Interview with Gábor Bojár: Small Fish Catching up with the Big Ones? –The Chances of Hungarian Innovation in the Global Market

In Focus (Antall Józsej Knowledge Centre), Tamás Péter Baranyi, Zsombor Szabolcs Pál, October 2019, Budapest

You have managed to build a global company from Hungary; moreover, you started it in the Kádár Era, which was anything but supportive of private businesses. What was your secret, how was it possible to break into foreign markets in those days?

It was much easier than it is today. This would be the short answer. I was asked this question as early as 1989, when we opened our American office. The company had been operating for seven years then, and we had already had a perceptible market share. In that period, we got a lot of free publicity, since back then Hungary was an interesting story because of our pioneering role in dismantling the Iron Curtain. So the fact that a Hungarian company was present in Silicon Valley was an interesting story by itself, and journalists were swarming too. And the question was always the same: How was it possible to build a global firm in those terrible conditions at home, from behind the Iron Curtain, with no capital and no passports—in a time when the most up-to-date computers were not even available? My usual answer to this was—and still is—that it was easy, and, in fact, it was much easier for us than for our colleagues in the Silicon Valley. In this industry, the secret to success is to employ talented people. That is, if you can recruit the talent, you will win. After that, winning customers is easy. This means that the battle for talented graduates is much fiercer than competing for customers. The largest challenge for a Silicon Valley start-up is how to attract the best talent, since a talented graduate will either go for job security and apply to an attractive big company, or start their own business. It is not likely that they will go to another start-up. So, start-ups find it the most difficult to recruit young talent in Silicon Valley—and now in Hungary, too. When we started the business, this was far from the case at home, so our situation was really easy since young talent had no other attractive opportunities in Hungary. Here, it was a novelty to work for private companies where bosses were happy to elicit the best performance from their employees, where talent was appreciated, and the best were selected—as this is what makes a private business. This was a crucial aspect, since I could employ young talent in this context very easily.

In reality, all the other disadvantages turned out to our advantage. We did not have access to large and powerful computers, so we had to make do with very small machines. The PC revolution had just started, so this knowledge came extremely handy. Even the lack of capital became our advantage, since it forced us to rely on the customers from the start, rather than on investors for survival. In my opinion, the biggest problem is still the fact that there is too much capital on the capital market, therefore it is much easier to convince investors than customers. Because of this, start-up companies basically concentrate on investors, which is really detrimental since it is not the investor who is going to use the product. We did not have any investors, so we were forced to focus on our customers, which made our product better. And, as for passports, they also became a huge advantage for us. I did not have a passport back then, but when I received a letter of invitation to present our software in Vienna, I went to the Ministry of the Interior to apply for one. There was an old comrade there taking my application for a one-day exit visa. He looked at me and said: “Of course, you will have your passport within a week.” So, I started to shower him with my gratitude, but he stopped me: “You do not have to be so thankful, comrade; we will be more thankful to you if you bring hard currency into the country.” So, eventually, even this worked to our advantage, as when we proved that we could really sell our software in the West, everybody in Graphisoft got a passport, a rare privilege at that time. In addition, we could keep the royalties we received for our software in foreign currency, another rare privilege then. Now it is much harder to attract the best talent: everybody can have a passport, our currency is convertible, everybody can choose to work on a computer of their choice, so all those privileges are lost.

And if you had to start a company today, how would you get on about it?

Well, it would be really difficult. Now, I would also concentrate on recruiting the best employees, but it is much more difficult today than it was before. That is why we built Graphisoft Park. We provide an environment there that resembles Silicon Valley. We have to compete with that place, as the best talent can go and work even there if they want to. We are focusing on those talented professionals who prefer to stay at home but are looking for a Silicon Valley like environment. And I would try hard to point this out to them: if you want to work for a company where you have a say in decisions, come to a Hungarian firm. Because
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if you go to a Hungarian subsidiary of an American company, you cannot participate in the strategic decision-making. The strategic decisions are made in the headquarters not at subsidiary abroad, so if you want a say in the strategy while staying in Hungary, you should work for a Hungarian firm instead of a subsidiary of a multinational company.

This might work with Hungarians, but can you also attract foreigners with the same prospects?

With Graphisoft Park I can attract even foreigners. For example, when our software firm grew to be a really big global company and we needed somebody with more experience in running multinational corporations, we tried to hire an American star manager for this. It was not easy: we had to lure him away from our great competitor, while we could pay him only half of what he made there. But we offered him a much bigger stock option, so our offer entailed that, if the company was to be successful, he would make more money. For this plan to work, he had to believe too that the firm was going to be successful. It was hard to convince him of this as long as we met in London and San Francisco. Eventually, we could at least convince him to come here. He looked around the Park and said that his own company did not have such a place, and, if a firm built a place like this for its employees, it would surely turn out to be successful. So, this was how we convinced him. By the way, thanks to his stock option, he did make more money than if he had stayed at his former firm.

