The Memo: 500 Emerging Europe
A deep dive on 500 Emerging Europe, one of the rising stars in Europe and very top performing funds in the whole 500 Global network ❤️🔥
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The EUVC Investment Club is investing into 500 Istanbul. Join us today to explore the opportunity further with us.
This article outlines why the EUVC Investment Cub decided to participate in this investment opportunity. It is not, and should not be perceived as, investment advice.
🎙️This substack is accompanied by a podcast deep dive with founding partner Enis Hulli fully dedicated to the 500 Istanbul opportunity. We highly encourage tuning in to get to know Enis and his thinking!
📰 Since writing this memo, 500 Istanbul has been rebranded to 500 Emerging Europe. This has not been changed throughout the article.
🤝 You’ll of course also be able to meet Enis in person at one of our Meet the Manager calls. Just join the EUVC Investment Club to sign up for these.
The Memo [TL:DR version]
500 Istanbul is one of the rising stars in Europe and one of the very top performing funds in the whole 500 Global network. We’re amazed by what they’ve managed to create with their $ 10M Fund 1 raised in 2016 and how they’ve managed to become a dominant player in Turkey. They’re nothing short of a beacon in the rapidly growing Eastern European startup ecosystem.
Fund I run-down
Fund size: $ 10.6M, 4.7x Gross TVPI & 53% IRR 🤯
40 investments in founders from 11 countries with a cumulative $ 500M annualized revenue & 97% of the revenue coming from foreign markets.
85% raised follow-on, $ 1.1B+ raised (and counting) and 5 exits created. Downstream investors counting funds tier-1 like Sequoia, GV, Riverwood, Brookfield and many more undisclosed to the public.
For every € 1 Enis and his team put in, follow-on investors came in with a whopping € 125 😲
Fund II run-down
Now let’s look at Fund 2, which is a € 70M fund dedicated to leveraging the Turkish and Eastern European region’s opportunities:
Fund size: € 70M, targeting replication of fund I’s success.
Currently € 35M committed with all LPs from fund I re-investing. The LP-base counts 25 founder-LPs, 3 European & Global GPs as well as one of Europe’s renowned emerging VC specialist fund of funds.
25 initial investments of € 250k to € 1M investments (average of € 500k) & follow-ups of € 1.5-2M (60-70% being reserved for follow-ons).
Investment strategy tailored to the Turkish & Eastern European startup ecosystems focusing on Geo-arbitrage and Technology transfer leveraging 500 Istanbul’s unique access to global SF-based funds.
Main change in strategy from Fund I is a higher reserve allocation, which is implemented in a co-lead & follower strategy with growth-stage investor Arin Özkula having joined the GP in Feb 2021 to lead the implementation of the follow-on strategy.
Access to the best founders is ensured through a renowned brand & reputation, solid track-record, and global connections. This is coupled with a massively aggressive deal sourcing strategy with every team member sourcing deals 50% of their time & an approach of guaranteeing founders GP-presence at any second meeting held - and an investment decision within 3 weeks.
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The Memo [Full Version]
To present our analysis of the investment opportunity, we’ve applied the VC Fund Canvas, which we’re developing with our good friend Marc Penkala & the EUVC community. Keep your eyes peeled for much more activity around this 👀
1. General Fund Terms
Everything is plain vanilla here, but let’s get an overview.
Target fund size € 70M
Investment period 5 years
Hurdle rate 1.40x
First Close January 2021
Already Raised € 35M
Final Close July 2022
Management Fee 2% (3% during investment period, 1% afterwards)
Carry 20% carry
2. Track record
This is of course the track record of Fund I.
Fund I Rundown
Fund size: $ 10.6M, 4.7x Gross TVPI & 53% IRR 🤯
40 investments in founders from 11 countries with a cumulative $ 500M annualized revenue & 90% of the companies distributing services globally.
85% raised follow-on, $ 1.1B+ raised (and counting) and 5 exits created. Downstream investors counting tier-1 funds like Sequoia, GV, Riverwood, Brookfield and many more undisclosed to the public.
