Should the common VC investment strategy, “a few of the investments in the portfolio outperforms other majority bad performers and normalizes the return of the fund”, be working in a market like Turkey?
The path to the answer is at the definition of outperforming. One of the key elements in VC is the diversification. You can increase the likelihood of having outperformers in a portfolio with diversification. This implies increased number of investments, and this results investments being made only into the the projects having outperforming potential. Therefore this causes several decent small businesses not to be receiving VC sourced capital.
On the other hand, there is a quantitative evidence that the risk on a VC investment gets lower as the rounds of investments (series B, C, D,.. ) increases. If you can imply a staged investment strategy (it also has its pitfalls), you may receive a normalized high return (lower than the return of the 1st stage) while lowering your risk and increasing the concentration of investment with the target return in a portfolio.
Turkish micro & small cap (from early stage to SMEs) has abundance of investment opportunities that has sound business potential to bring 6x or more returns (but little chance for a 10+X return) and if receive further funding provides a normalized return prospect (3-4X) with lower risks. This implies the common VC strategy may not be appropriate for Turkey. Focusing on decent businesses and increasing the weight of the staged investments in the portfolio would be an achievable approach at the current market dynamics.
As this is the case, instead of pushing founders and SMEs to unnaturally transform their business into a global business setup or make it disruptive, we may let them do what they can do best (outliers are always welcomed). In the mean time we should be focusing more on creating a deep and liquid secondary market in Turkey to solve the next big problem “exits”.