Startup Ecosystem Spotlight: Hungary

At this year’s Pirate Summit in Cologne, Germany, I had the pleasure of meeting plethora of Hungarian entrepreneurs and founders, one of whom asked me if I had heard of ‘Bridge Budapest’.

Now, anyone who has visited Budapest as a tourist will understand how dumbfounded I was by this question. The old towns of Buda and Pest are split by the Danube river, which is also home to a number of islands, and as such, the city has a plentitude of beautiful, ornate bridges which feature heavily on any tourist’s camera-roll. Little did I know, he was actually talking about one of the most influential startup organizations in Budapest. Red face.

As such, I chose Hungary as the first destination for our monthly series of CEE Startup Ecosystem profiles. We spoke to a number of experts on the ground to compile this overview of the tech and startup scene in Hungary.

If you are looking for an abundance of startups in Hungary, make a beeline for the capital. Budapest, the capital city of Hungary, has marked its position in Europe as an up-and-coming tech hub. Nowadays, Budapest — and in turn the rest of the country — has been placed in the international spotlight by Unicorn Prezi, and is becoming increasingly attractive to startups tempted by an affordable talent pool of developers and engineers, a startup-friendly government, access to funding from the EU and increasingly active homegrown VCs.

But it hasn’t always been like this. Just ten years ago, there was pretty much no startup ecosystem to speak of at all.

The early days

Speak to anyone who knows anything about startups in Hungary, and one name will pop up immediately: Peter Zaboji.

Zaboji, who sadly passed away in 2015, was a businessman, investor and former professor at INSEAD business school in Fontainebleau, France, and known by many as ‘Peter Papa’ — the father of the Hungarian ecosystem. Zaboji is credited with laying the paving stones for today’s flourishing tech scene by launching a number of events and organizations which would bring entrepreneurs together, and offer a platform for shared experience, mentorship, funding and growth.

Zaboji left Hungary as a child in 1956 and grew up in Germany, where he had a successful career eventually becoming one of the top executives of Siemens. He returned to Hungary with his family at the beginning of the startup dawn in Hungary, after his crown jewel corporate accomplishment in 2002 of managing the successful buyout of Tenovis and its subsequent successful exit.

One of his key mantras was ‘the biggest room in the world is the room for improvement’.

Zaboji considered himself ‘European first, Hungarian Second’ and tried to install in the Hungarian community the idea that business and innovation needed to be done on a global stage, not hidden away internally in a local ecosystem. Putting his mission in motion, back in 2009, Zaboji launched an English language entrepreneurship workshop series, the Venture Accelerator Course (VAC), in Budapest, which aimed to provide a basic education in the business side of launching a company.

In a Financial Times article, Zaboji stated, “Once I stopped teaching and had the time to look around the region, it quickly dawned on me that it was very much like the late 90s and the dotcom revolution in Germany and France, ie youngsters with great, working ideas, but no business knowledge”.

Before 2009, while some early stage technology companies existed, there was very little of what could be considered a startup ecosystem.

When Morgan Stanley opened an office in Budapest in 2006 and reeled in hundreds of developers with attractive Western European wages, a fancy office and good perks, much of the talent which could have been invested in early stage startups went off the market. Peter Kovacs, esteemed local entrepreneur, connector, and co-founder of xLabs and the Central European Startup Awards recalls a very different landscape:

“The arrival of Morgan Stanley made it difficult for early startups, as most development talent wanted to go there. At the same time, people still didn’t really understand what startups were, they thought they were a bit shady, they had a bad reputation for not doing things by the books, not paying taxes etc”.

However, while Morgan Stanley’s raising the bar of IT salaries in Hungary made it more difficult for small tech companies to pay wages in the short term, it also inadvertently made the IT sector a lot more attractive to the next generation of future startup employees.

Imre Hild, esteemed local investor, mentor and CEO at Global Traction, recalls, “At that time, no one was thinking about startups, the concept of startup was not really known. There were groups of technologists who had worked with corporates and then on the side they began external projects, but no one used the lingo. They were kind of playing around”.

That’s not to say that successful products had not emerged. iWiW, social platform known as the Hungarian Facebook, launched in 2002 and raised one million users almost overnight, before going on to be acquired by T-Online, the net branch of Magyar Telekom in 2006. The team behind current success story LogMeIn, previously known as 3AM Labs, had around 20 employees working out of an apartment in Budapest.

