Investing in Central & Eastern Europe

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

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)


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


Ranking

201449

2013 Change43 -6

5.4mPopulation

$17,170GNI* per capita(Bratislava)

Hungary


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’

Thursday 2 October 2014 ★ FINANCIAL TIMES 3


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

4 ★ FINANCIAL TIMES Thursday 2 October 2014


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

For advertising details, please contactJim Swarbrick +44 (0)20 7775 6220,[email protected] Roezler +43 1 897 360036,[email protected] FT reports are available on FT.com atft.com/reports. Advertisers have no priorsight of, or influence over, our articles.

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 create

the 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