If you’ve been following Hungarian news, not much of it has been good. But let’s not get into that. When the news is bad, you can also make headlines with a contrarian story.

This week the New York Times profiled three local startups that are defying Hungary’s dire economic climate.

Those three startups: Prezi, Ustream and LogMeIn.

The story is familiar to those of us who have been following the Hungarian tech scene. What’s news is that a handful of new companies are finally gaining traction. And Hungary’s startup scene is becoming increasingly interconnected:

“The ecosystem in Hungary is improving; young entrepreneurs and big investors stimulate each other,” Mr. Szabics [portfolio.hu] said. “There are a number of mentoring programs to convince young people that it’s worth it.”

(This is a trend I’ve also observed, and is worth a separate post.)

Keep in mind that none of these three startups is exactly new. The oldest is LogMeIn, founded in 2003. Could you even call this company a startup at this point?

Note also that each of these three companies has significant foreign participation (founders, executives, capital). Each of these companies makes the majority of their revenues outside of Hungary. And it’s a sure bet that the rest of the world had no idea these companies were founded in Hungary. (Until now.)

When I was at IndexTools (now Yahoo Web Analytics), we made no effort to tell people we were Hungarian. Quite the opposite. We preferred they didn’t know.

The New York Times doesn’t see much advantage in Hungary, either:

Some investors and entrepreneurs shrug off the country’s economic and political situation. Still, with government bonds rated junk, a large budget deficit, and the country’s combative prime minister, Viktor Orban, battling Brussels over his economic policies, negative growth is forecast for this year and the forint, the local currency, has been very volatile.

So the question is do these three companies represent a trend? Or are they exceptions to the rule?

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The event is very international – usually at least one pitch is presented by a team from abroad, especially from close-by: Slovakia, the Czech Republic and Hungary.

InitialFactor Afterworx always takes place on the second Thursday of each month, starting at 6.00 p.m. at Spengergasse 37, 1050 Vienna.

If you’d like to be invited, write a short mail containing your full name, your organization as well as a 1-sentence-statement about why you are interested in startups to afterworx@initialfactor.com .

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The 12 Entrepreneurs are a recently-formed group of European entrepreneurs that want to shake up the EU startup scene. As the narrative goes, they met each other in Silicon Valley, but rediscovered Europe.

Each of these young entrepreneurs had come to the United States because the opportunity wasn’t sufficient at home. Rather than accept the status quo they decided to change it.

[youtube z7CJnwFJbVI]

If that video whets your appetite, you can also read this five-page interview (links to a PDF).

Here’s a pithy quote from that interview:

Europe doesn’t believe in its own assets, Europe is not a risk-taker; there are multiple barriers to capital and growth for European entrepreneurs and no culture of failure. - Emmanuel Carraud

Naturally, you can also find The 12 Entrepreneurs on Facebook and LinkedIn.

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Friday’s kick-off speech was given by serial entrepreneurs Markus Wagner and Oliver Holle who are about to launch Austria’s new Angel fund ’InitialFactor Speed Invest’ this Monday.

Disclosure: As a member of STARTeurope, I’m one of the co-organizors of STARTup live.

That said, I want to state that this has really been among the two best startup workshop I’ve seen in CEE region (the other one was IPO48 in Prague). We sold out all tickets.

In hosting startup events, I believe it pays off to concentrate on one sector – in this case web and mobile ideas – because that brings together the smartest brains interested in one area, setting free enormous creativity.

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This is my first blog post to you on nowEurope – thank you for your interest! Let me first introduce to you what I do and how I intent to write for you here.

I’m a German biz graduate, 26, living in Bratislava, almost daily commuting to Vienna and thus connecting the startup communities of Austria and Slovakia. And that’s what I want to write about because I believe there are very attractive opportunities in transnational entrepreneurial action and more people should know about them.

