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FT SPECIAL REPORT
Investing in Central & Eastern Europewww.ft.com/reports |
@ftreportsThursday October 2 2014
Inside
RegulationBureaucracy remainssource of frustration
forbusinessPage 2
TalentpoolProfiles offour menandwomenwho are challengingthe
status quoPage 3
Old versus the newA region moves fromindustrial dinosaurs
toworld class championsPage 4
Lessons to learnLocation is no handicapto post-Soviet
worldcopying Silicon ValleyPage 4
More onlineFor a list of ‘challengers’reshaping the area,
visitne100.org
I onut Budisteanu was 19 when hedecided he could do a better
jobthan Google. A Romanian studentwith an exceptional aptitude
forcomputers, Mr Budisteanu started
taking an interest in the technology thatunderpins Google’s
much-hyped self-drivingcars.
He realised he could replicate it at afraction of the cost. His
system costs$4,000, compared with the $75,000price tag for the
Google car, which manyseeasthefutureof transport.
Mr Budisteanu and his home-madeself-driving car are at the
leading edge ofa technology revolution in central
andeasternEurope.
Entrepreneurs, programmers andsoftware engineers from the
region,
drawing on world-class mathematicaland engineering education,
are piquingthe interest of the world’s informationtechnology
companies and investors,and building a reputation as an
emerg-ingtechnologyhub.
“In central Europe, there are a lot ofsmart people who want to
build stuff. Itis like a cluster,” says Mr Budisteanu,now 20. “From
what I know, Romania isthe country with the most IT experts
inEurope and fifth in the world. The firstspark, the first step, is
the most impor-tant foramaker, forahobbyist likeme.”
A key growth market for global
inves-torsbeforethe2008financialcrisis,cen-tral and eastern Europe
is again rising insignificanceasadestinationforoverseascapital,
with technology emerging as a
oneof themost targetedsegments.Mr Budisteanu is one of 100
innova-
tors fromtheCEEregionselectedaspartof the New Europe 100
project, whichaims to raise the profile of
emergingentrepreneursandyoungbusinesses.
“The stereotype of the region’s indus-try is manufacturing,
basic productionbusinesses. This is changing rapidly,and these are
the people who are bring-ing the change,” says Wojciech
Przybyl-ski, editor-in-chief of Polish politicaland cultural
journal Res Publica, whichcompiled the list with support
fromGoogle, the Visegrad Fund, which pro-motes closer integration
within theregion, and the Financial Times.
“These [100] are the faces of the newregion, the names that will
rebrand this
part of the world.”Creating the next Silicon Valley, the
area of northern California that has cul-tivated some of the
world’s biggest andmost powerful technology firms, is thedream of
hundreds of countries and cit-ies, from London and Berlin to
Banga-loreandBeijing.
But investors betting on central andeastern Europe say the
combination of ahigh level of mathematical education,low overheads
and a globalised, west-ernised young generation makes for
aheadyandsuccessfulmix.
“There isagrowingconfidenceamongthose who did not grow up under
com-munism, who see the world so much dif-ferently from their
parents,” says JackStack, chairman of the supervisory
Technologystart-upsblow awaystereotypesGrowing interest from
foreign investors reflects theregion’s potential for innovation,
reportsHenry Foy Groundbreakers: Polish students with their
award-winning ‘Scorpio’ Mars-roving robot — AFP
board at Ceska Sporitelna, the
CzechRepublic’sbiggestbankbydeposits.
“From a private equity point of view,from an investment point of
view, peo-ple are starting to look much moreclosely at central and
eastern Europe.There isa lotof
interestandscoutingoutofopportunities.”
Alongside Mr Budisteanu, who islaunching a crowdsourcing
campaign tofund the production of his concept, theNew Europe 100
list boasts a Hungariandoctor who has created a medical
advicewebsitedrivenbysocialmedia,ateamofPolish students who have
built anaward-winning robot that could operateon Mars, and a Slovak
inventor of aflying car. “Google begun life as a
continuedonpage2
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2 ★ FINANCIAL TIMES Thursday 2 October 2014
Investing in Central & Eastern Europe
start-up in a garage, so we know innova-tion and great ideas can
come from any-where,” says Agata
Waclawik-Wejman,Google’sheadofpublicpolicy forcentraland eastern
Europe. “Twenty-five yearsafter the fall of communism, the
regionhaslargelyachievedthelevelof freedomand economic development
that pro-vides the momentum for
strengtheningcreativityandinnovation.”
Google, Res Publica and the teambehind the New Europe 100 list
hopethattherecognitionfrombeingincludedonthe listwillbringthe
initiativesatten-tion, investor interest and
potentialbusinesspartnerships.
“Wehavealreadyseenhowinnovationand entrepreneurship have changed
thef a c e o f P o l a n d i n j u s
t25years,”saysMsWaclawik-Wejman.“A
continued frompage1 decade or so ago, the conversation wasabout
catching up with the rest of theworld, but the aspiration of Polish
entre-preneurs today is to be the best in theworld.”
