Innovation and entrepreneurship are considered among the most important elements of economic growth and job creation. Considering that companies such as Apple, Google, Amazon, Tesla, NVDIA, which are among the largest companies in the world with their market values and revenue figures, were established as venture capital companies and received investments as venture capital companies, the importance of innovation and entrepreneurship for all economies is more clearly understood (NVCA 2023).
Unfortunately, it is possible to say that the adventure of entrepreneurship in Türkiye is not as successful as the countries that we take as a precedent. Although we have recently launched startups such as Getir, Trendyol, Peak Games, Insider, Dream Games, which are described as “unicorns” (used in the entrepreneurship ecosystem for companies with a market capitalisation exceeding USD 1 billion) and “decacorns” (used in the entrepreneurship ecosystem for companies with a market capitalisation exceeding USD 10 billion), entrepreneurship has not played an important role in Turkish economic history.
In addition to the social and economic reasons for this situation, there are also reasons arising from the legal system. The legal system referred herein connotes to the laws and regulations in force and their implementation. However, it should be noted that conceptually the legal system is much more than all these. Many concepts and elements within the legal system such as constitutional system, rule of law, organization and efficiency of the judiciary closely affect the investment atmosphere and entrepreneurial behavior in the country. It will not be possible to expect entrepreneurship to develop, contribute to economic growth and create employment in a country where the justice system does not function, where there is no trust in the courts, where legal uncertainty is at a high level and where there is no respect for the rules of law.
Does Turkish Law Protect Intellectual Rights?
The subject of activity of venture capital firms is predominantly technology [1]. This either means that the venture company produces an output such as software or hardware in the field of technology or that the transformative effect of technology is utilized in terms of company activities. As a result of this situation, the system and legal regulations regarding the protection of intellectual and industrial property rights become one of the main issues of entrepreneurship.
In terms of industrial property rights such as trademarks, patents and industrial designs, we can say that a modern system has been implemented in Türkiye with the Industrial Property Law No. 6769 adopted in 2016. However, it should be said that our legal system has not kept up to date, especially in terms of the protection of software. Law No. 5846 on Intellectual and Artistic Works (FSEK), dated 1951, was a regulation for the protection and regulation of rights on works of science, literature, music, fine arts and cinema, but with the additions made later, it has been extended to software.
It should be noted that these later additions are not sufficient, and that the FSEK, which ignores the commercial and industrial side of software and its digital and dynamic structure that differs from traditional intellectual and artistic works, is insufficient for the protection of software. Moreover, the IPL can only protect certain parts of the software, which jeopardizes the integrity and functionality of the software. At this point, it should be noted that what we are discussing is not the protection of software as a work, and that we are of the opinion that patents are not suitable for the protection of software. However, we believe that a more specialized and comprehensive legal regulation is needed for the protection of software in Türkiye. A new regulation should be designed to protect the code structure, algorithm and innovative ideas of the software and should be flexible against technological developments. Such a regulation will protect the rights of software developers more effectively and encourage innovation in the software industry.
Which regulations are needed in terms of financing entrepreneurship?
The financing of entrepreneurship differs from traditional financing methods such as bank loans and borrowing and shows unique characteristics. In this respect, the types of contracts, creditor behaviors, legal and financial relations in traditional financing lose their validity in entrepreneurship financing.
The unique, high-risk and creative structure of entrepreneurship financing involves significant difficulties in terms of the legal system. The fact that the methods applied in the financing of entrepreneurship do not find any response in the legal system or that the legal system prevents these methods will have negative effects on entrepreneurship and thus innovation. This will cause entrepreneurs to move to other countries whose legal infrastructure is favorable to the financing of entrepreneurship.
It should be noted that Türkiye has come a long way in terms of financing entrepreneurship. On 27 October 2021, the Crowdfunding Communiqué, which was published in the Official Gazette and entered into force, established the legal infrastructure of equity and borrowing-based crowdfunding and eliminated an important gap in this field. Although the Crowdfunding Communiqué has aspects open to criticism, it has shown significant success in a short time. In 2022, the crowdfunding system raised 250 million TL capital for 60 venture companies and 20.6 million USD capital for 59 venture companies in 2023. We consider these figures, which are extremely low compared to their global counterparts, to be a significant success in terms of the implementation of the system in Türkiye. In addition to crowdfunding, Türkiye also shows significant success in incubation centers with public and university incentives. Technology development zones and incubation centers, which have been on the agenda in Türkiye since the 1980s, have become the most important tools used by the public sector to finance entrepreneurship.
