Delivering Public Support to Private Companies Case of TTGV in Turkey

1. Delivering Public Support to Private Companies Case of TTGV in Turkey A. Mete ÇAKMAKCI Technology Development Foundation of Turkey Knowledge Economy Forum – Prague, Czech Republic March 28-30, 2006

2. RTDI in Turkey – Supply / Demand 76 Universities are operational 1,900,000 enrolled students (40% female) 25,000 enrolled in PhD programs 110,000 enrolled in Masters programs 76,000 academic personnel (37% female) Engineering enrollment 113,681 : 16,481 graduates Sciences enrollment (incl. Computer Science) 102,897 : 14,700 graduates (2003 data) 20,400 educating abroad (15,1 K undergrad, 3,2 K masters, 2,1 K PhD. 1,000 are supported by the state, including 714 in PhD programs.) (2002 data) 100 public R&D institutions with approx. 2,000 researchers. (11 are under TÜBİTAK) 26% of enterprises are involved in technology innovation activities of some sort. (State Institute of Statistics - 2002) RTDI : Research Technology Development and Innovation

3. Public Funded RTDI Support Programs • Technoparks : Technology Development Zones Law passed in 2001 Tax exemptions for R&D activities, VAT exemption for services and products created in the zones, Laxed regulations on academic staff participating commercial private activity. 22 approved, 10 operational with 349 firms. Around 5,000 R&D FTE staff employed. • TEKMER Incubator Program : Government owned and operated incubator program 13 TEKMERs, 14 DTIs operational with 149 current tenants. TEKMERs graduated 197 firms so far. • USAM – University Industry Joint Research Centers : TÜBİTAK funded private operated centers for shared contract research using the university research capacity. • Project Supports to Private Companies : • TÜBİTAK –Grants to industrial research projects • TTGV - Matching fund soft-loans to technology development projects • Finance for R&D investments : Capitalinvestments credit at market rates. • Other indirect supports (such as R&D tax discounts etc.) : Tax deduction for up to 40% of annual R&D costs.

4. 2010 Targets • In 2004 Supreme Council for Science and Technology (BTYK) adopted national R&D targets for 2010 • Total R&D expenses to reach 2% of the GDP (current level is 0,67%) • Half to be provided by the private sector (current level is 30%) • FTE R&D staff to reach 40,000 (Currently estimated to be ~30,000) • Extra budget allocation had started in 2005, to be increased annually. • An assessment of the targets: • Turkey’s GDP in 2010 will be 400 Billion USD (in 2005 USD - a very conservative assumption) : the private sector will need to spend an additional 3,5 Billion USD from the current levels • Strong stimulation is needed to draw in the private money • Goverment funding should be used to create a “multiplier” effect • Assuming 150 K USD per researcher in 2010 (1) , the private sector will need approximately 25,000 FTE researchers, i.e. 3 times the current levels.– strategic development of human resources is urgently required (1) ROC’s data for 2003 was 87,000USD per researcher.

5. Current Bottlenecks • Turkish Patent Institute • Foreign Economic Relations Council and EC • State Institute of Statistics • Total FTE R&D Staff in 2002 was 28,964 • i.e. private sector R&D staff was 20% of the total. Turkish exports between 1998 – 2004 increased 134% ! Very low global grade“production”of technology even though number of national patents are increasing

6. What is TTGV ? • Established in 1991 as an NGO (with a WB project). Established as a transparent, accountable, flexible and dynamic organization to implement/manage public funded programs. • Founders : 26 private companies, 6 government entities, 10 umbrella organizations, 14 individuals. • Subject to laws and regulations concerning foundations and the private law (like private companies) • A foundation established under law : can use and manage government funding programs. • TTGV is a member of TAFTIE (The Association for Technology Implementation in Europe) and will chair TAFTIE in 2007

7. How does TTGV operate ? • A board of directors where directors from the private sector are elected by the Founders’ Assembly • 15 directors : 10 from the private sector, 5 from government agencies (TÜBİTAK, KOSGEB, DPT, Treasury and Foreign Trade reps., i.e. other NIS stakeholders) • Full-time staff of 47, supported by a pool of 1,500 experts from the industry, government and universities. Employment is subject to private sector rules. • Follows International Accounting Rules and subject to 4 different annual audits including one by an independent international auditing agency. • Funding : Its own trust, Treasury/WB (ending by 4/2006), government programs and Global Environment Fund (GEF).

8. Overview of Support Activities • Technology Development Funding • Matching soft loans (no interest) to technology development projects of private companies. • Max. TTGV contribution is 1M USD. • 1350 project proposals received and evaluatedso far • 154 M USD in total committed to 415 projects • Helped to create a R&D volumeof 308 M USD. • Funding to Venture Capital Funds • Lead investor in two private VC funds in Turkey (7 M USD in 90 M USD total – 90% of all funds) • Represented in the board management of the funds. • Start-up Funding • First stage up to 400 K USD in equity funding for technology start-ups : closed our first investment • Technology Support Centers • Four centers operational to provide sector specific technollogy services • Environment Projects • Supported phasing out of 90% of Ozone Depleting Substances in Turkish industry with 26,5 M USD • Funding to Technoparks and Incubators (closed) • Technology Support Services(closed)