There are stumbling-blocks, however.Central and eastern Europe’s
spend-
ing on research and development activi-ties is about 1 per cent
of the region’sgross domestic product, according toMcKinsey, the
consultancy. That is halfthe rate in the western EU, and trails
the1.5percent intheBriceconomiesofBra-zil,Russia,
IndiaandChina.
And low domestic saving and invest-ment rates compared with
other emerg-ing economies were exposed when for-eign investment
slowed, and then disap-pearedafter the2008financialcrisis.
Others contend that entrepreneursand technology start-ups depend
little
oneitherof those factors.Graham Conlon, the Ukraine-based
international head of mergers
andacquisitionsandprivateequityatCMS,alaw firm, says: “Eastern
Europe has pro-duced very well educated young peoplewho are very
savvy in technology. It is aforte for various eastern European
mar-kets. There are a lot of IT companies
intheregiondoingverywell.”
He adds: “Eastern Europe is
catchingupandthefinancingisavailableforwell-run companies here. A
number of ven-ture capital and private equity funds are
dedicatedsolely tothisspace.”Fully-fledged technology firms in
the
region have already begun catching theeyesof international
investors.
Ceska Sporitelna’s Mr Stack thinksforeign investors’ level of
interestin the region over the past nine monthshas matched that
between 2009 and2013.
Private equity company CVC CapitalPartners made an investment in
Czechsoftware security company Avast
inMarch,valuingthebusinessat$1bn.
The communications and computerand consumer electronics
sectorsaccounted for 20 per cent of all privateequity investments
in the region lastyear, according to data from the ECVA,the
European Private Equity and Ven-tureCapitalAssociation.
Industry watchers say that after fund-
ing, the most important area in whichcentral and eastern
European entrepre-neurs need support is leadership skills,through
incubation centres or start-uphubs, or from the management boardsof
investors.
“These are young guys setting upthese businesses,” says Mr
Conlon atCMS. “They have travelled. They havebeen educated abroad
and have a west-ern outlook. There is definitely a shift
inskillsetandmentality.
“But unlike the set-up in SiliconValley, for example, they may
have theideas . . . but they do not necessarilyhave the experience
of managing andrunning a business and driv inggrowth.”
Microsoft has set up innovation cen-tres across the region,
including inPoland, Romania and Hungary to sup-
port local entrepreneurs, and has twooutposts of its Microsoft
Ventures initia-tive inBulgariaandUkraine.
The US technology company hopesthat by providing resources such
as soft-ware tools and test devices to start-ups,and by helping
prepare fledging busi-nesses for international markets, it
canincubate the potential leading globalcompaniesof thefuture.
“Entrepreneurship is at the forefrontof igniting economic growth
across cen-tral and eastern Europe,” says DonGrantham, president of
Microsoft Cen-tralandeasternEurope.
“Driving investments is crucialto the region’s productivity,
economicdevelopment and prosperity, andtherefore critical for
increasing CEE’srelevance intheglobaleconomy.”
Technology start-ups blow away the old industrial
stereotypes
1%ResearchanddevelopmentspendincentralandeasternEuropeasproportionofGDP
20%Shareofprivateequityinvestmentthatwentintoregion’stechnologysectorsin2013
Ukraine
Romania
Kosovo
Croatia
SloveniaHungary
Slovakia
Belarus
Lithuania
Latvia
Estonia
Czech Rep
Poland
Turkey
Bulgaria
GreeceAlbania
Macedonia
Serbia
Montenegro
Bosnia
Moldova
Russia
Russia
Austria
Germany
NorwaySweden
Italy
Warsaw
Kiev
Riga
Tallinn
Minsk
Prague
Bratislava
Bucharest
Sofia
Budapest
Zagreb
Pristina
Ljubljana
Vilnius
World Bank rankings on ease of doing business and the New Europe
100 list of challengers
FT graphicSources: World Bank’s Doing Business 2014; FT
research; Google * GNI = Gross National Income
Poland
Ease of doing business
Ranking
201445
2013 Change48 +3
38.5mPopulation
$12,670GNI* per capita(Warsaw)
Czech Rep(Prague)
Ease of doing business
Ranking
201475
2013 Change68 -7
10.5mPopulation
$18,130GNI* per capita
100 challengersPoland 28
Slovakia 16
Czech Republic 14
Hungary 8
Bulgaria 6
Latvia 5
Estonia 5
Ukraine 5
Lithuania 4
Romania 3
Belarus 2
Azerbaijan 1
Croatia 1
Slovenia 1
Kosovo 1
Slovakia
Ease of doing business
Ranking
201449
2013 Change43 -6
5.4mPopulation
$17,170GNI* per capita(Bratislava)
Hungary
Ease of doing business
Ranking
201454
2013 Change52 -2
9.9mPopulation
$12,390GNI* per capita(Budapest)
The New Europe 100 is a list of people and organisations who by
their innovation, big ideas or social influence have changed the
world or their local status quo. The project is intended to raise
the profile of world-leading innovation in central and eastern
Europe - and to build connections among like-minded people.