So what you keep hearing in the world of start-ups, namely, that it is enough to have a good idea, is not entirely true?

There are thousands of ideas, and only a few of them work. And not because the rest of them are bad, but because their originators have no perseverance that would ensure their success, and they are not flexible enough to see how to modify their original idea when they see it is not working. You have to be able to see how the market reacts and learn to refine your idea accordingly. I am often approached by young entrepreneurs who ask for my opinion about their business idea. It is not me though, but the market who must judge. So, I usually ask them who their competitors are. Eight out of ten of them answer that their idea is so brilliant and unique that no one else has thought about it, so they have no competition. To which, I usually say that they should forget about it then, because if no one else offers a similar product or service, it probably means there is no demand for it. The surest sign of demand is if someone else also offers something similar. Then, you must figure out what is there that you can do better. You must survey the market and see what is on offer, and how you could do that better. Your first task as an entrepreneur is to analyse yourself and find out what is it that you can do better than anyone else. Then you must find the market for it. You must learn what the market buys and why. And if you feel you can do it better, then you should. This is the winning strategy, which also worked for us. We could do 3D modelling. I had no intention to make, let us say, a new word processor because we had no reason to believe that we can make one better than Microsoft Word. Instead, we did 3D modelling and found out who needed it. We figured out what we did better than anybody else. What we were better at was that we developed for much smaller machines than others. Then we had to look for those who find this aspect important. We endured a lot of failure along the way before we found them. First, we wanted to sell to those who were already buying traditional 3D modelling for bigger computers. We thought that, if they got it on small and cheap machines, they would certainly choose this option. As it turned out this was not the case. Those who had the money for big and expensive computers would keep buying software for those. After a lot of trial and error, we realised that it was the architects who did not have the money to buy big machines, only small ones, so they constituted our best market. It was not a brand new idea, since 3D architecture software had already been available, but on large computers only. Larger architecture firms had bought these, so there was evidence that the product was in demand, but small firms had no access to these machines, only to PCs. So, we identified what it was that we did best, and we determined for whom it was important, as they were our target customers.

Do Hungary and the region have the ability and culture for start-ups to adapt to market needs?

I know of a lot of successful Hungarian software companies that have followed a very similar strategy and became successful on the global market, such as LogMeIn, Prezi, Ustream, TrezorIT, or Colorfront. There are a lot of firms that are successful globally because they know something better than the others and can sell it well. They also have something else in common: neither of them has applied for or received any state subsidy. That is why they have become successful. I mean they have not become successful in spite of not receiving state subsidy but because of it. Because sometimes state subsidy is even worse than too much private capital. Too much capital can hurt because it only teaches you what investors want, so you learn how to serve their needs, not the needs of the market, although some of the investors may know about the market too, and therefore they can give you useful feedback. However, the decision-makers of the state have no idea about the market. So, state subsidy cannot be useful since it only teaches entrepreneurs how to get funds from the state. Nevertheless, the state can also support businesses; not with money though, but with infrastructure and education. But if the state hands out money among businesses, it just does more harm than good.

Is this practice harmful conceptually, or do states actually do it badly?

States simply cannot do it well, because it is not what they are for. Today, one of the biggest problems of the global economy is that there is too much private capital waiting to be invested, a lot more than the number of businesses with the ability to make good returns. This is made even worse by the states’ pumping out more capital in the form of subsidies instead of doing their job: developing education and the infrastructure, monitoring competition. This also costs a lot of money, so states should spend their taxpayers’ money on such things rather than handing it out among businesses. Because this way businesses will only learn how to apply for funds, not how to make marketable products.

I have been invited to several committees that decided about the fate of these “support” funds. At first, I said yes, but I kept arguing that we should not give money, because it is not our job. Then I stopped accepting these invitations altogether. The point is that even if the state has the intention to entrust competent people with deciding about these project funds, state subsidy will never be effective. I cannot decide if a product is marketable or not. Even with my own products, it was not me who made this decision, but the market did. They say Europe is lagging behind the USA because they have more capital over there. But it is not the reason. As I have said, too much capital is harmful to businesses. We could actually benefit from having no surplus capital. What really makes a difference is that over there, people have a kind of “cowboy” mentality in their genes. The cowboy is out there on the prairie and has to survive on his own. In Europe, we are used to the state always coming to our aid as a benevolent uncle.

That is why it is an important question whether we, Hungarians, have the inclination to adapt.

