Entrepreneurs in Turkey -- like other developing countries -- have watched the venture-capital boom here with a certain envy. With U.S. conditions almost ideal for VC investing, American firms have little reason to take on the risks of a high-inflation economy like Turkey's -- despite its dynamic private sector and strategic location. And with a constantly depreciating currency, Turkish investors tend to prefer high-yielding, short-term government debt to long-term stakes in young businesses, depriving them of growth capital.

Gurhan Bilgin is trying to fill that hole in Turkey's financial system. For the past 18 months, the 35-year-old director of international business development at Demir Yatirim, the investment banking arm of Demirbank, a major Turkish bank, has been seeking foreign partners to create what he says will be Turkey's first private-equity fund. A native of the Aegean coast city of Izmir, Bilgin became interested in the venture-capital process as an MBA student at the University of Connecticut.

Turkey -- like Brazil -- has lured and disappointed investors many times. But Bilgin believes that with sufficient capital Turkish companies -- both from traditional industries that benefit from Turkey's customs union with the European Union and new high-tech companies that want to wire Turkey -- can bring real annual returns of 25%-30%. His challenge: to persuade investors of that. It won't be easy.

He talked with Business Week frontier Online columnist Karen E. Klein and frontier Online Editor Julia Lichtblau about his fund project and what it can bring Turkish entrepreneurs.

Q: Why does Turkey need a VC fund?
A: The economy has been lacking financial resources for a long time, and due to the high inflationary environment, borrowing and the credit markets are not really an option for gross financing. That led to Turkish companies staying pretty limited in scope and size. The only efficient way to help seemed to be the existence of a VC/private-equity outfit.

Q: But why now?
A: The need for venture capital became much more apparent after the customs union agreement with the European Union [which has abolished] customs and duties on most products [since 1996]. That fact intensified pressures on Turkish firms to either grow or go out of business... [But] private equity became an option [only] for companies of a certain size who had international connections. Traditionally, Turkish family-owned holdings have been a source of financing inside the country, but many entrepreneurs are reluctant to go to those groups because they fear the family may want to buy them out or take the business idea and run with it themselves.

Q: What about traditional lenders?
A: Banks here are not helpful because of the high inflation rate. Right now it's at 60%, which is down from over 100%, and our real interest rates have averaged 25% for the last decade. Government securities mature within three to six months, and they also bring in the highest returns, so there isn't much incentive for the banks to make private loans. In the past two or three years, there has been a new pool of capital from a Japanese investment bank managed by a team of young Turkish people. They have done some local agreements and exited from them within a two-year time frame with some degree of success.

Q: Where are you in the process of starting your partnership?
A: Our parent group has pledged to be co-sponsors on the condition that we bring in another sponsor that would contribute knowhow and expertise in the equity-investment area. Jointly we would set up a management team, decide on the investment strategy, and raise additional funding. We're targeting $100 million...but we wouldn't try to raise it [all] on our own. We would put in a good part of the investment ourselves...then target the International Finance Corp. [the World Bank's investment arm] because we know their strategy is to support and develop private equity...and there is no prior fund in Turkey.

I've been to London and various cities in the U.S. in search of such a partnership. I started out with a short list of about 10 VC firms that have a similar vision to ours, who are looking at emerging markets and new markets to grow their business. I have established initial contacts with about half a dozen, and we're dialoguing with them to see if our visions match. In the first quarter of 2000, we're going to see something. It should be right about that time [that] we'll have a pipeline of investments.

Q: What will you bring to the deal?
A: [We're] a financial-services group with companies active in investment banking, life insurance, and factoring. So we'll bring in planning, local knowhow, and subsequently, deal-flow through our network of bank branches. We also have a database of companies that includes information on their financial history, prior business decisions, and company track records, which is very important because that information is mostly not publicly available.

Q: Typically, venture capitalists are interested in small, high-tech firms. Why are you not looking for more typical investment targets?
A: The basic reasoning is the lack of later-stage facilities in an economy...that is generating huge opportunities in [this] considerably less risky area -- companies with a track record and ongoing business.

Q: I would think the Internet would interest a lot of people in the Turkish business community.
A:When we started talking about this private equity for later-stage, you didn't really hear about these things. I'm beginning to think we should do something on the VC side for startups. But it should be a different management team.

Q: Are there any particular industries you'll focus on? A: Manufacturing, textiles, and automotive components and accessories are some. The components industry...isn't negatively -- but positively -- affected by the customs union. Companies like Renault, Fiat, and Ford have already implemented new strategies designating Turkey as one of their hubs for manufacturing and export to the region.

Q: What about exit strategies?
A: We have a very well run stock market. Last year, turnover averaged $350 million a day. It exceeded $400 million a day, but with the earthquake and the Russia crisis, it came down to about $200 million a day. So the capital market is one exit. Another is foreign direct investors.

Q: What's the long-term outlook for the Turkish economy?
A: Chronic inflation started in the mid-'80s, and it has averaged 50% to 60% for the last 15 years. People and corporations get used to operating in that environment and raise their prices automatically, so it never ends.

But there has been an improvement since Turkey implemented a disinflation program under an [International Monetary Fund] staff monitoring agreement about a year ago. If their monitors detect positive results, it could lead to a standby agreement [a line of credit to help countries meet foreign currency obligations], which would include a financial package from the IMF and an inflow of foreign capital. So things all seem to be falling in place, except for the earthquake.

Q: How has the quake affected business concerns?
A: The World Bank...estimated damage to the economy in the $5 billion-to-$6 billion range. The region that the quake hit hardest was an industrial base [with] large, publicly traded firms and many smaller ones. But the IMF, the World Bank, and many other international financial institutions have pledged assistance in the reconstruction. So far, the response has been very positive, and the feeling here is that the quake will not have a continuous effect on the economy. The stock market has already rebounded.