9. TTGV Technology Development Funding ENTERPRISE SIZE PROJECT SIZE ENTERPRISE AGE

10. TTGV Technology Development Funding REGIONS SECTORS

11. Success Stories - SETAŞ Establishment : 1966 in İstanbul Sector : Textile Chemicals & Dyes • Projects supported by TTGV Technology Development Funding • “Development of Textile Dyes” - 1997 • “Development of Versions of Natural Thickeners for Textile Printings” - 1999 • “Improvement of Several Textile Dyes” - 2001 • “Advanced Filtration and Drying Techniques” - 2002 • “Development of Subsidiary Textile Materials” - 2002 • “Developing polyester and polypropylene based masterbatch” - 2003 SETAŞ received the Technology Success Awards for SMEs in 2003 Company data compiled by Y. Telçeken - TTGV

12. Success Stories - Özçelik Establishment : 1997 in Gaziantep Sector : Textile Machinery Manufacturing • Projects supported by TTGV Technology Development Funding • “Polypropylene Yarn Production Machine” - 1998 • “Making Design & Production of Production of Poly Spin Pet Combi Synthetic Yarn Production Machine” - 2002 • “Polyspin Synthetic Yarn Production Machine” - 2003 • “Polyspin stable Syntethic Yarn Production Machine” – being evaluated Özçelik received the Technology Success Awards for SMEs in 1997 Company data compiled by Y. Telçeken - TTGV

13. Success Stories - GATE Establishment : 1995 - Ankara Sector : Electronics Test & Measurement Devices • Projects supported by TTGV Technology Development Funding • “Universal Type Test and Measuring Device” - 1999 • “Computer Aided Test and Error Detection Tool for Communication and Satellite Systems” - 2002 • “Satellite Integrated Radio Routing and Telecom Transfer Terminal” - 2002 Company data compiled by Y. Telçeken - TTGV

14. Determining Additionality • Additional R&D intensity due to the existence of the support program is the additionality. (1) • Technology Development Support by TTGV between 1999-2005 was 2% of all private R&D expenditures. • Support receiving companies funded only 14% of all projects by TTGV funds. But, TTGV funded projects consumed 46% of all expenditures. (evaluation process is an inconvenience for companies) • Without TTGV support 22% would have canceled the project (12% of Large and 27% of SMEs); 44% would have shaved the budget by 40%. This would have resulted in 34% less R&D spending. • 42% of those rejected had to cancel the projects, 19% carried out with a smaller budget. • R&D intensity (2) for support recieving firms increased 3,61 points compared to the same profile control group. • TTGV supports had no effect on labor productivity. • TTGV supported firms in services had significantly higher export intensity, other sectors scored the same. • TTGV support receiving firms had higher employment generation, with R&D personnel getting higher salaries. • Support receiving (1993-1997) companies had better survival ratios in 2001 crises. • Supports had better impact on low and mid-low technology sectors (1) “Behavioral” additionality is harder to measure. Additionality requires observations for over 5 years after the support (2)R&D intensity : ratio of R&D spending to total sales

15. The Start-up Program • Early stage quality finances is a serious gap in Turkey (seed, start-up – phases of enterprise finance) : the gap is between 100 K – 400 K USD. • Current VC works as equity financing with minimum investment above 1 M USD. • In recognition TTGV started with WB support a start-up Program in 2004 – first of its kind in Turkey • A hybrid model – semi-independent arrangement • An ex-pat Turkish enterpreneur was recruited to manage the program • A high profile investment committee was established for investment selection • The financial model : 400 K USD initial equity investment for upto 25% of the company with strong minority control – exit option of buy-back is granted. • Around 85 inquiries received, 35 submitted Business Plans, 9 qualified for submittal to the committee after initial evaluation, 1 was issued a term sheet. (US ave. 1%) – 3 are being evaluated for the committee • Most Business Plans were “half baked” and required below 100 K USD and strong business mentoring.

16. Start-up Program : Lessons Learned • A hybrid model will never work. Issues of accountability – be fair to “heros”  • No best practice model, need to develop your own • Start with achievable objectives (forget about X10 returns) make sure deal flows through the pipeline first – build confidence, establish requirements and procedures, build capacity in the organization • A fully independent model is difficult (at leas initially) with public funds (a funds of funds model arrangement can be more workable under the right conditions) • While through put ratio is above US ave (1 in 35 BPs received), a mission program needs higher ratios for stronger faith in start-ups • need to extend into pre-incubation / BP support • Start-up is a culture and state of mind – you need the right chemistry, the team, vision and the networks. • Start-up will only work as part of a functional national pipeline. (the critical path). Issues of deal flow. • strong seed and incubation (incl. pre-incubation) supports are required.

17. Future Directions for RTDI Support Valorization of knowledge should be a higher program performance priority • Three levels of coordination and management : • Policy and strategy level (such as with regional, education, taxation and industrial policies, i.e. “enablers”) – program owners and policy makers • Enterprise level – program implementation and execution agencies (accounts) • Project level – project managers (outcomes) • Need to develop a tool set of different supports to cover all stages of RTDI value chain. • Emphasize social aspects of RTDI, networks (esp. ex-pat networks and multi-national), mobility and transitivity – aim beyond provision of finances

18. A Critique of TTGV • TTGV offers a very progressive model for support delivery. Management autonomy and flexibility in operations are pluses. The cost might be the linkages to the stakeholders, esp. the government. • Operating as a foundation has some limiting factors in spite of many strong advantages, alternative corporate structures may have to be considered. • An organizational culture is needed. Strong identity with the organization needs to be developed. Fast turnover in younger staff is an issue. (for many TTGV is either the first or the last employer!) • Strong venturing character is required. The support organization needs to be an innovative knowledge enterprise itself. (believe in what you preach) • The team and chemistry are critical. • Stay in touch with the real world of technology market. Develop mobility and networks of your own.

19. info@ttgv.org.tr www.ttgv.org.tr