Andrea Kozma, Director of CEU iLab
May 6, 2022
Being a startup entrepreneur has become a popular theme in Hungarian media. Great stories of cool solutions, young ventures raising venture capital funds, setting their eyes on foreign markets feature in business and popular magazines. We hear founders talking on the radio and podcasts, and even in reality tv shows where idea owners can convince angels to invest in their projects and partner with them.
There is plenty of money on the local market – overwhelmingly in state funded venture capital firms – there are meetups, events, hackathons, there is buzz, excitement, so hey, let’s go start a startup! Startup support organizations, competitions, conferences are plentiful. There are soft landing programs (on a halt during COVID) so why not take advantage and go to Silicon Valley? Let’s follow the gold rush movement to the West Coast, invent the next big thing, become rich and famous.
This is the narrative that attracts many young people to try themselves out in startup world, with the belief that it is our talent and our talent alone that will define our future.
The storyline originated in highly successful startup ecosystems, and now we want that Coca-Cola feeling here in Hungary, Central Europe too.
Under communism, Hungary had the most advanced entrepreneurial culture in the CEE region. The ”Gulyas Communism” system permitted a certain level of commercial activity. So you would expect that the Hungarian entrepreneurial ecosystem had something to build on, that we have a certain entrepreneurial attitude, and that all we needed was a ton of seed funding to arrive in the ecosystem and instantly hordes of young enterprises would take off.
That’s why it is a bit surprising that Hungarian search results show only 4,000 hits for the word “startup”. The last time Hungary was featured in the Global Entrepreneurship Monitor - the leading annual entrepreneurship ecosystem report - was in its 2016/17, which showed that entrepreneurs hold very low social status in Hungary (3,75 out of 9 dropping to 2 in 2018), ranking us #61 in the surveyed 65 ecosystems that year.
So we have an ecosystem with about 4,000 potential startup founders who can expect a low social status, unless they become wildly successful. Indeed the word, “vállalkozó”, - the Hungarian word for entrepreneur - shows a higher search rate, but startups are new ventures with global ambition, so the “vállalkozó” search likely yields potential entrepreneurs who have language barriers and are probably SME founders.
Low social status means that young people with a high quality education are more likely to choose a career in established global companies which are more in line with family expectations and overall social status.
We all know the story of the Thiel Scholarship, a scheme created by PayPal Founder Pieter Thiel, offering 100,000USD to college students who drop out of school to work on their BIG IDEA. There is a participant quote on their website which says: “My grandmother wanted me to have an education, so she kept me out of school.” You may interpret this as a criticism of US education, but the point here is actually the attitude: entrepreneurship is about celebrating exploration, action, self-realization.
So is it fake news, that Hungarian startups are conquering the world with the strength of Hungary’s innovation and talent? Well, it’s certainly a kind of wishful thinking. The reality is, that only a very small number of young talent is headed towards the entrepreneurial career path, and many of those who do entertain the idea are in the ecosystem for the wrong reasons.
Too much money
The first batch of state venture funds arrived to the Hungarian ecosystem in 2007 in the form of Jeremie Funds. The nascent venture capital sector lacked experienced, expert fund managers, and the absence of an arms-length relationship between the fund provider and fund management resulted in investment practices that only remotely resembled developed venture capital ecosystems.
The Széchenyi Tőkealap arrived on the market in 2011 and Hiventures in 2017. As a result, the Hungarian venture capital market is currently 87% state owned, almost completely crowding out private investment from the venture capital market. Relative to its GDP, between 2007 and 2016 Hungary has provided 2.5 times more state aid to enterprises than the EU average (Jáki, 2019).
In this period of time, a new generation of entrepreneurs arrived to the scene who identify the concept of entrepreneurship with a process of application to state funds. Given the very low level of entrepreneurial activity and small number of potential startup founders, this means that, in theory, there is more than enough money on the market to get each and every startup applicant funded. In developed ecosystems less than 1% of startups acquire venture capital funding. This is partly because of the strict investment criteria of the investors, but also because, simply put, not all startups need to be venture capital funded.
Many founders would do better to bootstrap their way to the market and finance early growth from revenue. In a healthy ecosystem, venture capital financing is part of the founders’ growth strategy: they have a clear vision about how they want to accelerate the growth of a validated product.
There is a lot of discussion around whether entrepreneurs are born or made, what their personality traits are, and what makes people entrepreneurial. If you think about the inspirational successful entrepreneurs, such as Steve Jobs or Richard Branson, what makes them different from others is their attitude to experimentation, risk taking capacity, and drive for independence.
Entrepreneurship is not only about business. It’s a way of life, it is about how you act and think. In an ecosystem that encourages aspiring entrepreneurs to start their journey in a state bureaucracy, the entrepreneurial attitude is discouraged. The startup journey will be reduced to managing administrative reporting processes in which the individual actions of the founders will be constrained and the focus from the product and the experimentation will shift to managing relationships with bureaucrats.
