A Turkish Private Equity Web Log

In an effort to cover the Turkish Private Equity Industry - for the promotion of Entrepreneurship, the private equity asset-investment model, and the communication thereof.

The Long Tail of Venture Capital: the Deal Flow Learning Curve
In 1999, working as an analyst for an Internet filtering company, we saw the Long Tail early on. With the top 300 sites comprising 50% of total page views and the top 1500 garnering two-thirds, little did we know at the time that our graphical representations of content and total number of hosts held the secret for Amazon’s, Ebay’s and iTunes’ future sales successes – the economic theory of The Long Tail for multimedia retailers and entertainment.

The idea stems from supply-side economic theory, where retailers have to rely on limited shelf space and stocking of popular items (hits) in order to maximize their revenue, thus you have supply and demand setting the price – the economics of scarcity. This fact still holds true for the Wallmarts of today. However, the idea of the Long Tail suggests that if you can make every product available to your customer (an economy of abundance) and get it to them easily while not even maintaining an inventory, then popular item #100,000 is just as important as popular item #9, and therefore, every sale does not increase your cost. Reaching economies of scale just got a whole lot easier. Meanwhile, producers and retailers still profit and customers get cheaper products (in theory) and more choice over time.

For those of you who haven’t read the Long Tail, go to Chris Anderson’s original Wired magazine article that started the “big head” rolling on his best selling book "The Long Tail". For a critique of what makes a Long Tail business, go to Guy Kawasaki’s "The Wrong Tale: A Checklist for Long-Tail Implementations" (for criticism is what Guy does best). Apparently, VC’s in the Valley are sooooooo tired of hearing entrepreneurs spout the Long Tail implications of their businesses in their plans. I digress.

The Asymmetrics of Deal Selection

In December, E-mbrio, the in-house incubator/VC of Teknoloji Holding, came forth last month with some interesting opening results since their foundation in June. As reported in the Hurriyet, E-mbrio has had 450 ideas and plans submitted through their website from prospective entrepreneurs in the last 3 months (or since their inception?). Of course, E-mbrio is only a €3 million fund for seeds and start-ups. Their outlook is to invest in 3-6 projects a year, potentially reaching 25 projects by 2010.

Of these 450 that applied, 10 were called for presentations and 2 of these companies received undisclosed funding. On a side note, I ask you, "Is this an accurate barometer of Turkish VC deal flow?" In my mind, for Turkey, any deal flow is good deal flow. Thus, I congratulate E-mbrio and look forward to their success for the sake of the industry.

Nevertheless, I couldn’t help but notice – you guessed it – a long tail. (C’mon, everyone is seeing them everywhere, anyway.) We know that generally 6 out of every 1000 business plans reviewed get funded. From the VC’s perspective, this is a tedious process, but you can see how the right team, the right plan, the right financial structure and a little luck can separate the wheat from the chaff. The right plan has what it takes and the half-baked plan doesn’t. Once funded, who are we to know that the brilliant idea from the VC that saved an entrepreneur’s production time or millions in expenses didn’t come from a half-baked plan sitting in his trash bin? Who are we to know that a funded entrepreneurs revenue-generating focus or marketing angle didn’t just come from a VC’s lunch date with a socially-inept entrepreneur-introvert who didn’t have a management team? Just like asymmetrics of information that works both ways when an entrepreneur is presenting the value of an idea in a VC’s conference room, so too does the quantity and quality of information given to a funded entrepreneur by the VC. Napoleon Hill once said, "Ideas are the beginning points of all fortunes." This is the intangible value of deal flow for a VC.

The Long Tail of Venture Capital

In this case, the economics of mass deal flow and receiving half-baked business plans could ultimately lead to successful investments and exits – steering VC’s (or incubators) in the right direction by providing information on upcoming trends, ideas, products and services that could potentially work (and be fine-tuned) in the future.

Not only do the small hits and half-baked plans prepare VC’s for the reception of future home-run presentations (what is right and what is wrong), but it builds their repertoire of potential leaders, managers and entrepreneurs in their list of contacts that could aid head-hunting for future investee companies.