When publishing, I’m dedicated to the KISSS principle – Keeping It Short, Simple, Sexy. That’s why I want to only cover one thought at a time and try to keep each post between 100 and 200 words. Hope you like it and I’m always happy about straight feedback :-)

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I especially like how Raffael introduced himself by email:

I’m a frequent reader of nowEurope and I love it! I think you are doing a great thing that very much reflects my own transnational reality since I’m a German, living in Bratislava, working in Vienna, being an active member of STARTeurope from Austria and Startupcamp Slovakia.

Welcome, Raffael!

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I always enjoy closing the loop, so consider this an update on my previous two posts about the IndexTools story (here, and here).

Few people in Budapest know that Yahoo Inc [YHOO] operates a small technical division in a warehouse in the ass end of the fourth district, an area I not so affectionally refer to as Cabbage Town (Kápostásmegyer).

Most of the original IndexTools developers still work for Yahoo, but the sales and marketing staff were let go, shortly after the acquisition in April 2008. CEO Marton Szoke, now a certified gazillionaire, still works with his old IT team, presumably with golden handcuffs securing him to his desk. Emer works directly for Yahoo, as an analytics account manager.

One thing I wanted to know is why it’s so difficult to get a YWA account. I had assumed the service is still in beta, while Yahoo continues to upgrade the server infrastructure. Apparently that happened fairly quickly. As Emer explained to me, the actual reason is the YWA business model. She also described some of the changes to the Indextools product, as well as the scrappy little startup I once knew.

Let me start by telling you why YWA isn’t open to the general public, and how to get an account.

Yahoo offers its analytics service as a free add-on to Yahoo Search Marketing, as well as to selected tiers of Yahoo Merchant Solutions customers. The company decided to prioritize these customers over individual users, to ensure a high level of user support. Yahoo also needs to conserve its server resources in order to enhance the performance of its reporting interface. In contrast to Google, YWA offers (nearly) real-time data reporting, which is a much more resource intensive service to operate.

For those interested, here’s the Yahoo help page describing how you can get a Yahoo Web Analytics account.

Yahoo’s analytic offering inevitably draws comparisons to Google Analytics. The most striking difference, from a casual user perspective, is real-time reporting. While GA takes up to 24 hours to update, YWA displays the latest traffic data, usually within 10-15 minutes. This feature greatly eases the process of troubleshooting an installation, optimizing ad campaigns and so on. Who wants to wait 24 hours?

The other big difference, with YWA, is drill-down reporting. Nearly every report allows you to click through the data to another level of detail. I find this navigation metaphor much more intuitive than GA. However, I also admit I am biased. YWA offers an extensive list of advanced analytics features, which I won’t get into here. Rather than comparing YWA to GA, the more appropriate comparison is with the market leader, Omniture.

Unfortunately, when it comes to user interface, Google is still streets ahead. During the IndexTools period, user interface always took a back seat to feature development (a strategy later justified by the acquisition). Yahoo intends to address the user interface, but the company’s first priority has been developing the back end. As part of joining Yahoo, the Indextools product needed extensive upgrades to meet Yahoo’s standards for security and reliability. That work, invisible to the casual user, is now complete.

Joining Yahoo has brought one additional benefit to the old Indextools feature set. YWA now uses the Yahoo cookie to extract much more granular demographic data from user traffic, including gender, age and interest. Before anybody screams ‘privacy!’ I should point out this data is only presented in an aggregated form. Individual user data and identity are not revealed.

While most of the original Indextools developers I knew still work at YWA, the company is no longer a scrappy little startup. Joining Yahoo has brought the team and its product under intense public scrutiny. When I first started at Indextools, from time to time the developers would casually reboot the entire system, resulting in a flood of support tickets, email and phone calls. Under Yahoo, the developers have to follow strict procedures.

Security and reliability are a top priority, which required extensive technical upgrades to meet Yahoo standards. Privacy is no joke, either.

One upside is the team now has the resources of a multinational technology company, with server infrastructure ringing the globe. The team no longer face the ‘succeed or die’ pressures of a startup. This is a different kind of pressure, more formalized and structured. It sounds more like … a regular job.