The organisers are: Res Publica, the Warsaw-based journal;
Google, the internet search company; and the Visegrad Fund, a
regional funder of arts and social projects aiming at promoting
greater integration within the region. The Financial Times is a
global media partner. Representatives from these four groups
considered more than 600 nominations from dozens of institutions in
the region and from the general public before settling on a final
list of 100 in September.
The ‘challengers’ were split into the four categories below.For
the complete list and a description of their achievements visit
ne100.org.Join the debate #ne100 and @neweurope100
Society and Politics
30% The individuals and teams in this category have had a
significant impact either on politics at home or beyond their
borders, having used digital tools to effect change. Among those
recognised are organisers of Estonia’s e-government initiatives and
the mayor of Ricany in the Czech Republic (see profile page 3), who
introduced an electronic auction for citizens' energy supplies
Business38% These ‘challengers’ are company leaders who are
either
building digital businesses with big potential or have already
achieved significant success. They include the creators of Prezi,
the Hungarian presentation software company (see interview page 3),
as well as founders of digital start-ups in cities from Bratislava
to Vilnius
Science15% This category highlights both young scientists at
the
start of promising careers and established researchers who have
gained a worldwide reputation for scientific excellence. They
include a 17-year-old Polish schoolgirl who invented a non-invasive
method of drug delivery to cancer cells (see article page 3) and a
Romanian university student who developed a cheaper alternative to
Google’s driverless car (see page 1)
Media and Culture17% This group includes journalists, artists
and others who
have used modern technology in their work including the
Belarusian publisher of the first online city magazine in Minsk
(see interview page 3), the Ukrainian journalist who used Facebook
to help organise the Maidan protests and the organisers of
Dokufest, a documentary and short film festival held in Prizren,
Kosovo
M ieczyslaw Wilczek diedonly this year, but in theview of many
Pol i shentrepreneurs, his dreamdied long ago, when suc-
cessive governments began tinkeringwith the former industry
minister’sgroundbreakingbusiness legislation.
In 1988, Mr Wilczek, a chemist andbusinessman, implemented a
radicalnew law unique in communist statesthat opened a Pandora’s
box of innova-tion inPoland.
The Act on Economic Activity, as itwas
formallyknown,wastantamounttobringing capitalism to the
businessworld of socialist Poland. It enshrinedthe right of any
Pole to start a business,and removed regulations such as
employmentcaps.Atastroke,hesetfreesuppressed entrepreneurialism
acrossthe country. Business groups estimatethat 2m companies and 6m
jobs werecreated in the two years that followed.But, after
subsequent governments andministers added amendment
afteramendmenttotheactandthenreplacedit altogether, many people
hark back towhattheysaywasagoldenageforPolishentrepreneurs.
While Poland, Slovakia and the CzechRepublic are at middling
levels in theWorld Bank rankings for ease of doingbusiness, all
three are languishingtowards the bottom of the ranking forsetting
up ventures. According to theBank, which regularly ranks
countriesin terms of how easy it is to start a
business, it is a simpler process for start-ups in Iran, Nepal
or Costa Rica than inthe Czech Republic, in 146th place,Poland
(116th) or Slovakia (108th),despite theirmembershipof theEU.
And their governments’ recent recordofaddressingthis
ispatchy.
Poland this year removed
require-mentsforentrepreneurstoregistertheirnew company at labour
and sanitaryinspectorates, saving some paperwork,but Slovakia added
more red tape to theformation process for limited
liabilitycompanies.
The most supportive country in theregion has been Hungary, which
hastaken steps to tackle the problem ofbureaucracy stifling
innovation. Theclearest illustration of a desire forprogress is its
Runway Budapest 2.0.2.0project.
Under the initiative, the Hungariangovernment has pledged to
roll outtrainingprogrammesforentrepreneurs,easetheiraccess
tofinancingandreducethe complexity of tax procedures
forstart-ups,amongothersteps.
Today,accordingtotheWorldBank, ittakes just five days to set up
a new busi-ness in Hungary, compared with 19 inSlovakia, 20 in the
Czech Republic and30inPoland.
“The first milestones and pro-grammes are set,” says Kalocsai
Zsolt,chief executive of RSM in Hungary, a taxand accountancy firm.
“However, fol-lowing the general elections in spring2014, the
Hungarian government needsto concentrate on practical develop-ment
of the programmes and introducetherelated lawsandregulations.”
The Polish Agency for EnterpriseDevelopment (PARP), a
governmentbodywhoserole is tosupportsmallbusi-
nesses, spends most of its resources
ongivingstart-upstheconfidenceandtoolsto navigate the company
formationprocess, according to Bozena Lublinska-Kasprzak,
theorganisation’spresident.
In an effort to guide start-ups to matu-rity, PARP has also
worked to draw upbest practice guides for companies toexpand their
business and competeoverseas.