It is not so much about adaptation. We should also plant the mentality that “God helps those who help themselves.”  People should understand that they must rely on themselves first of all, and not expect some divine intervention. The problem is that we expect the state to help, and that is why we are less successful. And I am talking about the whole of Europe now, not just Hungary. The state should provide the framework: legal certainty, protection against monopolies, clean competition—but they should not hand out money to businesses.

If European legislation is made for the breaking of monopolies, and the European Union establishes the legal framework for it, to what extend do you think such legislation will enhance European competitiveness? 

This would probably be a constructive initiative. Let me give an example of something that works better in Europe than in the USA. In the USA, software can be patented, unlike in Europe. Here, software is protected by copyright. In the USA, you can patent your software if it has some new solution. This restricts competition, since it means that no one else can come up with a similar solution. In the USA, they say this is necessary, because otherwise it is not worth investing. But that is not the case with software, so the European solution is better, since the crucial part of software development is not the idea but writing the code to realise it; that is the big task and it takes time. If the code is protected – and it is protected by copyright – it gives the originator enough time to realise the return. Because, by the time the others write their own code for it, the owner of the original idea will have made enough money to have a return on their investment. Here, the code itself is protected by copyright, so it is illegal to copy it. Using a different code for the same idea is substantial work, so the other businesses must work out the same thing in a better way, which generates competition, and that is good. But forbidding to make something similar restricts competition. But this is specific for the software industry. Of course, in other industries there is good reason for patents to exist. For example, in the pharmaceutical industry, it is relatively simple to copy a ready-made molecule, but developing and testing it required the large investment. So, it is sensible to protect a new drug molecule by patent. But in the software industry, I believe, the copyright is just fine.

You have mentioned that one of the state’s responsibilities would be to provide good education. Is this really the job of the state? You have said several times with reference to your own business venture in higher education that you want to prove it is possible to organise and run a school in a profit-oriented way.

There is profit in higher education, and there might be profit in public education as well, but that would come at the expense of equal opportunities. Higher education and public education are considerably different in this respect. In higher education companies often establish grants for talented students, and in this way some level of equal opportunities is provided. In public education, however, companies may contribute to equal opportunity only in the frame of their CSR activity, but this is substantially less than how they support higher education for their own selfish interest in exchange for access to talented graduates. So the state must play a more substantial role in the public education sector. In higher education, tuition is reasonable, and there can be profit and can be competition, so there is more room for private investment.

How would you compare your own higher education institution with North American for-profit universities?

In the USA, profit-oriented colleges and universities, which must make their private funds profitable, usually provide mediocre mass education. There are no elite schools among them. They usually say the reason for this is that mass education is much more profitable. I do not buy that, since there are premium products that are profitable in other industries, too; it is not only mass products that can make a profit. So that is why I decided to prove, at least on this small scale, that it is possible to run a profit-oriented elite university. However, I realised soon enough that it did not work, and I also figured out why. Private elite universities are not profit-oriented, but run on donations collected from rich individuals. And there are not too many newcomers among them. That is because the success of a university is built on the careers its graduates make. And that, in turn, depends not only on the quality of the faculty, but primarily on the incoming students. So, the most successful universities are the ones that can admit the best students. To attract the best applicants, they need to have an established reputation, which is hard to compete with, since about 100 to 150 years are needed to build that reputation. And this is where this whole system works well for social mobility: in order to uphold its reputation, a university has an interest in attracting the best students, so, for its own business interests it offers grants to talented students who cannot pay the tuition. With my own small school, I realised that it would be good if I could prove, on an international scale that it was better than its competitors—just the way that it had worked with our software. However, I realised along the way that, although I might be able to employ very good teachers, the real challenge was how to persuade talented secondary-school graduates to apply to my school and pay for it, too, while they might even be able to get a grant at MIT, Harvard, or Princeton. For my idea was that the institution should be able to survive from the market by collecting tuition. This was a rather hopeless aim, so the concept was modified: I did not establish a whole university but only a programme for students studying abroad. I said to myself: “If you cannot beat them, lead them.” So, if I could not compete with the best American colleges and universities, I decided to serve them instead. That is, I would provide a niche service for them, and, if I could be the best in that, these American schools would buy this service from us, rather than from others. So, I identified the best American colleges and universities as my market, and I did manage to make them buy the service from me. Now, we have an agreement with fifty good universities, in the framework of which their students in computer science are sent to participate in our programme as part of their compulsory study abroad semester.

You mentioned several times, that your school is more market oriented than others. But the need of the market today can be substantially different than it will be when the students graduate. Isn’t it dangerous to focus on the momentary need of the market?