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Featured in the photo from left to right are me, Zuzana Lettner and Katharina, and Vlastimil Vesely. Zuzana (VITE) was our original project coordinator, but roughly halfway through she project she left for her maternity leave. Christoph Henrichs took her place and did an excellent job of finishing up the project. Thanks also to Bernhard Schmid, who took the photo.

My colleagues did a good job of summing up the conference and so for that, I will refer you to the ICT Centrope web site.

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The evening included a panel discussion and dialogue.  The panel was made up of representatives from six leading US venture capital firms:  Highland Capital Partners; Battery Ventures; TVM Capital; Atlas Venture; Bain Capital Ventures; Commonwealth Capital Ventures; and Greylock Partners. These investors offered their views on the health of the US industry; what makes the investment climate in Boston different than Silicon Valley; and the importance of talent in the investment.

Here are some panel discussion notes. These views were shared by the majority, but I provide this recap with a disclaimer that these are opinions and interpretations.  Perception may not match reality, but can influence reality.

Key industry trends

• M&A market as a proxy for VC health
• The time line to exit is being extended to seven – ten years
• Invest in the first-mover
• The majority of investments are not in information technology

There’s a positive correlation between the merger and acquisition market (M&A) and venture capital.  M&A deals are the primary source of liquidity.  Technology M&A deals move in lockstep with the NASDAQ.  When looking at the health of the industry, M&A trends can provide a good proxy.

There are longer time lines for deals. Where investors used to expect an exit within five years, many of the panel firms are now expecting to wait eight to ten years for an exit.  Because of this extended horizon it’s now even more critical to work with the right people. Relationships are more important than ever because the investor and entrepreneur are tied together even longer.

When evaluating an opportunity, look at the strategic importance of the deal, the size of the market, and how the team executes against the opportunity. Look for the deal or team who had the initial market opportunity, product, technology, or idea and stay away from the second or third investments in the market. There are a couple of reasons to look long and hard before investing in the second or third team as these trailing ideas tend to:

1. water down the market valuation
2. pit the VC against the VC to dilute potential returns, and
3. the Internet buzz for the first-mover can make the hurdle rate for all involved unattractive (regardless if the product or service is better, think Zappos or Amazon there may be others who do it better, but would you invest in someone taking on either?)

Despite a perception for information technology getting the bulk of VC funding, the reality is 50-60% of funding is going into Life Sciences/Biotechnology (meanwhile, Dow Jones VentureSource shows on third of all VC investments are heading into clean technology and bio technology).  The biggest opportunities are in clean tech, the mobile market, and cloud computing.  While IT still gets the investment headlines, IT is clearly not the focus for a majority of funding or opportunity.

Tech leadership: East coast vs West coast

Over the past 20 years, here in the States, four or five regional investment centers have jostled for the investment and innovation position.  The regions usually mentioned are:

• San Francisco, CA;
• Boston/Cambridge, MA;
• Austin, TX;
• Seattle, WA;
• Raleigh-Durham, NC; and
• Washington, DC

Today we have a one-horse investment race. California’s Silicon Valley has an overwhelming lead in equity investment deals, and a view as an epicenter for industry-changing businesses.  As the primary destination for creative talent, California may continue to widen its lead as an innovation center. As a result, many here in the North East are casting their gaze towards Silicon Valley for first-tier deals.

Boston, Cambridge and other New England areas are fighting to remain relevant. One Boston-based VC firm, launched in the mid-60s, first opened their Bay-area office ten years ago. Now almost two-thirds of their investments are in the Bay area.  A second VC firm mentioned quoted Bay-area deals are happening at a rate of five for every one in Boston.

The value of risk : East coast vs West coast

Failure and risk are looked at completely differently on the West coast compared to the East coast. On the West Coast, failure seems to be viewed as a criteria for success; an entrepreneur is looked at with a sense of greater confidence as they have proven they’ve made mistakes and had a greater opportunity to learn from those mistakes. On the East Coast, failure seems to be a red flag.

