It was a raucous evening at Google’s office high above Tel Aviv. Some 250 people packed into a room where 12 startup companies – everything from a dog-owners’ app to a maker of 3D maps – were competing for $100,000.
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Geeks as they are, the presentations themselves were low-key, but the emcee for the evening – the Japanese entrepreneur and investor Kentaro Sakakibara – lit up the room with an impassioned, if somewhat idiomatically challenged, performance. The crowd was cheering and clapping, fired up by refreshments of sushi, Turkish delight and kosher wine.
None of this is out of the ordinary in the startup world, where competitions and buzz are as important for luring investors as algorithms and business plans. But the “Startup Fusion” event on March 22 was different in one important way: Three of the 12 competitors were Japanese companies and another three flew in from Turkey.
Under Prime Minister Shinzo Abe, Japan has been reaching out to Israel as part of a drive to raise the country’s standing as a global political and military power, and inject a more innovative spirit into hidebound Japanese industry. Like China and India, Japan wants to tap Israel’s high-tech prowess.
But Turkey? Its Islamist president, Recep Tayyip Erdogan – now marking his 12th year of uninterrupted rule – lashes out angrily at Israel on a regular basis and has brought to an end the tight military and political ties the two countries once enjoyed.
In spite of the political freeze, bilateral trade ties remain strong, reaching $5.6 billion in 2014 – a nearly 50% increase since 2009. Turkey is generally Israel’s seventh or eighth largest trading partner, with Israel exporting petrochemicals and potash and importing manufactured goods and food.
In the current climate, though, anyone doing business with Israel is likely to not to be talking very loudly about it. Cagdas Onen, whose Istanbul-based Onen Consultancy brought the three Turkish startups to Tel Aviv for the competition, says he doesn’t know of any collaboration between Israeli and Turkish tech companies.
But Onen is optimistic that win-win business ties can overcome the hostile political atmosphere.
“Politics is not my expertise, but I try to look at the subject from a business point of view,” he told TheMarker. “If both sides can win, it can have a positive effect on politics. We need to focus on the business part and limit the political part as much as possible. I know it’s not easy, but things will change.”
Onen, whose firm helps Turkish startups penetrate overseas markets, is a pioneer. He made his first trip to Tel Aviv a year ago and has been back three times since then for business. “I haven’t even been to Jerusalem,” he adds, ruefully.
It may be unpalatable to Erdogan and his AKP Party stalwarts, but tapping Israel’s Startup Nation would be in Turkey’s economic interests.
Under Erdogan’s rule, Turkey’s economy has enjoyed strong growth, with per-capita gross domestic product rising almost threefold since 2004. But the Turkish miracle occurred mostly in the global boom years, before the great worldwide recession began in 2008. Turkey’s economy reeled in response, and although growth quickly resumed at 3-3.5% a year, GDP per capita and labor productivity have stagnated. Inflation is high and Turkey’s current account deficit is equal to an unsustainable 6% of GDP.
How did the Turkish growth engine start sputtering? One key reason is that the economy has successfully made the transition to low- and medium-tech industry, most notably textiles. If it is going to keep growing, it has to evolve into higher-tech segments. It’s the same challenge that China faces on a much bigger scale. Economies can only deliver on job creation and higher standards of living by ensuring the labor force is producing higher added value, but that’s difficult in old-line industries.
Only about 4% of Turkey’s exports are high-tech products, compared with more than 40% for Israel. Serdar Sayan, a professor of economics and director of the Center for Social Policy Research at TOBB University of Economics and Technology in Ankara, blames the government.
“The high-growth performance of the early 2000s appears to be gone for good due to a bunch of factors, including failure to improve the quality of education, and failure to create an innovation-friendly atmosphere,” Sayan told TheMarker in an email interview.
“Turkey has had some progress in improving access to education, but the quality of education remains poor by international standards The country also severely lacks an innovation-friendly atmosphere, despite recent increases in incentives for entrepreneurs and R&D spending,” says Sayan.
Erdogan’s crackdown on social media isn’t helping. Twitter and YouTube have been temporarily banned, and last year Erdogan signed a bill that gave the government the power to shut down websites without a court order.
One Turkish entrepreneur at Startup Fusion played down the impact of the censorship (“It’s not a good thing, but it doesn’t affect our business”), but Sayan sees it as part of a broader ideological battle that pits the conservative Erdogan government against the country’s more liberal and secular population – the one that will provide the human capital if Turkey is to make the leap into high-tech. Rule of law and confidence in the court system, including the critical issue for tech companies of patent rights, have all deteriorated during the Erdogan years, he says.
The Ankara government has been trying to give a boost to the local high-tech scene, which remains relatively small and focused on the local market. Total startup investments in 2013 were just $80 million, versus $2.3 billion in Israel, and the largest exit remains eBay’s $200 million acquisition of Turkish online auction marketplace GittiGidiyor – and that was in 2011.
To try and give the sector a lift, the government is building an Informatics Valley high-tech park, 50 kilometers (31 miles) east of Istanbul. It’s also planning a $3.5 billion program to support R&D and aid Turkish companies buying foreign tech companies. Policy makers are working to make it easier for universities to commercialize innovations developed by their faculties. Collaborating with Israel could be another element.
“The Israeli example is often cited in the innovation debate in Turkey,” says Sayan. “Israeli success stories are quoted often, with admiration. Many Turkish companies would be interested in collaborating with Israeli partners. Political tensions might play some role in preventing further collaboration between Turkish and Israeli companies, especially in some sectors, but I don’t think they’d be the major factor.”
Getting a taste of the Israeli tech scene, not to mention the prospect of taking home $100,000 – half of the funding he says his company needs – was why Erdem Tas, cofounder and CEO of Turkish startup Foxinhome, made the journey to Tel Aviv.
Based in Istanbul, Foxinhome has developed a voice-controlled smart lighting system for homes and offices. Tas and his two partners have completed their R&D and have two working prototypes. They now need financing to begin commercial production.
Foxinhome didn’t take a prize – the two winners were canine app Dogiz and Themego, a theme-park rating website – but Tas didn’t go home empty-handed. He got a chance to see firsthand the Israeli startup environment, which makes it so easy for entrepreneurs to set up companies, find investors, reach global markets and stage an exit.
“I have friends who are starting up companies, but you have to push hard to do it. Israel has a better ecosystem,” says Tas. Although he and his cofounders have 10 years of combined experience in electronics and only have competitors in Texas and Japan, the company has yet to raise any venture capital.
Patricia Lahy-Engel, director of TheHive – a startup accelerator for new-immigrant entrepreneurs – says the idea of holding a startup competition with Israeli, Japanese and Turkish companies was an accident. She met Onen last September, and then learned that he and Sakakibara’s Samurai Incubate were planning an event a day apart from the one by TheHive. In the end, they joined forces.
But Lahy-Engel, whose accelerator is part of the nonprofit Gvahim, which helps immigrants with advanced degrees to find jobs in Israel, sees the benefits of introducing Israeli startups to Turkey, which boasts 38 million Internet users and 10 million online shoppers.
“Turkey is a very big market in terms of population – and it’s a very young population, very early adopters. They’re the fourth or fifth largest market for Facebook and they are very technology-oriented,” she says. “It’s also a foothold into Europe, in a country that, culturally, is not so different than Israel. Even if politically we’re not close, culturally we are.”