Istanbul Continues to Grow as a Global Startup Hub – Despite its Sultan’s Power Grab

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These are strange times in Turkey. In 2015 President Recep Tayyip Erdogan barely clung onto power in an unconvincing election victory,  just two years after popular protesters swept through Turkey from Istanbul’s Gezi Park.

Today ‘The Sultan’ has a vice-like grip: a constitutional referendum held in April gave Erdogan sweeping powers under a new, presidential democracy. A lack of checks and balances will move Erdogan closer than ever the powers befitting his nickname.

Political dissent has been stifled and Erdogan has been busy turning Turkey’s near-century-old democracy into a fiefdom. Over 50,000 dissidents have been jailed since a failed coup last year. Amnesty International Turkey chair Taner Kilic has been in police custody for a month.

Erdogan’s increased autocracy has heralded cries that open government in Turkey has breathed its last. “All around the world, this has only one name,” ousted minister Ismail Ok told The Atlantic. “It’s called a dictatorial regime.”

Dictatorships rarely foster exciting startup scenes. They are normally reliant on foreign investment, disruption to established economies and globalized workforce: three things sure to send shudders down an autocrat’s spine.

But despite Erdogan’s lurch to the political right, his biggest city has all the hallmarks of a thriving technology hub. It should be of little surprise: Istanbul, whether in its current guise or as Constantinople or Byzantium, has occupied a political and cultural spotlight for centuries. It straddles two continents and commands a lion’s share of its country’s economy.

A host of Istanbul-based entrepreneurs are thriving, boosted by a roster of high-profile tech exits. Foreign investment may be deterred. But amid Turkey’s uncertainty, there are several reasons for Istanbul’s startup founders to be very cheerful indeed.

Turkey has demographic advantages like few other major nations. Over half of its 78 million inhabitants are aged below 30. 86% of Turks own a mobile device, and Internet penetration is creeping up towards 60%, giving the country Europe’s fifth-biggest online population.

Ankara, Turkey’s political capital, is over five hours east by car. But no-one is under any illusions as to Istanbul’s domination of the country’s metrics. It’s understandable for a city whose population recently surpassed 15m. comprises 38% of Turkey’s total industrial output, and 40% of the country’s tax revenues.

Almost a third of all Turkish commercial firms are based in the city, whose position straddling the Bosphorus Strait has made it a major international trading hub: 57% of Turkey’s national export, and 60% of its import, flow through Istanbul.

The vast majority of Turkey’s tech activity is focused in Istanbul, too. Ankara, Izmir and Gaziantep have emerged as promising locations in the past couple of years but almost every major tech brand has come from Istanbul. Hazelcast, Tapu, Sinemia, Scorp and Iyzico have all recently emerged as key players in the local scene.

Entertainment and video platforms do well, but the city’s entrepreneurs cover a wide array of sectors and disciplines. This April Iyzico, an online payment platform, received a $15m Series C funding round led by Swedish VC Vostok Emerging Finance. Iyzico is sometimes dubbed the ’Stripe of Turkey’, referencing its larger, San Francisco-based competitor that still has not launched in Turkey.

Iyzico’s Cagdas Onen doesn’t believe that Turkey’s political volatility will dampen its startup ecosystem. “Although one can affect the other, at this point, when you concentrate on the business challenges that you need to solve, you can accelerate and scale your business to international level,” he says. “As long as startups solve business challenges and scale themselves to international level, they won’t be affected by the political situation.”

Istanbul’s entrepreneurs have been thrilled by a number of recent deals proving their industry’s worth. E-commerce platform Gittigidiyor was bought by eBay in 2011 for $215m. Yemeksepeti became part of the Delivery Hero empire in 2015, for $589m, and last year online entertainment service Mars was acquired by CJ-CGV for $800m.

The Yemeksepeti deal, in particular, “showed the public that technology start-ups is not a hobby, but rather a career alternative,” says Aras Kocaoglan, BIC101 program manager at BIC Angel Investments. It encouraged a flood of local VCs. Istanbul is now home to 15 business angel networks, 14 pre-seed and seed investors and 12 early-stage investors.

Finding local cash, says Onen, “is relatively easier…compared to the previous years.” Coworking spaces have, too, abounded. They include the Koç University Incubation Center, The Garage and habita. 500 Startups has a large presence in Turkey, having invested in 25 companies since its 2015 foundation, pledging $15m to the local market.

Isbank, Turkey’s largest private bank, also made a significant foray into the local startup market last month. It is  working closely with Kolektif House Levent, a prominent coworking location, to develop young entrepreneurial talent.

That has allowed talent to diversify, and offer solutions based on local pain points rather than cloning foreign ideas–a criticism often leveled at Turkey’s tech scene. In Iyzico’s case, for example, that has meant capitalizing on Turkey’s 55% of transactions made in installments.

Before 2014, the entrepreneurship ecosystem in the city was focused more on e-commerce, both in terms of startups and investments,” Burak Büyükdemir, founder of accelerator Etohum. “Recently things have changed and technologies on mobile, cloud, big data started to multiply addressing various industries ranging from health to finance.”

That aside, there are significant clouds hanging over the Turkish tech industry. Over 63,700 startups were launched during 2016, Turkey’s Union of Chambers and Commodity Exchanges reported. But that number was down almost 4.5% on the previous year. Tourism, a staple of the Turkish economy, has fallen significantly.

More worryingly, Turkey could suffer a brain drain as young, cosmopolitan tech talent heads elsewhere. Corporates like HSBC and PayPal have already left. Coasts and major cities voted against Erdogan in the referendum, and the country looks split along US-resemblant urban and rural lines.Soon there may be few places in which to blood new graduates and entrepreneurs.

Instability is a worry for any investor and it can be said that the foreign investors are relatively less prominent in Turkey,” says Kocaoglan. It has come at a potentially bad time, as Turkey’s young professionals are beginning to break through longstanding language barriers with Europe and the Middle East.

“The language barrier is a significant barrier for the local scene,” adds Kocaoglan. “There are many English resources available to help entrepreneurs and the founders make use of it. However a significant portion of people are not able to take advantage of resources due to lack of English speaking capabilities.”

But if anyone can buck their national politics and business roadblocks, it is the citizens of Istanbul. They are used to a city that moves at a wild pace, and local founders have long had to look beyond their metropolis to move ahead.

“Although it might be discouraging for a certain proportion of the community,” says Kocaoglan, “the potential of scalability and high impact is actually motivating for a majority of the community to create high value for the community we live in.”