY FRAMEWORK The regulator is not willing Team profiles are generic Often chasing after same investors and deals INVESTEES Low skills to develop projects Strong unregistered activities Extremely sceptical of external finance 26

36. Majority Ownership INTERESTING Minority 5 M EUR Mega Investment Size A Trivial Investment Radar 27

37. Current opportunity profile requires more “hands on” investments People with people skills and a vision for the business are required Management Skills 28

39. No question that there is ample supply of local talent with some international experience/exposure

40. Most team profiles have strongrepresentationfromI-Bank and consultancy careers

41. Job is more than deal making – it’s about growth and exit

42. Recently deal terms are shifting to more conservative (I-Bank)

43. Profession is more art than science – should look for diverse skill implants and spin-out teams – localempathy is important (“talk to talk, drink the tea”)

44. Anotherurgencyto develop local Turkish investor baseA FewGood Men 29

46. Deep talent pool is a strong enabler

47. Where is the deal flow?Source: EIF 1995 - 2002 2002 - 2010 30

49. 71% of all transactions took place after 2006

50. Of 86 public transactions, 65% were within 0-25 M USD31

52. So far the largest private investor in PE/VC is the İş Group in İş Girişim

53. Garanti is an investor in İstanbul Venture Capital Initiative

54. Many Turkish Blue Chips (including big manufacturing and services conglomorates) expressed interest in setting up their own funds. (some are already recruiting management)

55. “Minority psyche” is big barrier for most to commit to a fund

56. Unrealistic expactations on representation in investment decisions

57. Concerns on branding

58. Too early to speak about “retirement funds” in TurkeyInvestor Profile 32

60. Second/third generation is taking over in the family owned SMEs. Theymeanbusinessandareopentotheworld

61. Investors and Banks are quickly adopting to finance innovation. Theyneedto ‘innovate’ tostayrelevant

62. Big companies are still a big «?»

63. Capacity on the demand side is developing faster than the suppy side of policy and programs. Civil initiatives are mobilizing. Legaciesareslug.

64. Innovationand related buzzwords are still crowding out the agenda.

65. Challenge : Can Turkey be the ‘California’ of Europe?33

67. A public private partnership built upon the market credibility of the investors

68. Fund size is 160 M EUR. As of June 2011, 41 M EUR have been committed; 71,5 M EUR are under negotiation (24 M EUR is anyday for signature)

69. Full commitment is expected before the end of investment period at the end of 2012 – «iVCi 2» is under discussion

70. iVCi helped create strong awareness in the market, providing a mentoring facility for new/emerging teams

71. iVCi Strategic Network is currently chaired byMr. Ali Sabancı, a highly visible enterpreneur and investor.34

73. Turkey has extensive experience on localization of special purpose administrative structures

74. It might be time to consider setting up a proper “free financial zone” with its own regulator in line with other government priorities inside Istanbul

75. Sectorneeds a professionalassociation

76. TurkVCA is MIA since 2004

77. Concernsoverhighvisibility

78. Reliable data andstrongrepresentation is neededtodevelop a goodconductsectorand marketFuture of PE in Turkey 35