Startups in Hungary

Even if it is still a one-digit figure, the impact of startups weight in the Hungarian GDP can now be measured in full percentage points. Despite certain success stories, Hungary has not found a way to utilize the brainpower of startups in a traditional economy.

Hungary’s best-known startup Prezi has signed up its 100 millionth user. The presentation software maker announced this milestone at its 9th birthday along with the news that it would move into a new separate office in San Francisco thanks to its growth at the US market. Prezi.com started in April 2009 and presentations made using its software have been watched 3.5 billion times so far. Prezi’s key novelty is its unique zooming effect which puts storytelling into a virtual space highlighting relationships between concepts as opposed to simply showing a linear story.

A great deal of money has been spent on the startup sector in Hungary, much more than in neighboring countries, since 2010.

Popularity and awareness for the startup sector shows Hungary at a more advanced stage than its regional peers. Except of course for Poland, a much larger market with stronger ability to attract capital. A great deal of money has been spent on the startup sector in Hungary, much more than in neighboring countries, since 2010. Between 2010 and 2015, as many as 30 Jeremie-funds (the European Union’s development program for SMEs) were set up in Hungary as opposed to 2-3 in other emerging European countries. This makes some experts say the startup market in Hungary is overfunded due to disproportional state dominance. Some put the state’s share to around 75 percent of all available funding for SMEs.

The State Is Present More Than Necessary

The abundance of financing is sometimes seen as a danger for the startup ecosystem as it weakens selection by quality. Instead of investments by merit and true potential, quite a few investments are made for political fanfare only, showcasing the government’s efforts. For a faster development of the Hungarian startup market, considerably more and larger-scale exits are needed so that founders and investors could reinvest the proceeds into new and successful ventures.

“The state is present in the Hungarian economy more than it is needed; the rate of state redistribution is too high, political influence is unrealistically strong,” says Peter Oszkó, founder of OXO Group, a Hungarian startup incubator, and also a previous finance minister. “This hinders the development of the startup sector, because natural selection mechanisms of the market are completely lacking, even the smallest players encounter public interference. Furthermore, the state influences how contracts are awarded to companies. We lag behind the countries where market logic prevails,” he adds.

Hungary has not found a way yet to utilize the brainpower of startups in a traditional economy.

However, the startup scene provides an escape for entrepreneurs who want to avoid non-transparent schemes and nepotism. Even if it is not fully intact, this sector is still as far from politics as it can be.

In other countries of the CEE region, states tend to be present in the startup market through funds of funds. They do not invest directly into companies, but pick the best performing capital funds and trust state money to them. Or if public funds invest directly, they typically co-invest with private investors under their terms and valuation. In Hungary, however, angel investors often experience that if they make an offer to a startup firm, a state-owned fund appears and tries to lure away the target company by offering more funds and more favorable terms. This is not meant to be the role of a state institution; state funding should not distort healthy market procedures, adds Oszkó.

A Regional Startup Powerhouse?

As if to underline just that, a few weeks ago it was revealed that the latest tranches of Jeremie-funds were allocated to tycoons friendly to the government. MKB Bank, held by Prime Minister Viktor Orbán’s friend Lőrinc Mészáros, savings cooperatives’ bank Takarékbank, also a favorite of the Premier, and Sándor Csányi and Zsolt Hernádi—two of Hungary’s richest men—were among the winners.

It is certainly not a mere coincidence that the most lucrative Hungarian-born startups, such as Prezi, NNG, and Ustream, did not use state funds and they did not start up on the Hungarian market, but their founders aimed at global markets and served global needs. These examples show that since the Hungarian market with its 10 million souls is too small, startups should have larger-scale plans even at the start.

The Hungarian government has proclaimed a plan to make the country a regional startup powerhouse, but only few deemed this a realistic goal. “It seems ambitious enough to connect Hungary to the international trend of startup development as small, emerging, and fast-adapting companies with brave ideas are playing increasingly larger roles in the economy and its growth,” Oszkó says.

ICT plays a dominant role in the Hungarian economy, accounting for 10 percent of GDP. 90 percent of this however, comes from the operations of multinational companies operating in Hungary. Even if it is a one-digit figure yet, the impact of startups weight in the Hungarian GDP can be measured in full percentage points already. This figure lags behind the numbers in the US, where emerging companies financed by venture or private equity produce 20 percent of GDP. Part of the issue is not just size but also mentality: a lot of companies are being kicked off with hopes built on landing a few state contracts to start with. In nearby Slovakia and Romania, entrepreneurs understand better what it takes to set up a company and business plans do not tend to be built on working for the state.

A Solid Background for Biotech Firms

Due to the small consumer market in Hungary, companies offering B2B solutions have better chances than those nurturing B2C products. For example, biotech firms enjoy solid background from the country’s tradition in pharmaceuticals and related R&D. Although the local public is less familiar with these companies, their success has been demonstrated by a few deals recently.

Started off from a college dormitory in a provincial university town in Hungary, defense software maker BalaBit was acquired by a US-based software giant Quest in January. In a surprise transaction in March, the founders of Solvo, a biotech startup from the southeast of Hungary, sold 89 percent of the company to France’s Citoxlab Group. The banking software and web developer IND made a successful exit in 2014, when a global tech giant MySis bought the company from its founders. They have since then become active angel investors in their native northeast region in Hungary.

As an exception to the rule, some B2C startups have tapped international markets. Some of them operate in a sharing economy model which has become especially popular in Hungary, the country where Uber has been banned. Rendi that connects freelance cleaners with private households has received state funding to expand in Poland and the Czech Republic. Airport car sharing app BeeRides—which helps you earn money by renting out your car while you travel abroad—is now present in Dortmund, Germany, its first location outside Hungary.

Young Companies Could Create Inventions for the Agriculture Sector

These success stories are only the tip of the iceberg, Hungary has not found a way yet to utilize the brainpower of startups in a traditional economy. While its startups are strong in biotech, Hungary’s health-care system has not benefited from their inventions as much as in the neighboring countries. Screening and diagnostics could be the first such area. Considering Hungary’s strong tradition in food and agriculture, young companies could play a role in inventing new technologies for the sector.

Further opportunities in Hungary may emerge from eco-friendly technologies. A group of young entrepreneurs have invented a zero-emissions house called Noah, which only uses renewable energies. “Despite distortions in the local market, these promising examples could thrive in international competition,” says Oszkó, whose group also supports a Hungarian venture targeting the US consumer market with smart bracelets that can change color in line with the wearers’ outfit, offer fast identification solutions, and track physical condition while also connecting to other smart devices.

Apart from the plethora of state and EU funds, Hungary’s startup scene is receiving support from certain large corporations whose future heavily depends on technology. Large Hungarian banks and key international companies present in the local market have started incubation and startup programs and there is more and more talk about cooperation between young enterprises and large corporations. Economic and technological changes have come so fast that the large mammoths cannot keep up with the pace. Their innovation teams are slower and more expensive to keep than picking up knowledge from small and agile startups or absorbing them completely.

Apart from the plethora of state and EU funds, Hungary’s startup scene is receiving support from certain large corporations whose future heavily depends on technology.

The financial sector players are increasingly often launching accelerator programs as the previous crisis made the banking executives aware of the importance of innovation and adaptation. With their sector being highly regulated, banks have more time to pick up the pace. Besides Hungary’s leading OTP Bank, other players such as K&H, MKB, and CIB have invested heavily in startup programs. Aside from banks, energy companies and telcos are also active in seeking and supporting successful young ventures in their own fields. Experts say that such initiatives make sense only if they are utilized by the large corporations in their everyday operations.