Funding mechanism under venture capitals significantly differs from the other types of funding such as bank loans as they are not protected through a collateral.[1]Fund providers are also more involved in management of the company compared to other types of funding. Due to the nature of venture capitals, contracts related to ventures capitals are quite complex and such contracts often grants exit mechanisms to fund providers typically after an initial public offering or selling the company to a larger company. Nevertheless, even with all the risks for fund providers, venture capital is an important actor for technological innovation as they have funded successful technology ventures

Considering the technology’s role has in the defense industry, connecting technology start up owners with defense industry players may not be a bad idea. A state-sponsored venture capital establishment may be competitive in a state dominated defense industry that is lagging behind the private sector with regards to the information technologies. This would immensely help defense industry improve its capabilities with regards to information technologies and other areas of technology where private sector is far ahead.

Suggested Models for Turkish Defense Industry

Turkish government has a major influence on the defense industry in Turkey. Most of the large business transactions are conducted through state actors or private companies controlled by state actors. With respect to the state’s role in defense industry in Turkey, a hybrid venture capital model that combines various public sector and private sector models. While combining the features of public sector and private sector models, there are various points should be mentioned. Such points are:

  • Prospective venture capital company should be established as a commercial enterprise. Establishing state owned enterprises require more bureaucratic and legislative procedures. In addition to the establishment, decision making and management of a state-owned enterprises may create bureaucratic and regulatory challenges. For that reason, venture capital firm may be established as a limited liability company or a joint stock company where a state-owned actor (such as Turkish Armed Forces Foundation) has the majority of stakes or is entitled to manage the company through privileged shares.
  • Private sector venture capital models base their structures on the financial success which means the expectation of a return on their investments. However, a defense industry venture capital model should base their structure on innovation rather than financial success. However, financial success still has an importance as the venture capital company is a commercial enterprise.
  • Senior management and executive members of the board of directors should consist of people that have technology firm backgrounds and relevant fields. Agile decision making is important yet the influence of the state in venture capital’s affairs may slow down the process.


Policy Recommendations

A prospective defense industry venture capital may adopt various policies with regards to technologies that are going to be used by the defense industry actors. While adopting those policies, the management should always consider the value of the technology and the commercialization of that technology.  Below are various recommendations for the optimal performance of a defense industry venture capital firms:

  • Prospective venture capital firm may look for commercial off the shelf technologies that are not yet commercialized. Through licensing agreements and financial investments, venture capital would act as a system integrator; it would act as a bridge between the needs of the defense industry and inventors. This would require less funding and would be less risky because the technology is already developed.
  • Prospective venture capital firm may look for tech start-ups that is conducting R&D activities related with the need of the defense industry to invest in. In this model, venture capital firm will actively involve in research and development activities and later commercialize the intellectual property arise from the technology in the commercial market.
  • With equity and other type of investments, the target technology firm would financially grow bigger. Returns on the investment would depend on the success of the target firm and the commercialization of the intellectual property. Both the target firm and the venture capital firm would retain the rights to use the intellectual property after the exit of the venture capital firm.
  • Prospective venture capital firms should also review the financial status of the target firm since the secondary objective of the venture capital is the potential profits. Returns on investments separates defense industry venture capital from a directly state founded research and development activities.
  • An adequate legal due diligence should be conducted because of the intellectual property issues related with the possible innovation and or research and development activities.

A venture capital established for the purposes meeting the technology needs of the defense industry in Turkey may be a convenient and an alternative way for research and development activities. All the parties involved in such arrangement would benefit from the success of the venture capital; (i) target firm may enjoy financial success; (ii) defense industry may enjoy the success of the innovation; (iii) commercialization of the intellectual property may increase tax revenues of the state; and (iv) the national security needs of the defense industry would be met.

[1] Florida, Richard L., and Martin Kenney. "Venture capital, high technology and regional development." Regional Studies 22.1 (1988): 33-48.

Author Batuhan Ecin