State fund investment agreements require that the startup founders engage a mentor, and that they define the role of the mentor as a person who helps the funded startup and meet its reporting obligations to the investor. The role of the mentor is thus reduced to an aid, who is paid from the raised fund to help the startup meet its investment agreement obligations. This has consequently created a pool of career mentors who consider mentorship a paid job, whose role is to make up for the investor’s lack of portfolio management expertise.
Nurturing a new generation of startup founders with inherent personal motivation to build something from scratch is the biggest challenge of our ecosystem. We need founders who consider entrepreneurship as their choice of career. We need people who have a high level of confidence to act, experiment, learn and incorporate learning in the process of product development. People who believe that they can succeed without state aid, who know that they are the ones that can prove the validity of their product.
We need people who are resourceful: they know what they are good at and how to exploit their expertise, people who know how to forge partnerships in early stage venture development, and are open minded and hard working, who prefer to rely on what they know and what they have.
A typical phenomenon of early stage startups is that they fall in love too fast with their first idea. Experienced entrepreneurs have the skills to identify business and innovation opportunities on an ongoing basis, they see many potential opportunities, and push ideas quickly through the validation process. If the idea proves to be undesirable or unfeasible on the market, they can move on to the next idea and incorporate the learnings from an earlier, unsuccessful product into the next, better idea. It is this iteration process that, when mastered, sets the stage for the next, more successful project. The starting point should always be a search to answer the question: what is the problem, how do customers currently solve the problem, and how many people have this problem? Is this a big problem for many people or is it a small problem (inconvenience) for a few people (niche)?
We often see idea owners apply to incubation as solo entrepreneurs. All ideas require a set of expertise and personalities to fully develop them. The idea owner might be a brilliant software developer, but they’ll need someone with management skills, another with sales and marketing expertise and more, to actually get the product to market.
Often, founders think that they need to acquire all the expertise themselves, or prefer hiring the expertise they do not have, rather than partnering with someone who shares their vision. We often see that state funds are targeted to cover the cost of hiring the expertise that the founder is lacking.
But this strategy begs the question: If the founder is unable to convince partners to join in the journey and be open to share the upside with them, why bother to go for funding to make up for the lack of a team?
No matter how much founders think that they’re solving a big, real problem, they also need to ask their customers and hear what they have to say. Talking to real customers seems to be the hardest job to do for most of the founders. They prefer to send out surveys and launch FB or LinkedIn campaigns rather than have a real, human conversation with their potential customers.
Fear of rejection or negative feedback holds startup founders back from going through the systematic, repeated process of customer interviews. These interviews are extremely valuable resources of information about how customers think, live, and what problems they face: these are data sets that need to be analyzed and solutions adjusted based on the learnings. This process needs to be ruthlessly honest: founders should put aside their personal biases, and truly listen to what their customers have to say.
Early stage startup founders are short on resources. Therefore, they need to be extremely efficient with the resources they have at hand. Mining the people in their network, their startup peers, is an exponential opportunity to broaden their pool of resources. They need to go out and talk to people about their idea and the problems they are trying to solve. They also need to network with people who are very unlike them: they will probably provide feedback, ideas that would otherwise not occur to the founders, simply because they think and view things differently.
We see a significant correlation between startup progress and founder networking behavior: founders who interact regularly with peers and are active in the wider ecosystem show a more steady and faster progress compared to the introverted, shy, home-office-founder.
No one is born to be an entrepreneur. Similarly, no one is born to be a mentor. These roles require practice, personal attitude and certain behavioral standards. Mentors in an incubation process need to be recruited and screened in a similar process to startups. Expert entrepreneurs rely on their own resources and organize them in an experienced way.
Similarly, mentors should not take up the role of a mentor as a source of income. Good mentors are experienced professionals who are at the stage of their career when they can afford to - and want to - give back. Great mentors want to be mentors, because somewhere in their personal history, there was someone who helped them, and now they want to help too.
Good mentors also consider the mentoring process a mutual learning opportunity, and take personal responsibility to dedicate time and attention to the startups they mentor. They also need to be honest about their personal motivation and avoid screening investment opportunities or seeking board membership opportunities in the guise of a mentor. Mentor and startup founders need to build an honest, trusting and responsible relationship to mutually benefit from the process. Startups can benefit the most if they come prepared to mentoring sessions and have the open mind to listen to honest feedback. A great mentorship provides them with a tremendous learning opportunity and emotional support.
Jáki, L. K. E. (2019). The impact of state intervention on the Hungarian venture capital market. Economic Research-Ekonomska Istraživanja. https://doi.org/https://doi.org/10.1080/1331677X.2019.1629979
The article was originally published in Hungarian Startup Report 2021.
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