Adult streaming site LiveJasmin, which is often overlooked by the tech community due to the risqué industry it works in, was founded in 2001, and became one of the most popular adult sites in the world around 2004. To this day, it continues to be leading stream and chat site. The founder György Gattyán was named #1 on the Forbes Hungary rich list back in 2014. Many of the engineers who would then move to Ustream began working in streaming with LiveJasmin.

But while innovation was taking place sporadically, there was very little community spirit.

Events such as The Open Coffee Club — originally launched in London by Saul Klein, one of the founding members of Skype and founder of LoveFilm — and the Budapest New Tech meetup organized by Tamas Terray, founder of iMind.eu, started to pop up around 2007/8 and bring more and more tech heads and startup enthusiasts together in the same place.

However, when Peter Zaboji rolled out his ‘First Monday’ events back in 2010, a sense of community really started to come together. These invite-only events brought founders, investors, and bright new minds together, and began to educate attendees about startup culture, and create a more unified community where ideas were shared and advice was given.

Steven Sudy, experienced local entrepreneur and head of SparkLab says in a TNW article, “First Monday events were very important in growing our ecosystem. Initially there were very few startups. You always knew 99 percent of the people. It became very unified, more of a brotherhood”.  

The English language entrepreneurship courses and the ‘First Monday’ events began to encourage attendees to start thinking bigger, and create products which could target an international market, rather than products like iWiW which had never scaled outside of Hungary.

They were also the first introduction for many to startup culture, and a window into more developed ecosystems as found in Silicon Valley and other tech hubs.

JEREMIE Funds

In the background, as the roots of the startup community were developing, the EU Commission and EU Investment Fund launched the Joint European Resources for Micro to Medium Enterprises (JEREMIE) fund. As part of the new fund which was first launched in 2007, the EU would provide 70 percent of funding for early stage companies, if a private investor would put up the other 30 percent.

In theory, this was a great opportunity which should have fueled a startup explosion, however, local experts suggest the money was quickly snapped up by companies with ties to those in positions of power, and didn’t lead to many success stories.

In 2009, a total of eight holding funds were supposed to be available for SMBs, however individual projects were being managed by financial professionals with backgrounds in private equity. These investors were willing to put down the 30 percent, but approached projects as an investment to make their money back, rather than trying to grow and improve the SMBs themselves.

Irme Hilde argues, “Back in 2009 we had many financial professionals getting involved in JEREMIE projects who were working in private equity before. They were manning VC funds but treated entrepreneurial deals as if they were PE deals. They were ‘masters of the deal’ but had little to help the growth of startups. The format could have worked but it was troubled because it didn’t have safeguards; some funds took advantage. Considering that it was largely public money, the regulator should have introduced growth-friendly rules like VCs can’t ask for 51% of ownership off the bat”.

However, while the funds did little to help startups in Hungary take off, they did draw attention to the region from the outside.

Steven Sudy says, “The PR value of the JEREMIE funds was a bigger catalyst than the funds themselves. There was a lot of money and people started paying attention to it. Some good startups received funding, but the deals themselves were structured horribly and didn’t lead to many success stories”.

And soon enough, there would be a lot more outside attention.

The Prezi effect (2009 onwards)

Founded in Budapest in 2009 by CEO Peter Arvai, CTO Péter Halácsy, and Principal Artist Adam Somlai-Fischer, Prezi, web-based presentation software, would go on to be Hungary’s biggest success story to date. In an interview with Forbes, CEO Arvai recalls a very different business landscape back in the early days:

“The startup culture was brand new and unfamiliar to many in the city; in fact, Ádám and Péter had actually looked up ‘startup’ and ‘venture capital’ on Wikipedia before they reached out to me”, he said.

The success of Prezi, Hungary’s first Unicorn, would not only place Budapest, and in turn Hungary, on the map of international investors, but along with the teams of other homegrown tech successes like Ustream and LogMeIn, the founding team would be very influential in the startup ecosystem themselves.

As well as investing a lot of time, resources and capital into turning Budapest into a tech hub, the founders of these three companies set up Bridge Budapest, an NGO to promote entrepreneurship in Hungary. As part of this effort, Bridge Budapest has launched a six-month fellowship program for promising tech talent in Hungary, created a knowledge base called Bridge Basics about how to start a business, and kicked-off an initiative called the Aware Entrepreneur Test — all of which aim to have more success stories coming out of Hungary.

The founding team of Prezi, who opened an office in San Francisco straight off the bat in 2009, are praised for having brought an essential part of the startup culture from Silicon Valley back with them to their home country, and trying to install this entrepreneurial mindset in the next generation of talent too.