But Piotr Liss, a tax partner at RSM
inPoland,saysthatmanyentrepreneursincentral and eastern Europe
think thatalthough governments might tinkerwith minor regulations,
they are notdoing enough to support them finan-cially. “Many of the
actions are preparedin such a way that they have no financialimpact
on the [entrepreneur’s] budget,”
he says. “It is mostly simplification ofprocedures.”
Wojciech Przybylski, editor-in-chiefof Polish journal Res
Publica, whichcompiled the New Europe 100 list of topnew
entrepreneurs in central and east-ern Europe, believes government
inter-vention in start-ups in the region makesthings harder. Yet
innovators will stillfindawayaroundit,hesays.
“People have had to be so adaptable inthis region, given all the
various criseswe have had here. Entrepreneurialismhas sprung up as
a means of economicsurvival.”
Bureaucracyremains sourceof frustration fornew
businessesRegulationCountries comewell downWorld Bankranking for
starting new ventures, writesHenry Foy
Mieczyslaw Wilczek: opened a Pandora’s box of innovation in
Poland
‘Entrepreneurialism hassprung up in central andeastern Europe as
ameansof economic survival’
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Thursday 2 October 2014 ★ FINANCIAL TIMES 3
Investing in Central & Eastern Europe
Joanna Jurek, who has just turned 18,has come up with what great
scientistshave failed to produce during decadesof cancer treatment
research: a non-invasive method of drug delivery totumour
cells.
In the young Polish researcher’smodel, molecules of doxorubicin
(a drugused in cancer chemotherapy) areattached to nanoparticles of
gold, whichare used as carriers. The compound isthen placed in
nanofibres used to sewup surgical wounds following
tumourresections.
The bond between the carrier and thedrug can only be broken by
enzymesproduced by tumour cells, allowing fortargeted and gradual
release of the druginto the system. This limits the risk ofcancer
progression and mitigatesadverse effects of doxorubicin.
“Using doxorubicin poses a problem,since it is a non-selective
drug thatinterferes with the DNA structures of
not only tumours but also healthy cells,”Ms Jurek explains. “It
is also cardiotoxic,which means it can’t be given to patientswith
heart disease – as a result, it isslowly being phased out.”
Ms Jurek started developing herproject last year during a
summerfellowship at the University of Warsaw. Itcame to fame when
she won a prize inthe prestigious Intel InternationalScience and
Engineering Faircompetition for young scientists.
She says she never imagined her idea
would bring her internationalrecognition and an offer from
Poland’shealth minister to collaborate with aleading research
centre named after theworld’s most famous Polish scientist.
The Marie Curie Institute of Oncologyin Warsaw is giving Ms
Jurek space tofurther her research on drug-deliverysystems and to
start new projects in herother areas of interest which includeskin
and bone implants and cell origami.
Ms Jurek, who has still one more yearof high school to complete
not tomention university, has ambitionsbeyond the lab. In
particular, she wouldlike to develop her own product and setup a
company to manufacture and sellher cancer treatment at an
affordableprice. “I don’t want to write scientificpapers and hope
for someone withmeans to pick up my research and investin it. I
want to have the means to applythe research myself,” she
says.Aleksandra Wisniewska
Science Young researcher’s breakthrough spurs business
ambitions
Applied thinking: Joanna Jurek
The former Soviet republic of Belarushas a limited media sector
and usesRussian as the lingua franca. But IrynaVidanava, a
Minsk-based publisher,uses online media to give a lessrestricted
view of a country sometimesdubbed the last dictatorship in
Europe,as well as providing an outlet for theBelarusian
language.
“Belarus has no normal mediamarket because of
substantialgovernment regulation,”says the 36-year-old.
“We came to a pointwhere we were tired ofthe fact that Belarus
isassociated [abroad] withthe following things: ‘Thelast
dictatorship of Europe’,
potatoes, Lenin monuments on everysquare. The country is much
more thanthat, and we are trying to show thisother Belarus.”
The main vehicle of this campaign isCityDog, an online newspaper
whichhas more than 10,000 unique visitors aday. Topics covered – in
Russian –include where to find the bestcappuccino in the city, how
thegrandparents of the current generationof readers dressed in
their prime, andwhy some city residents are happywithout accounts
on social networks.
What may be considered ordinarymaterial for any city paper in
Europe,however, was absent from Belarus acouple of years ago, says
Ms Vidanava.
She describes the local mediabusiness as very small and
distorted, withindependent publicationsunable to survive
withoutexternal support. Finance
for CityDog was originallyobtained through a newlycreated
Belarusian
advertising agency andcommercial sponsors
including a mobile networkoperator Velcom, which
had a keen interest insponsoring
news about cyclism and for cyclists inMinsk.
CityDog has since become financiallyself-sufficient. “However,
this is anexception,” says the publisher.
She believes that the internet and, inparticular, social
networks (whichplayed a significant role during thelatest protest
movements in Ukraine,Venezuela and other countries), havebecome a
platform where people cancriticise the Belarusian authorities
withsome level of security – somethingmost cannot do on the
country’s streetsor squares. “That is why thegovernment is
attempting to regulatethis sphere,” says Ms Vidanava, whospeaks
from experience.
