Hungary's Slow But Steady Startup Roadmap

Spiegelungen

Instability within several former socialist economies prompted me to look at their developing entrepreneurial ecosystems and check in on whether the entrepreneurial mindset is emerging among new generations. Given that it stands at 54 in the ranking of 189 economies on the ease of doing business, Hungary seemed like a good place to start.

Hungary’s economy is the 51st “freest” in the 2014 Index of Economic Freedom, with an overall score well above the world average. Behind the rankings I am told are constituents and policymakers who recognize the role of new and young companies in the economy. For example, there have been two important waves of business registration reforms in the country. In 2009, new legislation for business formation reduced the minimum capital requirements by close to 80%, introduced online filing, and made the use of notaries optional. In 2010, Hungarian policymakers further simplified the startup process by implementing on-line registration with confirmation of registration within one hour of the application being made.

The trend has not all been positive however. In 2013, Hungary increased the registration fees for limited liability companies and added a new tax registration at the time of incorporation, hardly smoothing the path for citizens to form new firms. It also remains to be seen whether the positive steps will be strong enough to lure back to Hungary entrepreneurs who left for startup hubs like London

Another strategy in Hungary is one that has required more financial rather than political investment, namely the recent announcement by the Minister of Employment, Mr. Sándor Czomba, of a €23.5 million fund to help young Hungarians create 1500 new companies. This program will allow 3500 young entrepreneurs to participate in entrepreneurship courses, and then compete for funds in a business plan competition to take their ideas to market. Needless to say, such an investment requires smart leadership in order to succeed and not become another story of either government not being good at picking the winners or of throwing money at entrepreneurs without the appropriate mentoring, follow up and strengthening of the overall startup ecosystem.

The Hungarian government seems eager though to seek input and collaboration from entrepreneurship champions on the ground. For the new youth fund for example, it has given a leading operational role to the Young Entrepreneurs’ Association of Hungary (FIVOSZ), an organization founded six years ago by successful young entrepreneur Patrik Kovács. Kovács has adopted an ecosystem approach to startup promotion and has thus connected the organization to the global and regional networks of entrepreneurship promotion in search for best practices (e.g. Global Entrepreneurship Week; JEUNE - Young Entrepreneurs of the European Union, and the European Confederation of Young Entrepreneurs).

At the same time, the BudapestHUB task force established in 2013 has set a target to make Budapest the region’s startup capital by 2020. Zoltán Cséfalvay, Minister of State for Parliamentary Affairs and National Economy said last November that the State’s responsibility is to “act as a catalyst and clear all obstacles along the way”. The BudapestHUB is a working group convened in September 2013, composed of representatives of the Hungarian startup ecosystem, including investors, entrepreneurial leaders, and the Ministry of National Economy. Together, they issued the “Budapest 2.0.2.0 Runway – The Startup Credo”, which calls for the following:

  • Building-up a critical mass of startups;
  • Relying on local characteristics in order to become “the Startup Hub of Central and Eastern Europe”;
  • Fostering the commercialization of university research, by supporting spin-off companies resulting from university lab innovations, startup incubators, and university professors and researchers in acquiring the practical business knowledge and experience;
  • Tax facilitation;
  • Enabling private business academies; and
  • Conducting a study on how to create channels for the flow of domestic and EU funding to the pre-seed and seed stages, capitalizing on the estimated $586.8 million in the form of venture capital currently "looking for a place".

Capital is always of top concern but according to an OECD analysis of 2010-2011 data, Hungary is already recognized as having a high growth rate for venture capital with a +62% increase in venture capital over the one-year period despite the weak economic outlook at the time. Moreover, in 2011, the Hungarian venture capital market ranked 6th within the EU in terms of value of early-stage capital investments relative to GDP.

The challenge in Hungary remains the entrepreneurial mindset and combatting long-standing cultural attitudes about risk taking and job stability. The cultural capital gap is a strong force behind the paucity of growth enterprises in many ecosystems, and it could be one of the reasons why there are still relatively few scale up successes from Hungary – something vital to lowering Hungary’s youth unemployment rate now hovering at 29%. There are some exceptions, such as the web analytics company IndexTools, which was acquired by Yahoo, or the live streaming service Ustream, but as of 2010, 94.2 % of all Hungarian employer enterprises remain micro enterprises.

I wrote last summer about a similar story in Croatia. I am pleased to see that Hungary will partner with Croatia on the new GEC2 – a special Global Entrepreneurship Congress event focusing on the challenge of developing an Entrepreneurial Mindset. It will take place in Croatia in Zagreb, Dubrovnik and Split from September 21-26, 2014. The event will be lead by Croatia’s President Ivo Josipović who is deeply concerned about enabling a more entrepreneurial mindset in young people in his country. GEC2 Croatia will generate a more in-depth look at how post-socialist economies and other societies facing similar challenges can inspire and empower more citizens to start thinking like entrepreneurs and sharpening the underlying skills that enable them to succeed. More information about this event will be available soon at http://gec2.co/.

Of course, no matter what we all do to rapidly mature attitudes and environments that enable more individuals to take risks with their disruptive ideas, political instability and civil war will always have the power to wipe it out in a heartbeat. Yet, when the GEC gathered in Moscow last month, the Ukrainian delegation of entrepreneurs and their supporters all showed up saying they were taking the long view.

Hungary is leading the way in developing its entrepreneurial community, setting an example for those further behind in the process and reassuring the rest of us that even through dramatic political setbacks, entrepreneurs can transform their societies and become a positive force toward economic and political stability.

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