As well, by increasing the number of plans reviewed, the more opportunity VC’s will have to find a fundable entrepreneur. In addition, you will have your small hits with low ROI, but you will also (hopefully) have your higher valuation companies and successful exits.

But to be continued in another post, I ask you, "Is the Long Tail of Venture Capital really just a learning curve?" and "How can Turkey improve its innovation record and deal flow?"

book mark <$BlogItemTitle$> at Technorati!Technorati Tags: , , , , , , , , , , ,

Posted @ 00:02   0 Comments
TÜBİTAK Shuts Down Turkey’s Only Textile Research Center
This past week, the Scientific and Technological Research Council of Turkiye (TÜBİTAK) announced that it will be liquidating its one and only Textile Research Center (TAM). The TAM was originally established by TÜBİTAK, the Turkish Textile Foundation and Aegean University. Apparently, it’s being shut down “not because of its successes,” but rather the center “would have had problems with its legal status following the end of another TÜBİTAK program – USAMP, the University-Industry Joint Research Centers Program.

Statistics Don’t Lie, People Do

On a more humorous, but unfortunate, note, TAM Deputy Director and lecturer at Aegean University’s Department of Textile Engineering, Professor Isil Tarakçioglu, announced to the press that she was so ashamed of the TAM budget that she lied about it to her international colleagues:
“At a meeting of the European Network of Textile Research Centers (TEXTRANET), members from Portugal, which has a population of 10 million, said that there were four research centers in their country and the budget of the smallest was 3 million euros. I was ashamed to say that the budget of our center is 300,000 euros so I said 1 million euros instead. Our country, which has the biggest textile industry in Europe, had a center with a budget of 300,000 euros but now they want to close it.” (Turkish Daily News, “Turkey’s only textile research center to be closed down”, Jan. 10, 2007)
Can you imagine being so insecure, and just to “save face” for national pride, that you would lie about a statistical fact that could easily be checked? Who does that?! I mean, if you’re going to lie, at least you should lie big. Example: With Turkey’s 70 million population and based on Portugal’s figures, proportionately our budget should have at least been €23 million. We should question whether TÜBİTAK condones liars in their midst that represent Turkey on the international stage, especially lies that are smartly admitted to the press. Although this may be merely a change of legal status for funding, this write-off of taxpayer money is a shame.

This confirms my suspicions that the “build it, and they will come” mentality of state-owned technoparks/institutions and their administrations is senseless without clear goals and good management. If you are not monetizing your research and creating revenue streams, you are up a creek without a paddle. The motivation here should not have been cushy jobs with continued government subsidy, but rather strict project action plans set down in proposals to spin-off research and to seek scheduled returns on investment.

Until we realize that innovation cannot be spurred through government-subsidized technoparks and institutes, we will continue to wallow in slow bureaucratic application procedures, unrealistic business proposals, Phd’s who only care about inflating their egos, and the continuation of stymied entrepreneurialism. Perhaps what we need here is a step in the opposite direction: a Fund-of-Funds. With increased education on formal business planning and entrepreneurship, the private sector and the VC industry (reinforced by a Fund-of-Funds and an increasing foreign/domestic investor pool) could multiply innovation 5x – 10x. Universities could continue to take limited subsidy, but should be standing on their own with the help of their tuitions, foundations, private donors and better alumni relations.

The fashion and textile industries in France and Italy have had their problems and are struggling. Outsourcing to Turkey and the “Made in Turkey” branding war is starting to take center stage, but we have a long way to go until we right-size our funding sources and realize our full potential. Nevertheless, TÜBİTAK plans to form a new program, “Projects to Establish Scientific Technological Cooperation Networks and Platforms,” in the place of USAMP. It will be interesting to see what form this takes in the future.

For an additional summary of TÜBİTAK, go to Turkey’s Science and Technology budgets during the 1990’s and their R&D landscape.

book mark <$BlogItemTitle$> at Technorati!Technorati Tags: , , , , , , , ,

Posted @ 23:01   2 Comments

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