A decade ago, the governmentwithdrew the licence of her
magazineStudentskaya Dumka (StudentThought) which was mainly aimed
at ayoung audience. “It was anindependent publication in
theBelarusian language for young people,”she says. “This fact alone
was enoughfor the authorities.”
Subsequent attempts to publish themagazine without a licence and
as a CDwere also suppressed.
In response, she created a glossyonline version, www.34mag.net,
inEnglish and the Belarusian language.
Alternative web journals serve upcappuccino reviews and local
cultureMedia and culture
Sergei Kuznetsov interviews aBelarus publisher who givesa less
restricted view online
Innovative:publisherIryna Vidanava
Vladimir Koren, the mayor of Ricanyin the Czech Republic wanted
to cut histown’s high utility bills. The mayor,who is also a TV
presenter, hit on aninnovative solution: an electronicauction for
electricity and gas suppliesfor households.
The first auction for a one-yearcontract with the municipality
tookplace in 2012, in collaboration witheCentre, a Czech company
that hostsonline auctions for goods and servicesranging from petrol
to mobiletelephony. Result: the municipality’selectricity bill was
cut by about 25 percent and that for natural gas by almost17 per
cent.
“Members of the city council couldsee prices go down in the
auction andone of my colleagues turned to me andsaid: ‘What a shame
my house couldn’tbe part of this auction’. And my answerwas: ‘Why
not?’,” says Mr Koren, whowas elected mayor in 2010representing the
independent groupingKlidne Mesto (“quiet town”).
Starting with utilities, Mr Koren,who hosts a popular
scienceprogramme on statetelevision, launchedan
informationcampaign,collecting 518 localhouseholds into agroup,
whileeCentre came upwith nine suppliers(not, it must be said,
the giant state-owned utility CEZ) forthe Czech Republic’s first
e-auction forhousehold electricity and gas, whichtook place on
March 13, 2013 at 13:13.Within an hour, contracts worthKc27m
($1.25m) had been awarded,cutting the electricity bill for the
518households by 16.5 per cent and gas bya third. “People saved . .
. tens ofthousands of crowns for their familybudgets,” says Mr
Koren.
Inevitably, word spread, withmunicipalities from around the
CzechRepublic getting in touch to find outhow it was done. By the
end of 2013,the number of towns and villagesorganising e-auctions
for gas andelectricity had reached 652.
This has saved more than Kc21m formore than 21,000 households
andKc56m for more than 2,000 smallbusinesses, sparking hopes of
arevolution in how people buy energysupplies.
The model could develop further toproduce aggregated management
ofdemand and supply – with companiestaking over responsibility for
theimbalances of clients, “buying for thisaggregated demand
directly from thewholesale market, and dispatching thisportfolio on
the balancing market”,says Jan Ondrich, energy economist
atPrague-based advisory firm CandolePartners.
In Ricany, the e-auctions have savedmore than Kc7m, which Mr
Koren saysis a lot of money for a municipality of
its size. “You can refurbish, forexample, a main hall in the
culturalcentre for that,” he says.
Mr Koren has yet to find out,however, whether the
trailblazingidea will secure him another term
as mayor in local elections onOctober 10. “I’m known for one
popular TV show with more than 1mviewers, so I don’t know
whether I
am more popular for that orfor my job as mayor,”
he says.
TV host andmayorsparks a revolution inpaying for
utilitiesSociety and politics
Online auctions for powersupplies could extend toother goods and
services,writes Nicholas Watson
I n 2008, Peter Arvai travelled fromSweden to Budapest. He was
met atthe airport by his uncle. This was ata time when Hungary’s
economywas suffering from the fallout of the
global financial crisis. On the drive backto his home, Mr
Arvai’s uncle com-plainedaboutthelackof“fulfilling” jobsin the
country and how few globalbrands ithadcreated.
Over dinner with his uncle, Mr Arvairevealed why he had come to
the city: hewas about to start a company. “Youcould see my uncle’s
jaw drop,” he says.“Essentially, he thought this was mad.People
move from east to west, so whywouldImovetoHungary?”
Today, the company Mr Arvai co-founded, Prezi, is one of
Europe’s leadingtechnology start-ups. It writes presenta-tion
software that is used by 45m people,providing simple tools that
help userscreatedynamicpresentations.
The 34-year-old accepts that only an
unusualsetofcircumstancesallowedhiscompany to thrive. The first
circum-stance was a unique founding team. MrArvai was born to
Hungarian parents,grewupinKarlskoga,Sweden,andstud-ied at Stockholm
University. He workedat a number of start-ups and made
hisnameasthecreatorofomvard.se,aweb-site that allows patients to
compare hos-pitals and the quality of their treat-ments.
The concept behind Prezi was
createdinBudapestbyAdamSomlai-Fischer,anartist and designer, and
Peter Halacsy, acomputer scientist and university pro-fessor who
brought in Mr Arvai as chiefexecutive to help turn their ideas into
aviablebusiness.
