Bloomberg News

Harvard Dropout Thrives as Turkey E-Commerce Lures Amazon

March 27, 2012

Shoppers make their way through the Grand Bazaar on February 20, 2012 in Istanbul, Turkey. Though not the capital, Istanbul is the cultural, economic, and financial heart of Turkey with a population of over 13 million people. Photographer: Dan Kitwood/Getty Images

Shoppers make their way through the Grand Bazaar on February 20, 2012 in Istanbul, Turkey. Though not the capital, Istanbul is the cultural, economic, and financial heart of Turkey with a population of over 13 million people. Photographer: Dan Kitwood/Getty Images

In a former belt factory on the outskirts of Istanbul, Sina Afra and his 500 employees are building what the German-raised Turk says will be the country’s first billion-dollar e-trade company.

Afra’s Markafoni, the second most-visited members-only shopping network in the world, is a frontrunner in an industry that grew almost 60 percent in Turkey last year and has attracted investment from EBay Inc. (EBAY:US), Amazon.com Inc., Kleiner Perkins Caufield & Byers, Naspers Ltd. (NPN) and Tiger Global.

His main competitor is Harvard Business School dropout Demet Mutlu. Her Trendyol.com reached $100 million in revenue less than 18 months after going online. Both are representative of a crop of young Turkish entrepreneurs who are returning from abroad to lead a transformation of their country, with its China-like economic growth, from a low-cost manufacturer on the fringes of Europe to digital dynamo.

“All the trends are pointing in the right direction in Turkey,” Aileen Lee, a partner at Kleiner Perkins (ZZISK:US), which together with Tiger Global invested $50 million in Trendyol.com, said in a phone interview from Menlo Park, California. The venture capital firm counts Zynga Inc. (ZNGA:US) and Groupon Inc. (GRPN:US) among its progeny.

“You have a young society that’s really social and has really embraced the social web and mobile,” Lee said. “At the same time, the retail infrastructure has not been built out, so there’s a real opportunity to leapfrog the typical bricks-and- mortar retail commerce.”

Online Shopping

Turkish e-commerce transactions increased 57 percent to 22 billion liras ($12.3 billion) in 2011 from a year earlier, according to the Interbank Card Center, which monitors transactions. Forrester Research Inc (FORR:US) says e-commerce will grow just 12 percent annually in Europe over the next five years.

The torrid growth rate has given rise to more than 30 internet companies starting up in January alone. That has some worried. The market may be “a little frothy,” said Pamir Gelenbe, a venture partner for Antwerp-based Hummingbird Ventures. “There’s a great crop of entrepreneurs, but now there’s a little too much excitement and hype.”

‘Double-Digit Growth’

Those entrepreneurs busy building their businesses don’t see it that way. “We have 4.5 million members and we’re seeing double-digit growth every month with no slowdown,” said Mutlu, who attended this year’s World Economic Forum in Davos, Switzerland, and was praised in GQ as one of the “conference cool” at F.ounders, the “Davos for geeks” in Dublin. She’s 30 years old, dresses in clothes she designed for the website’s new private label and says she wants Trendyol to be Turkey’s first tech company to go public on the Nasdaq Stock Market in New York.

That’s if Markafoni doesn’t get there first. The 43-year- old Afra has rebuilt the old belt factory into a bare concrete and glass headquarters called Markafoni Plaza, with its own café and terrace. While techies huddle around design computers and models smoke cigarettes near a Range Rover parked outside, he explains that the company takes more than 12,000 photographs a day to market name-brand clothes, cosmetics and shoes at discounts of up to 90 percent.

Acquisition Driver

A former EBay manager in Berlin, Afra settled in Turkey in 2008 and three years later sold 71 percent of Markafoni to Cape Town-based Naspers for about $200 million. It was one of the biggest foreign commitments to an industry that Deloitte & Touche says will help drive Turkish acquisitions in 2012.

Cem Sertoglu, founder of venture capital firm Young Turk Ventures, said e-commerce will continue to grow by a double-digit percentage. The 40-year-old created and sold New York-based social networking company SelectMinds Inc. to Bessemer Venture Partners. Like Afra and Mutlu, he’s an example of a reverse brain drain that’s spurring innovation.

“It took me 17 years to come back,” Sertoglu said over lunch in Istanbul. “I started a company when I was 28 in the U.S. because being in New York looked much more attractive than a life in Turkey. By 2006, Turkey started to look like a normal country to a person like me, and now it’s becoming one of the most interesting digital markets in the world.”

Like China

Turkey has more than 34 million internet users in a population of 74 million, according to Comscore, making it the world’s 13th largest internet market. Its $735 billion economy, the largest in eastern Europe and the Middle East, grew 9.6 percent in the first three quarters of 2011, trailing only China in the Group of 20. Half the population is under 30.

“We see a dynamic in Turkey of young entrepreneurs with great training, lots of talent, who often worked abroad and are returning,” said Roland Manger, a partner at Munich-based Early Bird Venture Capital, which invested about $4.5 million in Istanbul-based games developer Peak Games. “What we saw eight years ago in China and India when the best and the brightest started to come back to build companies, is happening there.”

The privatization of telecom monopoly Turk Telekomunikasyon AS (TTKOM) and the emergence of cloud computing, which allows software distribution via the web, accelerated development, according to Selahaddin Karatas, founder of Istanbul-based mobile software companies Aradiom and SolidPass.