The panel’s recommendation was to look at failure, or risk, differently.  VCs and entrepreneurs could take a West coast view to fail quickly as positive.  Failing quickly costs less money and failing quickly provides opportunity for critical change. The perception for many on the panel was that the Boston investment culture looks at failure at the cost of opportunity. Failure is not the negative too many view it as.

This view from the evening VCs does not align with the findings of the Beacon Hill Institute, a Boston-based learning and research center. In their Ninth Annual State Competitiveness Report, that includes state-by-state results, the group stated:

Massachusetts also continues to outperform all other states in technology, as measured by grants from the National Institutes of Health, new patents, and its high tech workforce. The Commonwealth ranks first in venture capital per capita, making it, by that measure, the most attractive state in the union for startups.

It is easy to see Boston’s VC community and a Boston-based think tank have divergent views of the region. Like most due diligence, consider the source and the agenda before taking information at face value.

The value of the team

The most frequent comments of the night stressed the importance of a strong management team. However, the panel offered little concrete advice on how to assess human capital, or how to factor a human capital variable into deal valuations.

For the Entrepreneurs

Several investors emphasized that entrepreneurs should exit when they, the team, want to sell, not when the VC wants to sell.  As an entrepreneur you are building a company and the exit will present itself. Don’t push for an early exit, unless you are looking to just cash out and not build a company.

What this means to the VC is that from day one of the relationship all key people need to share a vision. When the investment management team and entrepreneur team share a vision there is a strong opportunity to make a great partnership and share in the upside.

What insights are transferable to other regions, industries, or investors?

• Where is the human capital talent going? Despite any report or projection, people vote with their feet.
• When evaluating opportunity, how do you identify and manage risk.  How is failure, and by inference, risk, tolerated?
• When assessing deals can you create a healthy environment for creativity (innovation) or a healthy environment to take risk or are these out of your control?

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My interest in Hungary and the region stems from an opportunity to study an advanced business degree in Budapest.  After living in America and China, two countries that dominate both their region and much global news, Hungary, the size of Pennsylvania, was a distinct change of perspective.

In 1999 I arrived in Hungary, straight from China.  The country and many of the seven countries that border Hungary were shaking off decades of planned-economy paralysis.  The region was entering a renewed sense of opportunity and Hungary was stabilizing its voice in the region, in Europe, and in the world.

The opportunity, and the challenge that lay ahead, for Hungary and others in the region was to set the proper goal.  The more I worked and studied at Central European University, the more I discovered a region, from the Czech Republic through Mongolia, full of immensely brilliant, able people to have an impact on a global scale.  With a brilliant work force, many in government chose a low-wage competitive strategy.  I felt then, as I do now, the race to the bottom is a short-term solution.

I discovered, in Hungary, a country that had:

• +  a century of education dedicated to math and engineering;
• +  geographic position at the border of the largest middle market in the world;
• +  an economic and policy opportunity to become harmonized with the greatest economic experiment in centuries:  The European Union

Any review of Forbes, Fortune, Economist, Financial Times, and other glossy magazines were touting CEOs leaping into China and gave a sense if you were not heading to Asia you were missing the boat.  While the journalists and followers were touting the Asian Tigers, I landed in the most fertile opportunity.  In March 2000 I started The Arctic Group to work with the government on technology transfer and foreign direct investment.  The future for Hungary and the region was not bright, but incandescent.

I now live in Boston and see regional investment and competitive advantage from a world view of options.  Just as a private equity team manages a portfolio of risk, regional and competitive advantage plays a portfolio of risk made up of human capital, government policy, financial investment, and organization leverage:  each with their own agenda that plays, too often, against each other.

I continue to look at Central and Eastern Europe as a unique opportunity.  My return to Boston shines a perspective on how this city and this country competes and invests, this is the perspective I look to contribute to nowEurope.  I hope the comparisons draw insight on what works, what is not working, and what might offer an alternative thought.

I continue to believe, as I did founding The Arctic Group, that “diversity in thinking, diversity in planning, and diversity in execution” is the key to innovation.  There are two choices in business:  either do it cheaper or better.  Each strategy has merit, but either position requires commitment.

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