For18months,thetriodeclinedtotakeasalaryandpumpedintheirownmoneytokeepthebusinessafloat.Thecompanyhas
since received $14m in investment,from groups such as Sunstone
Capital, aCopenhagen-basedfund,andAccelPart-
ners, the US venture capital group thathas previously invested
in internet com-paniesFacebook,BaiduandEtsy.
WithoutsayingwhetherPreziisprofit-able, Mr Arvai declares it has
“nottouchedasingledollar”ofthiscapital.Hesays it generates revenues
from its “free-mium” model, with most users
gainingaccesstosoftwarefree,andotherspayingforaccesstoadvancedfeatures.
Mr Arvai says the start-up scene inHungary’s capital is
beginning to takeoff,pointingtothesuccessof
technologygroupssuchasLogMeIn,aremotework-ing system, and UStream,
a video-streaming site. According to Crunch-Base, which compiles
data on start-ups,some 50 Hungarian technology compa-nies have
received investment since2008. This is small compared with Lon-don,
which has more than 3,000 techstart-ups, but Mr Arvai says the
talentand ideas exist in Budapest to createmore companies,
especially as investors
have begun to look more favourably onthecity.
Hungaryishighonthelistofcountriesranked by number of Nobel
laureates. Ithasbeeneasytopersuadeengineersandworkers from around
the world to moveto the country, which has more
relaxedimmigrationrulesthantheUSandwest-ern Europe. “If you ask me
about theamount of talent and creativity thatexists between
[Stockholm and Buda-pest] I would say they are comparable,”he says.
“But Sweden has built a 100-year business brand through
Ericsson,VolvoandIkea.”
Last Christmas, the Prezi chief execu-tive visited his uncle
again. Much to thenephew’s surprise, the older man
beganbrainstorming ideas for companies hemight start. “That was a
huge thing forme personally,” says Mr Arvai. “ I hadtears
inmyeyes.” Winning the
popular vote:Vladimir Koren
Budapest builds on talent poolBusinessFounder tellsMuradAhmed
thatmore relaxed immigration rules help attract foreigners, too
Pole position: investors now look more favourably on the capital
of Hungary which is high on the list of countries ranked by number
of Nobel laureates – Dreamstime
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4 ★ FINANCIAL TIMES Thursday 2 October 2014
Investing in Central & Eastern Europe
ContributorsHenry FoyCentral and eastern Europecorrespondent
Murad AhmedEuropean technology correspondent
Neil BuckleyCentral and eastern Europe editor
Aleksandra WisniewskaFT interactive data journalist
Nicholas WatsonJournalist based in Prague
Sergey KuznetsovJournalist based in Minsk
Kester EddyJournalist based in Budapest
Leyla BoultonCommissioning editor and head ofproduction, special
reports
Steven BirdDesigner
Andy MearsPicture editor
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In 2010, Peter Sasi and his two long-standing business partners
came to animpasse. In 15 years working for
multi-nationalsandasconsultantsinHungary,they had built up
significant expertise inthe field of enterprise content manage-ment
– managing documents for largeenterprises.
“We realised that if we wanted to growwe would have to go
international: Hun-gary was just too small,” says Mr Sasi.But they
needed funding and advice.Their company had annual revenues ofjust
Ft110m ($446,000), so the hopewas to find a venture capital fund
thatwould understand their vision andneeds.
Mr Sasi spent the first three months of2011 researching the
venture capitalworld before entering negotiations withPrimus
Capital, a Budapest-based VCfundservingcentralandeasternEurope.
“We could have ‘bootstrapped’[funded ourselves from reinvested
prof-its] for 10-15 years, but we wanted totake the fast lane,” Mr
Sasi says. It tookanother nine months before a Ft270mfunding
package gave Primus some 40per cent of a new entity, Multipass
Solu-tions, which took ownership of the threepartners’ ECM
Consulting. Two yearslater, and MPS has expanded into the
Gulf and southeast Asia. Revenues thisyear are expected to reach
Ft495m, withfurthergrowthinthepipeline.
Mr Sasi’s need to expand came at justthe right time: in 2010 and
2012, Hun-gary received money from the EU’s JointEuropean Resources
for Micro toMedium Enterprises, otherwise knownas Jeremie funding.
Under the pro-gramme,VCfundshadtoprovide30percent of the initial
capital, with Jeremiemoney making up the remainder. Withan addi t
ional two
programmeslaunchedin2013,atotalof28fundswerecreatedwithtotalcapitalofFt128.4bn.
According to Venture Finance Hun-gary, the state body
responsible for dis-bursingJeremiemoney,the28fundshadinvested
Ft57.5bn in 150 companies upto the end of August, the
informationtechnology and biotechnology
sectorsbeingthechiefbeneficiaries.“TheentireHungarian VC and
start-up scene has
been transformed for the better” by theJeremie programmes, says
LaszloKoranyi, vice-president for interna-tional and domestic
affairs of NIH,
Hun-gary’sNationalInnovationOffice,whoseresponsibilities include
encouragingstart-ups.
