In the era of the global start-up, countries must step up their game to attract FDI

This article is brought to you thanks to the collaboration of The European Sting with the World Economic Forum.

Author: A. Burak Dağlıoğlu, President, Investment Office of the Presidency of Turkey

• Entrepreneurship is a key driver of foreign investment and growth in countries all over the world.
• An increasingly competitive and globalized entrepreneur economy means competition is stronger than ever for foreign investment.
• To account for this, states should establish dedicated investment promotion agencies (IPAs) that know the ins and outs of their country’s start-up scene.

Throughout history, entrepreneurship has been a consistent driver of economic growth. Whatever the country, whatever the culture, this holds true.

With the advancement of technology and globalization, entrepreneurship has taken a new turn. Entrepreneurs now put their ideas into action and expand their footprint faster and further afield than ever before.

Many of these innovative projects have significant impact on global, national, and local economies. They are a global start-up ecosystem that transcends borders and countries, and that affects the day-to-day lives of billions of people.

The globalized start-up boom

E-commerce start-ups democratize the marketplace for small businesses across the world, helping them to access a global consumer base. Cleantech start-ups play a crucial role in setting environmental standards for almost all industries, accelerating their transformation processes towards global targets such as net-zero emissions. E-mobility technologies, sharing economy models, and smart city implementations are also critical for the sustainable development of urban infrastructure.

With such a global impact, start-ups increasingly attract significant funding from international investors. The rise of start-ups with global expansion ambitions has remarkable implications for global foreign direct investment (FDI) flows.

Start-ups — whether they work in technology, mobility, biotech or anything else — are now an integral part of a country’s value proposition for international investors. To attract FDI, countries need to get serious about their own start-up ecosystems and their own value propositions in order to sell them to the world. That’s why now investment promotion agencies (IPAs) are more important than ever.

IPAs need to know their country’s start-up ecosystem like the back of their hands, and keep an eye on any fast-growing global start-ups looking for their next destination.

They can and should play an intermediary role in connecting start-ups and investors, especially the global investment community seeking value-creating start-ups in the world. It is, therefore, equally important for start-ups to collaborate with their IPAs to access international funding and investments through their global networks. This makes IPAs strategic partners for start-ups.

IPAs should also closely work with both public and private stakeholders to develop and maintain a favourable start-up ecosystem that is competitive internationally. Academia and industry collaboration should also be further supported not only to develop a talent pool, but also as a platform to put into action those ideas that spin off from universities.

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IPAs in action

Take Türkiye. Turkish start-ups raised $2.3 billion funding between 2011 and 2021, and exits and secondary transactions amounted to $6.4 billion during that same period. Early-stage investments averaging $100-$150 million per annum skyrocketed to $1.6 billion in year 2021, despite the COVID-19 pandemic. That growth momentum has continued into 2022 as well, securing $1.2 billion in the first quarter.

Foreign investors have made notable commitments to these funding and exits. Thanks to the snowball effect recycling capital into the ecosystem, Türkiye now has several unicorns and decacorns recognizable to consumers from London to New York. Unlike conventional sectoral investment schemes, this is a quite remarkable achievement because a decade ago, the country’s start-up ecosystem was almost nonexistent.

Moreover, start-ups in their growth stage make significant greenfield investments in order to scale up their operations and reach their true potential. Most of them think global from day one and have the potential to invest in other countries where they bring capital, transfer knowledge and technology and generate employment — all typical benefits that conventional FDI projects bring to an economy. VC-backed start-ups have been increasingly investing in greenfield projects across the world.

As international VCs pour money into local start-ups, they also encourage the domestic investment community, corporates, banks, and high-net-worth individuals to invest in those same start-ups, and others in the ecosystem. This strengthens cooperation among investor networks and makes start-ups a major asset class with lucrative returns. It also helps corporates mainly in two ways: Investing in start-ups enables them to tap into cutting-edge new technologies in their industries, and it also allows them to diversify their businesses, pivoting to new and different industries that could also be complementary to their existing business models.

How IPAs make a difference

The Investment Office of the Presidency of the Republic of Türkiye, for example, facilitates this dialogue in several ways. First, in order for fund managers and general partners to set up with VCs easily, Türkiye’s IPA has conducted policy advocacy campaigns to improve and update legislation, and to allow the government to contribute financially to the funds as a limited partner (LP). This investor-friendly legislation, combined with a pro-active IPA engagement, has significantly contributed to the development of an angel investors network within the country.

Second, Türkiye’s investment office has connected local VCs in the country with international LPs through exclusive roadshows and by facilitating one-on-one engagements.

Third, it has also brought international VCs into Türkiye to familiarize them with the local star-tup ecosystem. As start-ups grow, they consistently need more funding. For that reason, engagement with private equity firms working in their space allowed them to leapfrog at the growth stage. In these ways, Türkiye’s IPA has made a real difference to the growth of start-ups in the country — and it is a model that other states should take notice of.

In a globalized world facing an economic downturn, the competition between start-ups for much-coveted venture capital funding is only going to become more competitive.

For all countries, but particularly those in the developing world with much promise but less international attention, dedicated IPAs are not just useful — they are an essential part of scaling a domestic start-up ecosystem.