The Startup-Cowboys of Budapest Interview with Imre Hild, Part One

The world of startups is continually changing, but its mode of operation is the same everywhere in the world. Imre Hild, founder of iCatapult, talks about the American and Hungarian startup culture and what makes startups successful.

What do you think about the culture and environment around Hungarian startups?

Imre Hild

If I want to be brutally honest: we have an amusing misunderstanding in Hungary about startups. The general misconception is that all you need for a startup is an idea: if you have an idea, you’ll find an investor and voila! You have a business. But it does not work like that. An idea is only an assumption a startup has about the market itself, the product or the usefulness of the product. It’s only a supposition. It’s not worth anything unless tested on the market. Even asking questions and listening to their answers is intimidating for most startups. Startups, in most cases, are full of dread about the clients themselves. The beginning of the whole process is a hard period where you need to find out if your assumption can be validated.

This is the main problem, this is where most of them fail. They begin, wrongly, with running to an investor with the idea. But the investor, as they say, is a deadhead. Why do you need an investor? In Hungary, venture capital usually only enters the scene when the business is already in the “growth phase.” Most of these businesses, however, are not in the growth phase—they have barely even decided what they are actually going to do. There’s no value proposition, there’s no product that would add some value or service to a conceived target market. This phase should not be financed by venture capital, because what happens is that there’s suddenly a lot of money, and a lot of pressure, so every member of the startup is going to have 15–50 ideas on what it is that they should do, with the VC calling every day asking for the strategy and for implementation of the strategy, because otherwise results might never come.

What is the VC doing here? He is actually asking a company registered three days ago to come up with a five­year plan! But he will readily admit that there’s no way to tell what is going to happen in the next three months, even. VC’s with these five­year plans achieve two things: first, they let the startup indulge in daydreams. They ask them what’s going to happen in three years, five years, when it would be easier to calculate Jupiter’s position than to tell where a startup will be then. (Eric Ries, one of the founders of lean startup thinking, calls plans based on complex assumptions and beliefs ‘astrology”). The second thing is that they also restrict the entrepreneur, who begins to get wary: what happens if they can’t deliver on the plans, since they were made against their interest. Now he is not building that startup for the client, but for the investor. This is what’s happening today in massive numbers, and it is not healthy.

Are there any good examples in Budapest?

A good startup needs clients and a product that will satisfy the needs of a larger market segment. If that segment is able to support the startup, it will not need an investor. My favorite example is Prezi. First, they had a product, then they had a value proposition, they put it up on the Internet and it practically went viral (the best way to get clients, by the way) in a large, homogenous, global user group. This is the nirvana every startup dreams of. But you shouldn’t get to that point from VC money. You get there by defining what exactly the market needs. This is the step everyone misses.

The main problem is that there are masses of young adults joining the startup movement and they learn a bad frame of mind, a bad norm. What they learn is that you need ideas, you need to pitch and you need investment capital. However, exactly the opposite is true. What they need to do is understand the market and how it operates and discover customers; realize what the customer values, and build a value proposition and a product based on these. Only then should they begin to develop a product. Most don’t get to this point, because they have already spent $150–200,000 of the VC’s money without results, and the customer is the least of their concerns. And most VC money today comes from EU funds and is distributed by government bodies.

Instead of the market players are looking at the government…

The third party with misconceptions here is the state, the regulatory environment. Currently, the state wants to tell us what is innovation, what direction innovation should take, what kind of formal venture is a startup and how to approach your startup. Part of the Gazella Program (a sponsorship initiative for incubated startup businesses) is, for example, the expectation that a startup needs to create its business introduction materials in another language besides English. Why specify this? Why don’t we let the startup decide if it wants to localize or create its product in different languages?

Another mistake in the regulations is that it makes it mandatory for every startup to compete at two international events. But startups shouldn’t be competing, even if it does look like a popular sport. A startup is a way of entrepreneurship. The point is to build a business and provide for clients, not to learn how to pitch at competitions. We are paying an extreme amount of attention to looks, image and perfection, but this also indicates a lack of real substance. Those partaking in the program will become excellent pitchers, only no one tells them what comes after the pitch. With a slightly funny analogy: it’s great if you do well on the first date, but the vital part is what comes after that. This where the focus should be. 99.5% of a startup’s life happens after the pitch, not during.

What do you think could be done to clear these misconceptions?

Education and training. Either financed centrally, or by cooperatives, you need to support training that focuses on explaining the details. The concerns I voiced before are valid not only in Hungary, but everywhere in the world.