Figures from the Hungarian VentureCapital Association reveal
Jeremieaccounted for 63 per cent of all
VCinvestmentsnationwidein2012,puttingHungary “in first place... in
the EU interms of early-stage VC investment as a
proportionofgrossdomesticproduct”.But Mr Koranyi stresses that
“a new
way of thinking” has also started toevolve. “Investors started
to pay atten-tiontoearly-stagecompaniesthatprevi-ously were
completely out of theirfocus,” he says. “Start-ups started
tounderstand that they have to focus onthe international market to
producehigh-growth. Equity financing became
arealalternativetogrant-seeking.”
Yet many ask whether the flood ofmoney has helped or hindered
long-term growth of innovative companies.Imre Hild, chief executive
of iCatapult, aBudapest-based accelerator, says toomany VC fund
managers have classicalprivate equity backgrounds and do
notunderstand the mindset or needs ofentrepreneurial start-ups.
“Their way of thinking is: I have toconsider whether I want to
buy the com-pany, flip it around and then sell, or Idon’t want to
buy it,” says Mr Hild, whohimselfusedtoworkwithVCfunds.
Theresult is thatVCfunds
inHungary–followingprivateequitypractice–havetakencontrollingstakes
inmanygrowthcompanies and have then sought
tomicro-managethefounders–anearcer-tain way of denuding the company
ofenergyandinnovativethinking.
Ondrej Bartos, a partner at Credo Ven-tures, an €18m
Prague-based VC fundthat has invested in 13 companies acrossthe
region, though not, so far, in Hun-gary, says he feels “pretty
good” that theCzech Republic has so far failed to accessJeremie
funding. “It never works topdown,” he says. “Governments
don’tknowwhatthey’re talkingabout.”
EU-funded venture capital modelproves to be double-edged
swordFinancing
Influx of EU Jeremie cashboosts start-ups in Hungarybut venture
capital fundmanagers are accused ofmicro-managing and
stiflinginnovation, writes Kester Eddy
Ft57.5bnTotal($236m)of
EUJeremiefundsinvestedinHungariancompanies
63%ProportionofHungarianventurecapitalinvestmentsin2012fundedbyJeremie
R obert Noyce is not a householdname. Perhaps he should be,as
his work has helped createthe modern world.
Noyce, who died in 1990, was co-inventor of the microchip, the
gizmowhich made the computing industrypossible. He also co-founded
twosemiconductor makers, Fairchild andIntel. Those companies
helpedestablish northern California’s BayArea as the centre of the
technologicalworld. His invention also helped givethe region the
moniker Silicon Valley.
While in his 50s, Noyce wasfrequently visited at home by a
youngman with long hair who would arrivenoisily on a motorcycle.
The 20-something wanted advice on how tobuild a lasting technology
business ofhis own. That man was Steve Jobs,co-founder of
Apple.
Noyce’s mentorship of Jobs hints atwhy Silicon Valley thrives.
The 50-milestrip of land between San Franciscoand San Jose is
packed with talent andmoney: leading academic institutions,such as
Stanford University, scores oftechnology companies, includingGoogle
and Facebook, and the moneymen of Sand Hill Road in Menlo Park,home
to some of the world’s leadingtechnology investors and
venturecapital funds.
This concentration has produced aunique culture, with knowledge
passedfrom one generation to the next helpingto create world-class
tech businesses.
So are the digital start-ups that arespringing up across
disparate locationsin Bratislava, Prague and Warsawdestined to
fail? Should the techentrepreneurs across central andeastern Europe
just pack up andmove to California?
No. And here is why. NiklasZennstrom, founder of Skype,
theglobal company that first sprang to lifein Tallinn, Estonia,
suggests that theinternet has created a borderless
world, where ideas travel further andfaster than ever before. No
longerwould a young Jobs need to forge arelationship with Noyce
over a dinnertable. Today, they would probablytweet one
another.
The physical proximity that gavethose living in Silicon Valley
anadvantage has disappeared. EasternEurope has strong
universities,computer scientists and a skilledworkforce. But
problems remain; thebiggest is access to capital. None of
thetop-tier technology investment fundsin Europe have offices in
the region,and locals complain they have to travelwest to secure
the significantinvestment that a promising start-upneeds to
grow.
The Startup Genome project’s list ofthe world’s top 20
“ecosystems”features the likes of Tel Aviv, Bangaloreand Santiago.
The only easternEuropean city included is Moscow.
This should not be a surprise. In theperiod when Noyce was
advising Jobson how to build Apple, the Berlin Wallwas being
pulleddown. It has takendecades for theiPhone maker tobecome
theworld’s mostvaluabletechnologycompany. Overthe same period,
amarket economywas taking rootacross easternEurope.
Creatingsustainablebusiness takes time. So does
nation-building.
But for ideas to spread, people needto interact. One way to
ensure that is toshine a spotlight on them.
This is the driving force behind theNew Europe 100, a list of
people whoare transforming technology, science,politics and
beyond.