Cloud Flattening

“Turkey had a very advanced e-commerce scene starting in 2000 in terms of the offerings, but they never materialized in terms of revenue,” said Karatas, who returned in 1999 with an economics degree from Wesleyan University in Connecticut. “When Turk Telekom was privatized, almost overnight a whole new class of e-commerce companies emerged simply because the disconnect between the offerings and the user base was bridged.”

Saudi Oger Ltd. bought 55 percent of Turk Telekom from the government for $6.6 billion in 2005 and began expanding broadband access and improving speed. “With the advent of the cloud, the level of the playing field is being flattened,” Karatas said.

EBay, the largest online auctioneer, bought a minority stake in retail marketplace Gittigidiyor in 2007 and increased its holding to 93 percent last year. Ticketmaster owner IAC/InterActiveCorp (IACI:US) bought vendor Biletix. Hummingbird Ventures joined Early Bird in the Peak Games investment. And Amazon (AMZN:US) invested in Ciceksepeti.com, an online florist founded by Emre Aydin, a former SAP AG consultant.

Flowers for Mom

Aydin started his website when his brother called from the U.S. and asked him to send flowers to his mother and mother-in- law in two different cities. Aydin looked online, realized it was impossible, and started building a site the same night, he said in an interview. “I didn’t know what a VC was,” he said, referring to venture capital.

In nine months, Aydin had 20 trucks. Revenue tripled every year as he switched to fulfilling orders through florists rather than storing flowers in his own warehouses. “I didn’t search for Amazon, we just met by chance. They were amazed at our growth. They offered to invest, but we didn’t need funding.”

Aydin sold about 18 percent of the company to Amazon for an undisclosed amount last year, and still works at a plain desk in a poorly lit office in central business district, while city buses on the roads outside are plastered with Ciceksepeti banners. The company expects sales of about $38 million this year and is looking to buy gift-industry competitors.

Atomico, the venture capital firm started by Skype Technologies SA and Kazaa BV co-founder Niklas Zennstrom, opened an office in Istanbul in January to look for deals in Turkey. The London-based firm boasts Rovio Entertainment Oy, creator of the “Angry Birds” game, among its investments.

Credit Available

“If you look at the macro level in Turkey, everybody knows the numbers, and these are great,” said Wouter Gort, who manages Atomico’s Turkish operations. “If you look at credit card penetration, willingness of people to buy online, and new people entering online with enough consumption strength to buy, these are all bullish signals.”

That doesn’t mean every online venture will succeed. Clones are common, as companies take advantage of low barriers to entry. The owners of the leading food and flower delivery sites won’t talk to each other because their companies share a suffix. Yemeksepeti, which came first, means “food basket,” while Ciceksepeti means “flower basket.” Both play off the age-old Turkish custom of receiving deliveries from street peddlers via baskets dangled from a window.

Investors are also concerned that a reversal in Turkey’s economy could quickly put a damper on the e-commerce party. Goldman Sachs Group Inc. (GS:US) and the World Bank say Turkey’s debt and trade imbalances, especially a current-account deficit of $77.8 billion or 10 percent of GDP, make the country’s economy vulnerable.

Trendyol’s Mutlu is sanguine: “Of 30 million people online, only five or six million have bought something online, which means there’s room for growth. And we’re a discount business, so even a downturn could help.”

Global Leaders

The largest U.S. private shopping site, Gilt Groupe Inc., gets fewer than one-third of the unique visits that Markafoni and Trendyol receive, according to Idil Kesten at Comscore. Gilt Groupe is valued at $1 billion on SharesPost Inc., which allows investors to trade in venture-backed private companies.

Using Comscore data, Markafoni says it trails only France’s Vente-Privee, a joint venture with American Express Co. (AXP:US), in unique visits to a members-only shopping network. Trendyol is third in unique hits, according to Comscore data, though it surpasses Markafoni in overall hits, with nearly 15 million in February.

Burak Buyukdemir, who earned an MBA in Berlin and founded the e-Tohum startup camp in Turkey, said companies are making the transition from copycats to innovators. Examples include Minder, which is working on control systems using brainwaves, and Buggum, with a game optioned by Electronic Arts Inc (EA:US).

“All of my friends in the U.S., in the long term their dream is to come back,” Buyukdemir said. “They see the opportunity, and the success stories we’re seeing now have a snowball effect.”

Investment Pace

Nevzat Aydin, no relation to Ciceksepeti’s founder, co- founded food delivery portal Yemeksepeti.com in 2000 after dropping out of a master’s program at the University of San Francisco. He expects two or three e-commerce investments of $200 million or more in Turkey this year and a “serious increase” in the $50 million to $100 million range.

Yemeksepeti has expanded to Russia and Dubai, and is in the process of starting operations in three more countries, illustrating what Manger of Early Bird says is Turkey’s opportunity to become a regional e-commerce hub.

“Turkish companies are very eager to expand into markets that the West is less familiar with,” Manger said. “Add in the Middle East and Central Asia and you’re adding in hundreds of millions of potential new customers.”

Says Nevzat Aydin: “Turkey’s geographical location, proximity to Europe and the Middle East, good Internet penetration and young population present a big opportunity. We’ll have this ‘Internet spring’ for some years to come.”

To contact the reporters on this story: Benjamin Harvey in Istanbul at bharvey11@bloomberg.net; Ercan Ersoy in Istanbul at eersoy@bloomberg.net

To contact the editors responsible for this story: Gavin Serkin at gserkin@bloomberg.net; Mark Bentley at mbentley3@bloomberg.net


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