For every € 1 Enis and his team put in, follow-on investors have come in with a whopping € 125 😲
Dive deeper on some of 500 Istanbul’s Deals
The performance of 500 Istanbul’s execution has proven to be top quartile and thus stands a high chance of being replicated.
With 4.7x Gross TVPI & 53% IRR at year 5, 500 Istanbul is on track to become one of the top performing VC funds in Europe. In VC, successor funds to a previous fund in the top quartile remain in the top quartile ap. 50% of the time. VC funds with previous performance in both the top and second quartiles outperform the S&P 500. This means that firms with previous VC funds that are above median tend to replicate their success, suggesting that investing in GPs that have previously performed well will yield strong risk adjusted returns. The stronger performance persistence also suggests that GP skills & networks for successful investing are hard to copy, creating a moat around successful firms. Consequently, VC is a highly network and relationship driven business.
The challenge in an increasingly competitive market is to get into the right networks by building relationships with leading investors in every stage. 500 Istanbul has proven their ability to do that with Fund I and Fund II will be a continuation of the same Investment Thesis. The Investment Strategy, as detailed below, has been slightly adjusted, and execution risk mitigated by adding a GP to the team. As such, we expect the 500 Istanbul team to be able to replicate their performance from fund I.
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3. Investment Strategy
500 Istanbul’s investment strategy is tailored to the Turkish & Eastern European startup ecosystem. It focuses on filling the post-seed crunch that has existed in the ecosystem for the last decade. They couple this with a focus on geo-arbitrage and technology transfer opportunities where they can leverage 500 Istanbul’s unique access to international markets and global SF-based funds.
Turkey’s post-seed crunch & 500 Istanbul’s opportunity 🕵️♂️
From 2012 to 2010, 965 startups raised a seed round of less than $ 1M, but only 87 startups received a Series A round. The total Series A volume over this 9 year period was a mere $ 247M. And the crunch continues. $ 1.3B was invested in the first half of 2021, but only 4% was invested in deals in seed & post-seed stages. Yet the region continues to see great acquisitions; since 2018, there’s been more than $ 4B in liquidity for regional startups.
Fund II will be doing 25 seed investments, 12 first follow-ons and another 6 second follow-ons. The team will lead in seed with average initial tickets of € 500k and co-lead or follow in their follow-on investments with tickets ranging from € 1.5-2M.
Fund II has a larger amount (and %) of capital allocated to follow-on investment (60-70%). This constitutes the main difference from Fund I and, also, the highest risk factor. The decision is in line with what you typically see in the market. Small first time funds typically allocate the majority of their capital to initial tickets to ensure enough shots on goal (to reach adequate portfolio diversification) and maximize the ownership that can be acquired with limited investable capital. However, the lack of follow-on capital means leaving valuable opportunities on the table. 500 Istanbul experienced this in Fund I and are correcting it in Fund II by allocating 60-70% to follow-on investments. Assuming they can execute on it, this will lead to higher returns in Fund II.
But how will they they be able execute on it and mitigate this risk factor?
To bolster the execution power of the team, Arin Özkula has joined the 500 Istanbul in February 2021. Arin comes with PE & growth stage experience from 4 years as a partner at Revo Capital, a € 100M AUM VC fund and Ünlü Private Equity, a € 100M PE fund in Turkey. It is very important to note that the GP team now has a full year of experience investing and working together (Enis & Rina have been doing so for 5+ years already).
The employed follow-on investment strategy consists of co-leading or following other investors, thus relying on market signals to validate their conviction in teams. Matched with 500 Istanbul’s proven ability to attract tier-1 global investors to the portfolio, the foundation for strong execution is in place.
A rarely seen portfolio breakdown
Interestingly, the 500 Istanbul also breaks down their portfolio into three categories based on the type of opportunity they’re pursuing; 1) Geo-arbitrage & tech transfer, 2) Regional dominance, and 3) Local winners. Let’s take a closer look at each.
Geo-arbitrage & tech transfer
Startups where there’s a significant opportunity in exporting the tech and product, while leveraging the talented and cheap human capital in Turkey and Eastern Europe. Firefly, BillionToOne and BuyBuddy are examples of this type in the Fund I-portfolio. These startups are born global, making 500 Istanbul’s reputation for a founder friendly approach and global network an important advantage in winning the best deals.
