Developing the Startup Ecosystem Could Be a Breakthrough for Hungary, According to Research

A McKinsey analysis showed that Hungary has a good platform for expanding its startup ecosystem, which may be the country's game-changer in terms of talent retention and digitalization.

According to the study, if Hungarian startups could grow at a rate and scale similar to other European countries, they could attract €2.5-5 billion of additional resources to the sector. A significant proportion of this, €0.6-1.3 billion, would be used in the local economy. A more developed startup ecosystem would increase tax revenues, help the uptake of digital solutions and boost the digital transformation of the economy as a whole. 

According to the McKinsey study, Hungary is in a particularly good position to achieve the targets outlined in the above forecast:

  • a sufficient number of startups are operating in the country,
  • the amount of venture capital available is within the average of the V4 countries,
  • the availability of a skilled workforce,
  • moreover, the number of professionals in the IT sector exceeds the regional average.

Despite this, Hungary lags behind its neighbors in the number of startups (commonly known as unicorns) with a company value of at least $1 billion: 4 unicorns have managed to grow up in the Czech Republic and 11 in Poland, while in Hungary, according to public data, only LogMeIn has reached this level.

“The output of IT professionals from Hungarian universities, colleges and bootcamps may be a few percent higher than in other countries, but it doesn't matter much," Péter Csillag, president of HunBAN (Hungarian Business Angel Network), co-founder and former CEO of Starschema, tells Connect Magazine. “Instead of IT specialists, 

startups typically require English-speaking, team-working, modern technology-savvy, fast-learning, soft-skilled, risk-taking professionals.

We are certainly not doing so well in this category.”

Péter Csillag argues that the emigration of home-grown experts isn't always a negative thing, so long as those who go abroad to gain experience and skills eventually come back and we can also recruit experts from elsewhere to provide value and knowledge to the country. Yet, we do not rank well among the best places for IT experts to work, so we clearly have room for improvement.

Transparency, entrepreneurial culture, knowledge sharing and training

According to McKinsey, there are seven factors that have a significant impact on the number of startups that are formed and how many of them make it to the mature stage. First among these is the ease of starting a business and raising capital. Transparent, simple regulation that facilitates business creation and capital raising, while preventing abuses, is essential for a successful startup ecosystem. Domestic practices are not in line with international examples, analysts have noted.

The second factor, according to the study, is the supply of skilled professionals, and the third is a favorable tax environment for both startups and investors.

Other important factors are:

  • directly encouraging the strengthening of an entrepreneurial culture,
  • the strategic allocation of public funding,
  • transparency and knowledge sharing,
  • and finally, training for founders and professionals.

McKinsey partner Márta Matécsa emphasized that if progress can be achieved in the identified areas with the close cooperation of the sector's stakeholders, there is a chance for a thriving startup culture to emerge in Hungary, which will dynamize the entire economy. 

“Cooperation between all stakeholders would help the country to develop a startup culture that could generate around 30,000 high value-added jobs and up to €1.3 billion in additional direct local spending”, she added.

"This is an area where the Hungarian startup ecosystem is highly fragmented. Indeed, more and more people are willing to cooperate and share knowledge on a broad scale, it's disheartening that many entrepreneurs are still approaching business creation from a defensive, hypercompetitive stance" explains Péter Csillag. "These companies and their founders hide their ideas, sign NDAs with everyone, even for a coffee conversation, and typically don't get far as they can't get people on their side, capital, or attention."

The president of HunBAN sees that startup founders who are willing to collaborate show up at every event, not only as students but also as speakers, talk a lot and in detail about their achievements and failures, and as a result it is easier for them to find the collaborative partners, colleagues and financiers that are important for them.

 "Game theory works extremely well in the small, resource-limited Hungarian startup market:

it pays to turn a competitive, zero-sum game into a cooperative, positive-sum game, 

especially if it involves opening up foreign markets, because in the long run it is more beneficial for all the players involved," he points out.

Inspired by the economic crisis?

The global economy is facing a number of challenges: rising inflation, the uncertainty of recovery from the pandemic, the war in Ukraine and the transformation of resource-intensive energy supplies in Europe. Most experts agree that a longer, more challenging macroeconomic period has begun.

Yet diamonds form under pressure. The success of many of the world's biggest startups was born and built during an economic downturn.

The current economic climate necessitates bold business decisions as companies try out new approaches. During economic downturns, those who are slow to act tend to withdraw, while those who are willing to take risks often see new chances arise.

What about Hungarian startups?

Hungary currently has around 2,900 startups, employing between 10,000 and 15,000 people and attracting more than €1.4 billion in funding.

Hungary's economy has many strengths, such as a culture of scientific innovation, innovative talent and proximity to large European markets. All these strengths can contribute to a thriving start-up ecosystem. Combining these with best practices from other countries could provide Hungary with a real opportunity to increase the resilience and competitiveness of its economy. The research also noted that key indicators of the Hungarian startup ecosystem (including value creation, funding and the number of startups per capita) were compared to successful ecosystems in Europe, the Middle East, and Africa to identify the potential of the Hungarian startup ecosystem.

Hungary seems to be on a par with the region as a whole in many aspects that are generally considered to be the basis for a successful start-up life cycle. It creates a similar number of start-ups as other CEE countries, is on a par with the Czech Republic and Poland in terms of venture funding (estimated at €40-80 per person) and has a largely similar talent pool. In some aspects and segments of the startup ecosystem, Hungary is even ahead of its competitors; for example, it has the highest share of ICT professionals in the region (3.6% of the total workforce compared to the CEE average of 2.8%, read more here).

More data and analysis here.

Blue Colibri App at the forefront of startup collaboration

"Experience has shown that it is difficult to introduce different digital platforms within a company and companies are more cautious with startups, but serving users is one of the most important tasks, which is why we joined forces" said the initiator of the People Platform, the co-founder and CEO of Blue Colibri App at his partner presentation at the end of January.

Tamás Barathi mentioned this on the occasion of the expansion of the Blue Colibri App for internal corporate communication and HR-digitalization, in cooperation with four other startups and their digital solutions.

And how is this type of cooperation valued by the market? According to Péter Csillag, success also depends on how the start-ups join forces. If the results show that, in addition to the noble intentions, the capabilities are there (e.g. partnering or merging startups can integrate, grow together, use their resources more efficiently) then market players—customers, investors, press, etc.—will pay more attention.

“Capitalism is not a complicated thing: if a startup becomes more competitive after a change, for example by teaming up with other companies, it will show in its numbers relatively soon, and the market will appreciate that," he adds.

Source: McKinsey / Connect Magazine

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