It is not possible to say that this relative success demonstrated in crowdfunding and technology development zones is demonstrated in the venture capital financing model. The venture capital financing model stands out as the most widely used model in the world in terms of financing entrepreneurship. One of the most important contract types in terms of the implementation of this model is convertible bonds, which are a mix of debt and equity. Convertible bonds are similar to loans in various aspects and investment against shares in various aspects, but they do not fully display the characteristics of both. In this system, the money paid to the venture company is followed as a debt for a certain period of time, but the debt is converted into shares upon the realization of a contractually determined transaction (investment purchase, etc.).
Convertible debt securities provide significant advantages for both entrepreneurs and investors. Considering the flexibility it provides for the entrepreneur and the investor, its low cost compared to the transfer of shares, and the technical and financial impossibilities regarding the calculation of the value of early stage venture companies, it should be noted that such contracts provide a significant advantage.
When we look at the practices outside Türkiye, we see that various institutions have designed convertible debt agreements that are of a type in order to provide practicality, to make investment processes more efficient and standardized, and to reduce transaction costs. Standardized agreements such as SAFE (Simple Agreement for Future Equity) and KISS (Keep It Simple Security) can be cited as examples in this regard.
Under Turkish law, there are various institutions that are similar in form to the above-mentioned convertible debt instruments [2]. However, it is not possible to say that these institutions functionally meet the expectations of the venture ecosystem. In Turkish law, issuance of convertible bonds is subject to strict formal requirements, extensive regulation and supervision [3], as well as technical difficulties and high costs. This results in the disappearance of the speed and cheapness criteria expected from convertible bonds, and in practice, convertible bonds are hardly used at all.
Obligations of the State towards Entrepreneurs
Türkiye allocates significant amount of resources for the promotion of entrepreneurship and carries out important activities in this regard. However, it should be mentioned that in addition to these activities which the state has actively carried out, it also has an obligation to create a favorable ecosystem for entrepreneurship. In this context, the state has obligations to remove obstacles against entrepreneurship as well as actively supporting entrepreneurship. According to the Global Entrepreneurship Monitor [4], Türkiye is in the “B” category with an entrepreneurial index score of 4.2, lagging behind many countries.
We believe that a new law for the protection of software is one of the priorities of the Turkish legal system. In addition, we believe that an entrepreneurship law that includes regulations such as easier establishment of start-up companies, operating within more flexible regulations without being overwhelmed by bureaucracy, and the establishment of an appropriate legal infrastructure for the financing of entrepreneurship would be functional in terms of removing legal obstacles to entrepreneurship.
Notes
[1] It should be noted that, theoretically, the subject of activity of the venture firm does not have to be technology, but the high growth potential, which is recognized as a definitional element of the venture firm, can only be in question for technology ventures.
[2] Article 504 of the Turkish Commercial Code (TCC) explicitly regulates that joint stock companies may issue convertible bonds. Article 463 of the TCC, which regulates the conditional capital increase, regulates that the capital may be increased conditionally by providing the creditors of the company or group companies with the right to acquire new shares by exercising their conversion or purchase rights in the articles of association, due to newly issued bonds or debt instruments. Article 18/9 of the Capital Market Law (CML) directly refers to bonds convertible into shares.
[3] It should be noted that a convertible bond that is not issued in accordance with these regulations, in addition to the risk of being considered as an unauthorized credit transaction, there is a risk of constituting the offence of usury under Article 241 of the Turkish Criminal Code.
[4] The global entrepreneurship index is an initiative that prepares an entrepreneurship score for countries by taking into account the environmental factors necessary for entrepreneurship.
Bibliography
National Venture Capital Association (2023). NVCA 2023 Yearbook. p. 11. https://nvca.org/nvcayearbook/ (e.t. 22.08.2024).
Startup Watch (2024). Turkish Startup Ecosystem. 2023 Year In Review, v. 1.4. p. 3 https://startups.watch/reports