These startups are expected to make up 18 of the 25 initial investments to be done in Fund II, which is a significant increase compared to Fund I. These types of deals have proven to create higher returns. This decision also makes sense from an access standpoint as 500 Istanbul has a stronger brand with Fund II, giving them increased access to the most sought after founders.
Startups that focus on winning and expanding in the region. Their competitive advantage relies on a regional focus and advantages over global competitors that can’t tailor their approach to the local market.
In our podcast episode with Enis, he described how Insider holds such a position. Insider is the top 3 provider across 27 markets. A local player might outcompete them in one market, but no-one can outcompete them in all 27 markets because they’re tailored for the region. Five of the 25 initial investments are expected to be of this profile.
Startups that build services to win opportunities that are unique to the Turkish or Eastern European markets. Through the 500 Global Network, the team has asymmetric information to evaluate and help these startups, making it a profitable play when the opportunity is big enough. Two of the 25 initial investments are expected to be of this profile.
The EUVC Investment Club is investing into 500 Istanbul. Join us today to explore the opportunity further with us.
4. Unfair advantage
We believe 500 Istanbul have a strong unfair advantage, primarily deriving from their ability to attract and access some of the best performing startups in the region.
The 500 Global Network
Being a 500 Global fund is more than being associated to a logo. The 500 Global family of funds has invested in more than 1,100 Non-US based deals spanning more than 50 countries. This is actually about half of the entire 500 portfolio. What is more, more than half of the unicorns in the 500 portfolio are non-US companies or founded by immigrant founders (which in the case of 500 Istanbul is important, as the Turkish diaspora is part of the team’s focus).
The 500 Global Network also brings a host of fund manager benefits that contribute to a rapid learning curve and efficient deal-making procedures as well as back-office management for the team. For a new, sub-€ 100M fund getting this kind of support from a network that has more than 2,400 portfolio companies allows the manager to focus entirely on the core part of the VC job; finding, winning and scaling the best startups, whilst keeping operations lean.
International reach and access
The 500 Istanbul team focuses on investing in founders with global ambitions, which is perfectly aligned with the core value add of the team; their international reach to customers as well as investors.
The 500 Global Network has a portfolio counting more than 2,400 startups. This provides a deep level of insight that is leveraged in making sound investment decisions, but also in providing support to portfolio companies. As Enis put it in an EUVC episode:
“When one of our portfolio companies had to enter the Southeast Asian Fintech market, I had zero network there. But the 500 funds over there could help enormously with direct C-level access to the largest players.”
Enis Hulli, Founding GP
Similarly, portfolio companies have access to the 500 Global Seed Accelerator program in Silicon Valley and can access the 200+ vertical expert mentors. This network is well-known amongst the best founders and creates a strong gravitational pull to 500 Istanbul.
Full focus on deal sourcing
The 500 Istanbul team has one of the most aggressive approaches to deal sourcing we’ve ever seen. Everyone must spend at least half of their time deal sourcing. This also goes for the VP, who in most funds would be dedicated to back-office activities. The rule is simple and no-one forgets it: “50% of your time, 5 meetings per day”.
And there’s another simple rule inside 500 Istanbul; show up with a prepared mindset and guarantee GP-presence at any follow-up meeting. And promise a yes/no decision within three weeks.
“Entrepreneurs are romantics, working with people you love is important and we love you guys. You are the investor with the fastest response rate. I haven’t seen that response rate in any investor. It is a huge support. 500 made Insider’s and its cofounders’ lives easier in the journey.”
Hande Cilingir, Insider CEO
500 Istanbul is one of the only global institutional seed investors with a focus on Turkish and Eastern European markets. It may sound stupidly simple (and for sure it won’t last), but right now and for the duration of the investment period for Fund II, this won’t change markedly. Especially not in Turkey where the majority of the fund will be deployed.
Too often investors in less-developed startup ecosystems fall prey to their own greed, leading them to use exploitative terms that come in the way of follow-on funding and divert founder focus to cap table management rather than growth and eventually also hurt their reputation as investors.
