From cancer-sniffing knives to Prezi: Why Hungary's startup scene is kicking up a gear

Large pool of reasonably-priced developers and engineers? Check. Foreign and EU investment? Check. But even though Hungary's startup activity is taking off, it still seems to be lacking a few key ingredients.

Budapest: The startup capital of Hungary is heating up. Image: Shutterstock
There's life beyond Prezi. The cloud-based presentation software might well be the posterchild of the Hungarian startup scene, with more than 60 million users and $71.26m in financing from several investors, but it is not alone.

When the company was launched in 2009, it looked like a crazy bet: a small startup from a central European country trying to fight Microsoft PowerPoint's dominance.

Today, not only has the product acquired worldwide recognition, but Prezi's story, together with that of other successful Hungarian companies, like LogMeIn, NNG, and Ustream, has inspired the growth of a vibrant and lively entrepreneurial scene.

"What I see happening now is that people who gained very valuable experiences in companies like Prezi are leaving that company to start their own and bringing the knowledge and knowhow and the domain expertise, reproducing good companies," Csongor Biás, head of tech incubation at Design Terminal, the Hungarian state agency responsible for the stimulation of creative industries, says.

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According to Biás, the current situation in Budapest, by far the main technological hub of the country, resembles in this respect what has being going on for a long time in Silicon Valley: people leaving big companies like IBM, Oracle, and Sun and creating their own startup, in a virtuous circle of innovation.

While the comparison might seem far-fetched, it is true that Hungary's startup scene has been growing steadily recently, attracting both capital and talent.

The upward trend in investments has been boosted in the past few years by funding made available by the European Commission through the Joint European Resources for Micro to Medium Enterprises, or Jeremie, program.

Jeremie was created to foster entrepreneurship and support small and mid-sized enterprises, with the condition that only 70 percent of the funding could come from the EU. The rest had to be provided by private investors.

From 2010 to 2013, 128.4 billion Hungarian Forints (€413m or $456m) were given by the EU to a total of 28 Hungarian funds. Of this, according to state officials, 75 billion forints had been spent by the end of last year.

Since the program's inception, the so-called Jeremie funds have been making the greatest number of investments in Hungarian startups. But international investors have also played an important role: Prezi raised $57m in November 2014 in financing from US firms Spectrum Equity and Accel Partners, while Ustream raised $75m in 2011 from SoftBank Capital and Korea Telecom.

So unlike the situation elsewhere, a lack of capital is not an issue in Hungary.

"What's missing here is rather what I call 'smart money'," Peter Kovacs, CEO of Budapest-based recruiting platform IseeQ.co and co-founder of the Central European Startup Awards, says. Investment is only partly about money. Connections also count and in this respect there's still room for improvement.

"A lot of investors are coming from real estate or other markets, and they simply don't have the global network that they should also provide to their portfolio companies as investors," Kovacs says.

However, some of the best-known venture funds are specifically focused on the technology sector, such as Conor Fund, Day One Capital, Fiedler Capital, and Primus Capital.

And aspiring entrepreneurs have many other networking opportunities, aside from those provided by investors. Business meetups are organized almost on a weekly basis. Startup-related events are also very common and attract a growing number of participants.

"There is this guy called Patrick Vlaskovits, who has Hungarian roots," Biás says. "He's the author of the Lean Entrepreneur book, which is a New York Times bestseller. We invited him five years ago to a meetup, and there were only six or seven people. We invited him back this year and the room was full and people couldn't fit in."

A quick look at the Facebook groups 'Budapest Startups' or 'Budapest Startup Jobs' is enough to reveal how vibrant the local scene is.

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But there are problems. "Probably the biggest challenge that a startup here will face is the bureaucracy. There's no easy, facilitated way for a startup to start a company here. There are really convoluted accounting and legal structures, not just to start a company but also, for example, to receive funding," Fiedler Capital's community development manager Reka Forgach says.

The cost of hiring technical talent in Hungary is far below that of Western counterparts, and there an abundance of highly-skilled programmers and developers, thanks to the country's tradition of excellence in the teaching of science, technology, engineering, and mathematics.

But what you save in wages, you could end up spending in taxes and social security, which together add almost 40 percent to the total cost of labor. And the VAT is also the highest in Europe, set at a stunning 27 percent.

However, none of these issues of bureaucracy and taxation are really preventing the entrepreneurial ecosystem's growth. There are now almost 300 startups in Hungary, most of which are based in Budapest.

The southern city of Szeged, where big companies such as navigation software firm NNG have their R&D centers, and Debrecen, the second largest city of Hungary, can also boast their own local scene. But neither can compare with the capital.

Broken down by sector, startups operating in the life sciences and biotech field are among the most sought-after by investors.

Innovation in this field is rampant: from the iKnife, a surgical knife developed by Hungarian chemist Zoltán Takáts which is able to 'sniff' cancer in the tissue being cut, to the Hand-in-Scan, a device that provides quality-assured feedback on hand hygiene, making sure no bacteria have survived on medical workers' skin. Hungarian startups are also proficient in everything that has to do with data analytics and artificial intelligence.

"Any type of development activities, or software development activities that require deep scientific knowledge or functional programming algorithms that really need deep mathematical skills, Hungarians generally speaking are very strong," IseeQ.co's Kovacs says.

One example of this is Enbrite.ly. It's a data-analytics startup with offices in London and Budapest, which helps advertisers verify that their online ad spending reaches actual humans, avoiding fraudulent behavior and fake-traffic schemes. Last December the firm won the Slush 100 competition in Finland.

It's difficult to narrow down Hungarian creativity to a single industry, as one characteristic of local entrepreneurs is being able to tackle challenges in almost every field. OptoForce, for instance, is a startup that has invented a 3D sensor that feels the strength and direction of the forces applied to it, useful for industrial automation.

Meanwhile HashtagCharity connects techies that want to volunteer their skills with NGOs operating for the common good; and Sinetiq is a neuromarketing research company providing media companies with emotional insights directly from their viewers' brain and body.

So what's the missing secret ingredient that could boost Budapest's status even further? Again, it all might boil down to relationships, rather than hardware or software inefficiencies.

"What Budapest is really missing is a sense of community and a sense of pride -- that we can be a very great startup destination," Fiedler Capital's Forgach says.

That lack of confidence is being addressed both by state-sponsored initiatives like Design Terminal, which is actively organizing tech-related events to help Budapest establish itself as a global player, like the recent BrainBarBudapest.

There are also private initiatives like Bridge Budapest, a non-profit association set up by the founders of LogMeIn, Prezi, and Ustream, and managers of Seagate Technology and NNG. Its aim is to build and share success stories that could serve as a model for young Hungarian entrepreneurs.

Results will come - all the Hungarian startup scene needs is a little more time.

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