Chronicles of a Wandering Mind

Continuing the story of two groups of entreprenuers who are starting up a software company in Turkey and US. In the previous post, The American entrepreneurs have completed their legal requirements and have started developing their product, yet their Turkish counterparts are still struggling and face with the unexpected regulations and associated cost at every step of the way. Will they finally be able to actually start developing their product anytime soon?

The Turkish entrepreneurs now have a certified accountant to help them with the accounting. However, just when they thought that they were free to focus on software development, their accountant informs them that since they are working for themselves, they have to become member of a semi-governmental association that provides benefits (health care, etc.). Apparently, for self-employed people and this is mandatory! They are “touched” by the thoughtfullness of their government in ensuring that they have benefits. The fact that they have not made any money and will not make any for the next year or so is a minor detail. If they knew, their American counter parts would be saddened that unlike Turkish government, their government does not care enough about them to force them to pay benefits to secure their future! How inconsiderate of them.

The cost of this thoughtful burden on the Turkish entrepreneurs: $130 per month per owner. Since we have three founders, this is roughly another $400/month for our budding entrepreneurs! As stated in the earlier posts, this is a significant amount of money in Turkey (more than the minimum wage) and increases the burden on our entrepreneurs significantly. It may sound like a nobel idea, but it is not! Just like many other such regulations, the cost of these regulations prevent entrepreneurs from starting or succeeding in business.

As a reoccurring theme, Turkish system does not seem to understand the fact that the businesses have to first start and succeed (exist?), before they can be taxed. No new businesses means no new jobs, no profit, no “fees”, no tax revenue, nothing! Just three more young university graduates in need of employment (and benefits!), instead of a high value add company that can potentially employ other people, export products, pay taxes, etc.

It is important to reiterate that the government essentially starts taxing new businesses from day one, before the business gets any chance to actually make any money never mind profit. I’ve talked about several of these “fees” over the last posts, but here is a summary of the regulations/fees a new business faces in Turkey:

• Incorporation costs ( $1200 one time)
• Chamber of commerce registration ($130/year)
• “approval” (whatever that means) of the accounting books ($300/year)
• Mandatory certified accountant (~$4000/year)
• Mandatory social security for owners ($5000/year for 3 owners)
• VAT declaration ($120/year, done monthly even if there is no transaction)
• Corporation tax ($50/year even if there is no transaction)
• Opening an office “fee” by the local municipality ($250)
• …

As can be seen from above, the burden put on our small software startup by the regulations in Turkey is almost $11,000 for the first year. This is pure overhead for a company that has no commercial activity, and not an insignificant amount in Turkey.
It’s important to note that the costs do not include anything like rent, furniture, computer hardware/software, etc. just the overhead enforced by the regulations. It also does not include the administrative costs (someone has to do all this work). In our experience to handle all the associated paperwork requires someone to dedicate half of their time and it is constant source of distraction for the entrepreneurs, therefore it is safe to say that the negative impact of the regulations on new businesses go beyond the financial burden.

In such an unfriendly environment to business startups, it is not therefore surprising that there is hardly any software companies emerge out of Turkey despite the signicant amount of talent in the country. Instead of implementing utterly useless “subsidies”, Turkish government should consider just getting out of the way of the entrepreneurs. No more regulations please!

In the next post I’ll talk about yet another good idea gone wrong: Technology Development Parks, aka Technoparks!