500 Istanbul is not one of these - quite the contrary. Enis Hulli is a strong promoter of founder education and the 500 Istanbul team is investing with SAFEs. This is a best practice in the early stages of investing as its terms reflect that investors are there to empower entrepreneurs. The best founders get the best terms from the best investors.
Ecosystem building activities
Just as important as capital, the region needs access to know-how. The 500 Istanbul team has been highly visible in the ecosystem. Not just by participating in events and seminars. They’ve also taken mentorship positions in most major incubator and accelerator programs in Turkey and have organised bi-annual educational events for founders in major cities across the region.
These activities together with Enis’ hosting of the CC:-podcast (focusing on global growth journeys from emerging ecosystems & bridging tech ecosystems) puts the team front and center for founders fundraising in the region.
Dive deeper on Enis’ Investment thinking
5. GP & fund team
The fund is managed by a 3-person GP team consisting of Enis Hulli, Rina Onur Sirinoglu and Arin Özkula, sporting a sound match of entrepreneurial & investment experience. Together, they’ve built a core team renowned for their dedication to finding and winning the best deals in the region.
6. Performance metrics
Fund reporting is completely vanilla, as expected by a 500 Global Fund. This means reporting happens on a quarterly basis covering fund financials & drawdowns, deal flow analysis and investment memos on placed investments. EUVC Investors will of course receive these reports.
7. Platform play & tech stack
We’ve written at length on the 500 Global Network. By now it should be clear how it adds value to portfolio companies. Of note, and as said above, the global network helps run a leaner operation, as well as increase the knowledge-base and develop best practices for the 500 Istanbul team.
Looking at the tech stack, the 500 Global Network gives the team and its portfolio founders access to a community platform. Here founders can book office hours with 200+ mentors and 80+ full-time employees of the 500 Global team, access events and connect with founders across the 500 portfolio as well as redeem perks of a total aggregate value of $ 1.25M. But, most importantly, founders can connect directly with downstream investors within the 500 Network. This is something that no € 50M fund could build themselves and shows the strength of being part of something bigger.
8. Fund financials
The fund runs for 10 years (i.e. until January 2031) with an investment period of 5 years (January 2026). The fund can be extended with two one-year extensions subject to the advisory board’s approval. This is standard for the industry or, as we say, super vanilla.
Management fees are an average of 2%. Again, this is super vanilla. As an example, for the 2018 market, the sub-€ 100M venture fund segment’s blended average of lifetime management fees came in at 2.04%. For 500 Istanbul, the breakdown of the management fee is that of 3% of committed capital during the investment period and 1% afterwards.
Fund managers are entitled to 20% carry. This is the industry standard, with the vast majority of VC funds going for this value. The hurdle rate (minimum multiple on invested capital for investors before the GPs receive any carry) is set at 1.40.
The GPs commit 2% of the total LP capital which is also market standard and the minimum LP commit is € 250k.
In analyzing the fund model and its key assumptions, we find that the Istanbul team are conservative when comparing Fund II’s model to Fund I’s actual performance.
9. Fundraising strategy
Most important for this analysis is the constituency of the LP-base and whether the fund is likely to meet it’s closing target.
Addressing the latter first: final close is in the summer of ‘22 and € 40M is already committed with strong traction towards final close. We little risk of the team not meeting its target.
The current LP base counts 25 founder-LPs, 3 European & Global GPs & a renowned emerging VC specialist fund of funds.
By bringing in the EUVC Investment Club the number of investors that come from the startup and VC ecosystem will expand radically, which will bolster an already strong value-add LP community backing the fund.
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Risk Warning Investing in venture funds, start-ups and early stage businesses involves risks, including illiquidity, lack of dividends, loss of investment and dilution, and it should be done only as part of a diversified portfolio. The EUVC Investment Club is targeted exclusively at investors who are sufficiently sophisticated to understand these risks and make their own investment decisions. You will only be able to invest via EUVC once you are registered as sufficiently sophisticated. This content is for informational purposes only and should not be considered investment advice.