Bridge Budapest sets out to incubate the next generation of tech and entrepreneurial talent by offering selected Hungarian university students a six-month paid fellowship where they work under the expertise of the most promising startups founded in Hungary. Their previous programs provided the opportunity for talented students to visit the United States and experience life in Silicon Valley or other tech hubs, and bring back all of their learnings to apply to their own companies in Budapest.

But the founders of Prezi went a step further than simply setting up startup foundations. CEO Peter Arvai set his sights on making real changes to society in Hungary. With the support of Google and Hungarian localization business espell, Prezi co-founded WeAreOpen — an initiative that gives visibility to diversity. As of today more than 1,000 companies, NGOs and communities have joined their manifest, which states that they judge their employees based solely on their performance and actions.

Additionally, Péter Halácsy, the co-founder of Prezi, wanted to make a real difference in his paternal home, and put the wheels in motion for a social project aimed to change the general public’s mentality about helping others. This project is called the ‘Heroes Square Project’, and operates in Budapest where it is led by Dr. Philip Zimbardo, the esteemed sociologist famous for the Stanford Prison Experiment. Halácsy would also go on to create The Budapest School, an initiative to modernize and improve the education system for primary school children in Hungary. Another founder went on to create a school which teaches young girls to code.

Prezi as a company also offered Hungarian startups a positive example to emulate. Prezi has employed team members from 27 different countries, and given employees at the Budapest office the chance to spend one month in Silicon Valley. The startup is known to have a closed Facebook group called Prezi Mafia — a play on PayPal Mafia — where more than 200 current and former employees share ideas and collaborate on new projects in Hungary and further afield.

Imre Hild says, “You cannot underestimate the Prezi effect on the Hungarian Ecosystem. Their story was the birth of everything; they were a poster child of how a startup should be. Outspoken, global, liberal — they acted like a Silicon Valley Startup. But most importantly, they are normal, good people, who are down to earth. They played a big role in changing people’s impression of startups, and inspiring people to jumpstart their own companies”.

The Ecosystem today

Just seven years after Peter Zaboji launched First Monday as a monthly invite-only event, the ecosystem couldn’t be more different. Powered by Facebook groups, there are meetups and workshops all over Budapest on a regular basis. The city is also home to a number of tech and innovation festivals, such as Brainbar, which is sponsored by Google and Wire, as well as the software-focused Craft conference, organized by Prezi and Ustream. The two globally successful startups organize four International conferences in total.  

Steven Sudy argues that over the last seven years, as seen with the Prezi Mafia, social media has played a big role in expanding and bringing together the local ecosystem. Facebook groups like the closed group “Startup entrepreneurs” now have more than 16,000 active members, and active communities which share local news, invites to events, and offer advice and support to fellow entrepreneurs.

But local — and foreign — media beginning to take more of an interest in the Hungarian tech scene have offered more unity within the country, and more visibly to the rest of the world. Forbes Hungary is new and very active in startup news, Business HVG covers a lot of startup and innovation, and Index.hu has a well-respected tech section too.

Support Organizations

While the majority of startup activity has grown out of Budapest, the country has also seen smaller scale startups scenes emerge in other parts of the country due to a strengthening support network. Debrecen, the largest city after Budapest, has an active scene; Gyor in western Hungary near the Austrian border and Miskolc are growing consistently too. The Hungarian government has tried to foster the country’s startup ecosystem by providing funding for local incubators and accelerators in Budapest and further afield.

In 2016, eight incubators were funded using money earmarked from the European Union as well as the Hungarian government. Each of these incubators was given just under €2 million and was located outside of Budapest in a strategic move to boost rural development.

Despite a couple of success stories, many argue the idea was conceptually flawed from the start. Many entrepreneurs have sneakily played the system by founding their companies near one of the rural towns in attempt to secure funding, but have effectively lived and worked out of Budapest, where a staggering majority of the country’s GDP — as much as 60% — is generated.

Steven Sudy addressed a second critical issue: “We don’t need eight accelerators,” he said, “We need two really good ones”. Instead of thinly spreading the funding, the government could have achieved better results by more strategically concentrating it in its most promising hubs, such as Budapest.

Given the limited success of the government run projects, entrepreneurs have been turning to the growing number of other private incubators, accelerators, innovation labs, and coworking spaces that are helping bring vibrant life to the city’s startup community.