It may lead young Poles, Lithuaniansor Ukrainians to peruse this
list andseek out a mentor in their field, as Jobsonce did with
Noyce.
COMMENT
MURAD AHMED
SiliconValley has lessonsfor the post-Soviet world
EasternEuropehas
stronguniversities,computerscientistsandaskilledworkforce
A t the sprawling Fiat plant inKragujevac, southeast ofBelgrade,
eastern Europe’sold economy meets thenew.
ThesitewaslongoccupiedbyZastava,a communist-era group turning
outclunky Yugo cars. During the 1999 Kos-ovo war, Nato planes
bombed it. But inApril 2012, it reopened after a €1bnrefurbishment
to produce the Fiat
500Lpeople-carrier.Serbia’spost-communistmodernisationwasdelayedbythe1990sYugoslav
wars. The rebirth of the plant,however, showed the two-decade
proc-ess of retooling central and easternEuropecontinues.
When the Berlin Wall fell in 1989,former communist bloc
countriesseemed unlikely candidates for an eco-nomic miracle. Much
of their industrywasoutdatedanduncompetitive.
Buttheyhadpotentialadvantages,too– above all, low wages coupled
with highlevels of education and skills. They werewell-located,
close to the west Europeanmarket, as well as emerging economiessuch
as Turkey. Over the next two dec-ades, central European countries
weretransformed from industrial dinosaursinto what Pawel Swieboda,
president ofDemos Europa, a Warsaw-based think-tank, calls a
“production hub for theEuropean market”, with
manufacturingaccounting for more than 30 per cent
ofgrossdomesticproduct
inPoland,CzechRepublic,SlovakiaandHungary.
But with much slower economicgrowth since the 2008 financial
crisis,
central European countries face a newchallenge: to shift from
low-cost manu-facturing centres to innovative,
knowl-edge-basedeconomies.
After General Electric of the US took apioneering stake in
Tungsram, the Hun-garian lighting producer in 1989, it wasfollowed
into the region by other con-sumerelectronicsgroupssuchasPhilipsof
the Netherlands, Germany’s Siemens,andSamsungandLGofSouthKorea.
Automakers flocked in, too. Someopened greenfield plants, others
tookover existing sites, rebuilding them andretraining staff. The
best-known exam-ple is VW’s transformation of Skoda, theCzech
automaker, from a company pro-ducing a single, outdated model into
aworld-classmanufacturer.
Fiat launched manufacturing opera-tions in Poland by taking over
FSM inTychy, Silesia when it was privatised in1992. Since the
1970s, it had constructeda Polish version of the Fiat 126. In
1999,France’s Renault acquired Dacia ofRomania, now maker of the
popular,low-costLoganmodel.
Today, the Czech Republic and Slova-kia, with only 16m people
betweenthem, produce more cars than France.Central and eastern
European govern-ments helped by creating attractiveinvestment
environments through eco-nomic reforms; the west Europeanbanks that
took over large parts of east-ern Europe banking provided
financing.
EU membership for 11
ex-communistcountriessince2004gavefullaccesstoasingle European
market numbering
more than 500m people. The McKinseyGlobal Institute noted this
year thatPoland, the Czech Republic, Slovakia,Hungary, Romania,
Bulgaria, Sloveniaand Croatia together averaged annualgrowth of 4.6
per cent from 2000 to2008,amongthebest intheworld.
“Oligarch” owners have also investedin Russian and Ukrainian
naturalresources companies and heavy indus-try, introducing new
technology andraisingproductivity.
The 2008 financial crisis accentuatedthe shift in manufacturing
to Europe’slower-cost centre and east, says MrSwieboda: “Producers
from westernEuropean countries came under stress,and they found
nearshoring in centralEuropetobehighlyadvantageous.”
But with most of central and easternEurope not yet regaining
2008 levels ofoutput – apart from Poland – Mr Swie-boda is one of
many voices calling for anewgrowthmodel.Asthewagegapwithwestern
Europe narrows, CEE countriesmust not do all they can to increase
pro-
ductivity inexistingmanufacturing,butmust also do the groundwork
for newtypesofbusinesses tospringup.
“Creating an environment in whichsmall, innovative companies and
mid-capscanthriveisimperative,”saysAlainPilloux, managing director
for
industryandcommerceattheEuropeanBankforReconstructionandDevelopment.
That includes improving road, railand telecoms links within and
betweencountries, as well as taking particularsteps to stimulate
innovation andknowledge-based businesses, says MrPilloux. These
range from better protec-tion for intellectual property rights,
toimproving the tax treatment of researchanddevelopmentcosts.
While international venture capitalgroups, and technology giants
such asMicrosoft and Intel, have invested incentral Europe’s
technology scene,homegrown groups from the
regionremainrelativelyscarce.
From industrialdinosaurs toworld-classgrowth ratesOld vs newThe
regionmustmove beyond being amanufacturing powerhouse, saysNeil
Buckley
Economic miracles: a Skoda plant in the Czech Republic. In 2000,
Volkswagenbought out the company and has transformed its methods
and output – Bloomberg
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