Is There An E-Commerce Bubble In Turkey?

The Turkish government should consider carefully whether it is a wise course of action to continue investing in technology startups.

ANKARA – The last decade has brought unimaginable change to the Turkish Republic. Ten years ago the streets of Istanbul were crowded with gypsies selling tulips they’d plucked from neighborhoods for one million liras. Finding a decently priced restaurant in Anatolian heartland cities like Konya and Bursa that would accept a credit card was like encountering an oasis. And the fanciest mobile on the streets of Ankara was the barely text message capable “ghetto brick phone.”

Today, the same stolen flower will cost you one Turkish lira thanks to much improved currency policy. Nearly every restaurant has a handheld credit card machine waiters can use to swipe plastic at your table, though American Express cardholders are invited to pay cash (like every convenience store in the U.S.). And Turks are ordering food delivered to their home from an iPhone during their post-work commute, whilst flipping through Facebook and Twitter.

Much of this change is the result of liberalized economic policy and regulatory improvements on the ease of doing business since the current government took power in 2002. And among other things, the Turkish miracle decade has culminated in a booming e-commerce market.

Data from the Turkish Interbank Card Center (or BKM inTurkish) shows that there were 135 million e-commerce transactions by Turks in 2011, worth 22 billion Turkish liras ($12 billion). Those numbers point to 57 percent growth since 2010, and many of the conditions in Turkey suggest this is just the start.

When all the factors are added together, a picture of a very inviting investment opportunity appears for angel investors and venture capitalists who are interested in taking time to look at the e-commerce business in Turkey.

To start, there are over 35 million Internet users in the country, nearly half its population. This is the twelfth largest penetration of the web in the world and the fifth largest in Europe (following Germany, Russia, the U.K., and France). According to comScore, Turkey is in the top 10 global users of Facebook and has nearly 17 percent of its population Tweeting up a storm – compare this to just 8 percent of Americans on Twitter. This rate of Internet penetration and social networking use is a critically important platform for e-commerce to thrive.

Just as important is the capacity of companies to deliver their products. Turkey has a well-functioning cargo system with multiple shipping firms that can deliver products anywhere in the country within 24 to 48 hours.

While credit cards were in limited use a decade ago, today the penetration rate is strong. There are over 51 million credit cards in circulation, and last year debit card holders made over 1 billion transactions, according to BKM.

Perhaps the most enticing aspect of the outlook for Turkish e-commerce activity is the young population. Over 93 percent of the nation is under 65 years old, and 26.6 percent of the population is less than 15 years old, according to the World Factbook. Compare that to Italy’s citizens 65 and older accounting for 20.3 percent of its population and Germany’s seniors totaling 20.6 percent of its people. Italians 14 and under are only 13.8 percent and Germans the same ages are a mere 13.3 percent of their population.

The statistics are essentially the same for all of Europe, suggesting that Turkish businesses are the best positioned to take advantage of a large consumer base that is tech savvy and growing up in a booming economy.

Having said all this, there are at least two concerning factors that should suggest a modicum of caution.

The first concern is whether government “investment programs” providing cheap financing without requiring any ownership stake are supporting or crowding out the growth of angel investing, venture capital, and private equity.

The Turkish government has been very active in supporting technology start-ups. For example, a Turkish government agency for small-to-medium-sized enterprises known as KOSGEB will finance 70 percent of a venture up to $400,000 without requiring an equity stake. Other programs cover between 50 percent and 75 percent of technological innovation development costs, with one agency reportedly doling out as much as $1 million in incentives to a single project. Little of this comes with expert analysis or criticism, and the government is more interested in a large number of start-ups over careful targeting of the best concepts.

Some private investors view this as a positive since companies they invest in have ready access to substantial funds to boost development. Others are frustrated since the incentives of cheap or free government money means they have fewer companies coming to them for financing (as basic economic theory would suggest). And it turns out that there were no Turkish venture capital firms until the founding of 212 Ltd. last year. Lastly, simple logic tells us that governments not pressured by the profit motive will destroy a lot of capital as they almost by definition funnel money into that which mattered in the past.

If the Turkish government is crowding out private investment, officials at agencies like KOSGEB should seriously reconsider the unintended consequences of its “help.” Beyond just reducing the prospects for Turks to use their private capital to invest in Turkey, such incentive structures guarantee there is more capital flowing to e-commerce and other technology projects then the private sector would otherwise provide because of its more thorough analysis of company valuation. Turkish officials should recognize that they are in a rapidly changing environment and lack the necessary expertise to properly value the hundreds of projects they provide money for each year.

This is the second point of concern: whether the e-commerce market is overvalued and overly optimistic about its future because government resources have artificially inflated values.

In 2011, the e-commerce market in Turkey exploded. A South African firm acquired a 70 percent stake in Markafoni, the largest private shopping network in Turkey in a deal that reportedly valued the website at $200 million.

Around the same time, venture capitalists Kleiner Perkins and Tiger Global invested tens of millions in fellow private shopping network, which had $100 million in revenues just 18 months after launching. These VC firms reportedly are valuing the very young “high-quality, low-cost” web store at around $150 million.

The problem is that this and other valuations are based on very little actionable experience. Since many of these websites are new and exciting, it remains to be seen how popular they really will be in Turkey over the long run. Valuation is always a tricky thing, but as the U.S. learned around the turn of the millennium, animal spirits can really get the best of investors when blinded by the juicy return prospects of an e-commerce business.

In April of this year, eBay completed a deal to purchase Turkish online shopping center (which translates to Going,Going, Gone) in a deal valuing the company at whopping $215 million. Whether this is the mark of a bubble in the e-commerce sector remains to be seen.

While the top 20 e-commerce sites saw an average of 60 percent growth in unique visitor traffic last year, according comScore, there are well over 100 e-commerce players in Turkey. It is far from certain that the Turkish consuming public, even with all of its positive trends, can sustain this many shopping networks over the long haul.

During the first American e-tech bubble (there is perhaps a second one forming now?), investors couldn’t get enough of their and When the bubble popped many of the unsustainable business models folded and the few strong Internet markets remained. The dominance of was due in part be cause it was able to execute better than anyone else.

So, too, will the case be when the Turkish e-commerce bubble pops. Only the most reliable and durable projects will remain. In the meantime, with an unclear future for a rapidly expanding market, the Turkish government should consider carefully whether it is a wise course of action to continue investing in these technology startups.

Anthony Randazzo is the Director of Economic Research at the Reason Foundation. He can be reached at This commentary originally was published by RealClearMarkets on May 31, 2012.