Design Terminal — one of the country’s oldest and most well-recognized incubation systems — used to be fully run by government money, but now works from private money with some governmental partnerships. Another older incubator is Kitchen Budapest, which is run by Telekom Hungary. Newer startup support organizations such as Telenor Accelerate, Lab.Coop, and Impact Hub Budapest, along with innovation labs like xLaboratories and Sparklab have begun making a positive impact on the startup community as well.

Coworking spaces too have sprung up where entrepreneurs can flesh out their ideas through close collaboration. Some that have garnered the most attention and proven themselves as the most important community meeting points include Mosaik, Loffice Budapest, Kaptár, and Impact Hub Budapest. Mosaik in particular, though founded just two years ago, has been fundamental in cultivating the expanding startup ecosystem. In its first year, it hosted 152 high quality events focused on startups, innovation technology, and networking. Last year, it hosted more than one event per day.

With that being said, the overall ecosystem still has a long way to grow and presents inexperienced entrepreneurs with challenges, as they are often left “to figure out how to build, launch and market a world-class product [on their own]”, as put by Robert Hegedüs, Founder and Advisor of Mosaik.

This is representative of a much larger problem facing the ecosystem: a lack of mentorship. Though the number of support organizations (i.e., incubators, accelerators, coworking spaces, etc.) has grown significantly over recent years, many of the people running them have never worked outside of Hungary. Digital Factory — another incubator in Budapest — is trying to change this image, though. As such, it is run by a team of 10 key individuals who, between them, hold eight different passports, have lived in 21 countries, and have worked or invested in more than 30.

“Mentors in Budapest face very challenging work”, said Imre Hild. “They must understand startups, how to access bigger systems in Europe and the US, and how to connect startups to the right markets, investors, and opportunities. Often times the mentors are the ones who explain how certain business models work internationally, they are the ones who introduce the ‘real world’ to the startups”.

The general lack of mentorship, however, is problem that persists and presents itself clearly upon analysis of the startup funding environment within Budapest.

Education

Education is critical for the development of a well-positioned and successful startup ecosystem. While Budapest has historically been behind in this regard, it has slowly begun making strides to catch up.

In the past, universities throughout the country were traditionally famous for their focus in the area of life sciences. Areas such as innovation and business studies have never been truly competitive with Western European universities such as those in Copenhagen, however the tide has begun to change.

The most well known university, for example, is the Budapest University of Technology and Economics (BME) which specializes in areas such as technology, math, and physics. There is also Corvinus University of Budapest which is best known for its studies of business and economics, and Central European University (CEU) with strong MBA programs and even an accelerator that recently won the title as the Best Accelerator and Incubator in Hungary.

While there has been a shift to place stronger focus on business education, however, most universities have accomplished this by partnering with large corporations that could guarantee jobs and high wages. Over the last two years, the country’s most innovative educational strides have been taken in private developer and user experience schools sponsored by these larger corporations, in addition to an increasing number of coding bootcamps such as Le Wagon, Green Fox Academy, and Codecool.

These partnerships, however, have shown themselves as a double-edged sword. While they have helped develop a new generation of technologically adept individuals, they have ironically hindered the development of the country’s innovative agenda. Many of the large companies which have partnered with the educational institutions have also ended up recruiting the students and snapping up young talent to employ in their own businesses.

As a result, the repercussions have been quite damaging to the startup ecosystem, which requires an entrepreneurial spirit and a comfort outside the bounds of an established corporate environment.

Role of large corporations

Despite the inadvertent hindrance these large corporations may have caused, they have also done plenty to boost the startup ecosystem outside of educating a technologically advanced populous.

In recent years, Budapest has seen an increasing participation from some of the large companies that it helped give rise to, including MKB Bank (one of Hungary’s largest commercial banks) and MOL Group (Central and Eastern Europe’s second largest company). MKB Bank, for example, launched an incubator specifically for fintech companies that completed its first batch of startups in July 2017. Even more recently, multi-national oil and gas company MOL Group announced partnership with Budapest’s Design Terminal — one of the city’s leading incubation ecosystems — to bring innovative ideas to the company and help disruptive startups scale up their activities. In addition, Deutsche Telekom has also worked closely with Kitchen Budapest — the innovation lab that helped launch Prezi.

Funding opportunities

In Budapest — and the country as a whole — there is no monetary shortage of funds for startups. In fact, according to a report by Invest Europe, Hungary was shown to have led the CEE region for venture capital investment in 2016. As the leading country, it accounted for 31 percent of the region’s VC investment total with €31 million and a record high of 73 VC-backed companies.