A good, complex, comprehensive coverage and training is necessary. These young entrepreneurs can understand the different components, but they can’t see the big picture. To simplify it: reading a couple of Techcrunch and other articles or watching online videos on a subject is not “research.” These people start an e­commerce business without knowing the first thing about the history of e­commerce, what types of business models worked or haven’t worked, what the biggest segments are for development, who is using what platform and on which platform they will reach their customers for almost free. Startups all over the world have tried many different business models that could greatly benefit the businesses just starting out, but this is worth nothing if we don’t know about those experiences.

Everyone is trying to reinvent the wheel. They are trying to reach customers one by one or through direct sales, because this is all they know of and this is what you can ask money for. Their knowledge has huge gaps, which could be easily filled because the information and experiences of others are readily available. Fifteen years ago, the Internet economy was born and now we are at a point where, if it were a country, it would be the 6th largest in the world. For example: how did Priceline operate between 1998 and 2003, or how does Kayak currently operate? I don’t mean how we think they operate, but how do they operate in reality? You can teach these through examples and case studies exactly as they are taught in business schools in other professional fields. This kind of “domain­specific education” is what’s entirely missing/ There are only stories and anecdotes going around. This kind of education has been integrated into the Budapest HUB action plan, in which we have specified the four pillars essential to dealing with startups: fostering environment, normative sponsorship system, education and training, and regulations and taxation.

Is there a difference between Hungarian startups and startups in other parts of the world? Or every startup basically works the same, regardless of physical location?

A good startup is the same anywhere. A Hungarian startup works exactly like a Romanian, American or Vietnamese one. It pays attention to its customer, makes decisions based on customer communication, validates before every decision and builds a product through quick iteration.

Unfortunately, the unsuccessful startup is not like that. Most people think that all you need is an idea, and you need to shape that idea into something that the investor will like. They do so because what they see is that if the investor likes the product, they will get money; if he doesn’t, they don’t get funded. They focus on the investor and not the customer. This is dangerous, since most investors don’t understand the customer—they expect the startup to understand their customers.

Startups’ lack of understanding of the market can be quite awkward sometimes. There are cases where the investor has brought in a consultant who actually has to explain to the startup how their market builds up. This can be embarrassing. The startup needs to be the expert in its own market, since the only way it can create a substantial and sustainable value is if it knows its market from the inside out. You know this the second they start talking…

What kind of (radical) changes have happened in the past couple of years in the startup world in Hungary?

Five years ago, there was no startup culture at all. Let me tell you an anecdote: the other day, I was talking to the author of Startup Nation, and he told me that when his book was getting translated, the translator didn’t want to use the Hungarian word for “startup,” because they wouldn’t have understood that in Hungary. This was in the summer of 2012. We can laugh at it now, since startups have become mainstream. This has been a very fast, sweeping change in less than a year’s time. The startup lifestyle and the word itself have become mainstream and presentable since it shifted from being an alternative to unemployment to being a real career option in certain segments, typically in the engineering and technological fields.

There is an international oversupply of all kinds of auxiliaries: accelerators, incubators, consultants, competitions, events, organizations that all wish to help startups, it’s just that there aren’t enough real startups. There are lots of startups that have become startups exactly because they can play the role of a startup in such an ecosystem. How do you know this? For example, if a startup goes through 2–3 accelerators, it’s pretty obvious that it’s become a startup to be accelerated, and not because it wants to be independent. Even the term “accelerator” is hard to pair with every kind of startup, as their point is to have the startups there only for a limited amount of time, in the prototype phase, meaning it has to arrive when there’s something to accelerate. The startup then leaves the accelerator three months later, with as much input and knowledge from mentors for which this improvement would have otherwise needed 1.5–2 years. It is only for a short phase in a startup’s life when an accelerator can actually help.

What makes a good startup?

Not the investment it receives. Many think that if a startup attracts investments, it is a success. This is pretty much the “employee” reading of a startup’s life: if we have security, we have success. If I wanted to be racy, and Americans can be quite racy in these cases, I would say that this equals to admitting that the startup is unable to pull in funds from its customers, which is hard to perceive as success. A startup’s success is making a sale, i.e., if it can sell customers a product or service.

Something that has been suppressed in the startup world is that a good startup is mindful of its resources: it doesn’t sell shares unnecessarily, has income from its customer and doesn’t go to competitions. Although this is the right attitude, you don’t hear about these kind of startups too often, since they are few and far between and it is hard to write pompous articles about them. In my book, a startup is successful if they can develop a product in a very short time (meaning a couple of months) that is actually generating noticeable interest in a fairly big market. Most of the time, you don’t have to have outside help to achieve this. You can list all the successful Hungarian startups: Prezi, Ustream, LogMeIn, NNG—they all became successful without considerable outside help.

End of part one, stay tuned for part two!

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