Nevertheless, the problem remains that a large majority of the VC funds are backed by the state. Given the government’s poor track record with regard to funding through the Jeremie program and the Gazelle fund, many entrepreneurs are wary of taking such capital and instead search for other private funding opportunities locally or abroad. One should note, neither Prezi, Ustream nor LogMeIn began with assistance from JEREMIE.

For those who look locally, the lack of suitable mentorship translates to a lack of ‘smart money’ — funding accompanied by effective mentorship — which ultimately hinders their growth. Steven Sudy pointed out, “You still hear of term sheets with 50 percent equity stake for investors. When you’re trying to build a startup company, this can be a death sentence”. This fact highlights the general lack of experience that exists in Budapest’s current funding arena, as well as the incentive for entrepreneurs to look for outside funding.

However, as Imre Hild pointed out, smart investing has begun to take root:

“Over the past year we have seen more companies being built properly, and more investors who are only taking 20 percent — realizing there is no point to clip the wings of a startup by taking such a big seed chunk. Back in the day it was news to many that there was such a thing as a next funding round independent from the original investor”, he said.

The changing mentality of these investors is due in part to the scores of entrepreneurs that have gone abroad for programs like Startupbootcamp and Startup Sauna, and taken active roles in the startup community upon returning.

Currently, entrepreneurs in Budapest have a few options for local funding. Day One Capital, for example, is an early-stage investor that manages privately financed funds to invest in countries within the CEE. Other active venture funds include Conor Fund, Baconsult , Andgo Partners and X-Ventures. Moreover, leaders of local success stories have begun investing and taking more active roles within the startup ecosystem.

This year specifically has seen a number of developments with regard to venture funding in Budapest. As an auxiliary component of its successful accelerator OXO Labs, former Finance Minister Peter Oszko launched OXO Ventures and announced new €50 million fund in partnership with the European Investment Fund to focus specifically on innovative early-stage tech companies. Additionally, Hiventures has been actively investing from its €160 million fund, sponsored by the European Union and the Hungary Development Bank. While traditional investors place their bets on sexy new technology, Hiventures focuses more on building innovation and less on making money.

Nevertheless, funding from outside investors currently remains the best — yet most difficult — opportunity for entrepreneurs in Budapest. This type of funding, in conjunction with the accompanying investor experience, is ultimately what helped launch the city’s biggest success stories, including Prezi, and is crucial for the continued growth and success of Budapest’s startup ecosystem.

Robert Hegedüs, Founder and Advisor of Mosaik, highlighted this point, saying, “I believe the most successful startups emerging over the next few years will be the ones who bypass the local VCs and manage to bootstrap themselves to a stage where they are able to attract VC money from abroad”.

If the startup ecosystem in Budapest continues to develop and launches more success stories like Prezi, the city will benefit from a larger influx of foreign capital. Prezi was the initial catalyst bringing foreign investment to Hungary, which has most recently helped newer companies like BitRise secure foreign investment.

Looking forward

Despite the obvious challenges regarding smart money and mentorship, Hungary also faces the general challenge of honing in on its potential as a startup ecosystem. Peter Kovacs, argues that the country’s startup ecosystem suffers from a lack of self-confidence as well as a clear focus, and needs to more closely define its competitive edge.

Access to idea validation is also a significant obstacle for entrepreneurs within the country to overcome. Validation within Hungary from a bank or local investor is not enough to prove the worth of a product or service. Entrepreneurs need to test their ideas abroad in order to adequately gauge their acceptance and potential success. With increased access to foreign capital, local entrepreneurs will be able to achieve this more easily.

The arrival of major international startup education brands such as Techstars, Seedcamp, Startupbootcamp, Kauffman Foundation, and Lean Startup Machine would play a crucial role in this development. When these major startup brands show presence in Budapest, it will validate Budapest’s position as a startup hub and open the door for a flood of outside capital and mentorship.

As best explained by Imre Hild:

“The startup ecosystem here is like Hungarian goulash. All the good parts are here, but it’s not quite done just yet. We need more input from the outside. It doesn’t matter if you are a big name in Budapest; you need to measure yourself against the US, against the rest of the world”.

With success stories like Turbine.AI which was recognized as the top health startup of 2017 at the Pioneers Festival in Vienna, in addition to others like BitRise which was the first Hungarian startup to get into Y Combinator, the future for Budapest looks promising. Entrepreneurs who have tried in the international arena are returning home and bringing lessons to share with their peers. Moreover, costs remain relatively low and tech talent is high.

The ecosystem is heating up, and pretty soon this Hungarian goulash will be ready for global investors and consumers to feast upon.

This article was co-written by Zac Laval.