When I say “market oriented” I do not mean to focus on the momentary requirements of companies, because it can change really quickly. We are focusing on bridging the chasm between academy and business. The key performance indicators in academy are the number of publications, impact factor, scientific prizes, etc., in one word: peer appreciation. In the world of business, however, the key performance indicator is the appreciation from the lay users. This is a huge chasm and if the engineering graduates inherit a mentality from their faculty to focus on peer appreciation, then they will design products that can be effectively used by other engineers only. This is why the world has so many terribly difficult to use products. We want to complement the science education with this kind of market mentality in order to enable engineering graduates to design really easy to use products.

By means of your study programme, you have ample opportunities to meet Hungarian and international students, as well. In your opinion, what are the differences and similarities between them? Do Hungarian students live up to international standards?

They absolutely do; the problem is that there are not enough of them coming here. Because this is an extra burden for them. American students have to spend a semester abroad, so they choose us as the best place for them, apart from the fact that Budapest is a very attractive city—obviously, this aspect also plays a huge part in their decision. It is different for Hungarian students: they attend their own university, and they can also take courses here at the same time. But it is extra work for them, even though they receive credits here that they can transfer to their own university. But because they have to travel to the other side of the city, it is such a burden for them that they will not take it;. And why is that? Because they can get a job without this extra work, as the companies are quick to hire them after three years of study, there is such a shortage of software developers in Hungary. However, the ones who make the extra effort and come to our courses are good, very good actually. We do have some success stories in which our Hungarian students started a business with their American fellow students, and they achieved success together.

We do understand, that the secret of success of a university is the ability to attract the best talents from high schools. But in order to do it they still need the best faculty as well. What makes teachers and professors good?

You are right, the quality of education depends on the teachers as well. That is why the teaching profession must be attractive, financially, as well, but not only financially. Ethically, too, but not only ethically. It must be attractive as a job, so that teachers have the opportunity to work creatively. A much greater freedom must be given to teachers. Hungary is also a good place because teaching mathematics has a long tradition here, and it is always been of high standard, thanks to our geographic position and history, since mathematics served as a stable ground and a common language to rely on for all the various cultures that came into contact with one another here.

You have repeatedly stated that the current, so-called “fourth” industrial revolution is an opportunity for our region to break out of its peripheral position and catch up with the core countries. Would you still say this is the case?

I still think that the IT revolution is bringing a tremendous transformation worldwide. In this transformation, Hungary and Central Europe could have a huge advantage if our leaders just took the opportunity. But for the time being, I can see no such initiative. Where would this advantage lie? Well, what made Western Europe rich? The discovery of America, when trade shifted to the world seas, and when nations good at navigation began to colonise. And then colonisation motivated the Industrial Revolution, and the colonisers became very rich. Today, the seas are not as important as they were a few hundred years ago, and the knowledge of navigation is not such much of an advantage anymore. Everything happens on the internet, and those who are good at mathematics can do better online because mathematics is the foundation of informatics. Our mathematical knowledge and tradition may serve as a cultural advantage similar to the nautical tradition at the time of the great discoveries. And with good leaders, we may be able to profit from this, similarly to how Elizabeth I discovered the potential in navigation for England. If she had not built a fleet, England would not have become a world power. So, there is a need for leaders who recognise the opportunity and adapt their politics and infrastructure to it. That is, our leaders should invest in the education of mathematics—just like Elizabeth I invested in shipbuilding.

So would you say the advantage of the Western countries in this area does not lie in the concentration of capital?

In this case, capital does not play such a significant role. In the first wave, the winners of the discoveries were the Spanish, not the English. Later, however, the English also realised that they had something to do in this area: they could sail like the Spanish, and they would be able to defeat them; all they had to do was to build a smarter navy. They did defeat the Spanish eventually. The situation is the same now; in those days, England was just as much behind Spain as we are now behind Western Europe. Even if we are not the first movers, we can be the winners in the end. The first movers have to experience many things and face a lot of dead ends from which their successors can learn.

Is it not contradictory that while everything—companies themselves included—is becoming more and more global, competitiveness is a local matter, depending on local politics?

I think globalisation could also benefit small countries, maybe better than America. While America is still an inevitable beneficiary of globalisation, in the American economy, as well as in the world, the role of small and medium-sized enterprises is increasing in comparison with multinational corporations. And we are much better than the Americans in making small and medium-sized companies competitive on a global scale. Because American small and medium-sized companies are spoiled by their huge domestic market, and, as a result, they primarily focus on it without the need to adapt to other markets. But we are forced to do so, since we have no domestic market. Thus, by adapting to the global market, we could be more successful with smaller companies. Of course, this is not the case with large companies, because large companies have the marketing power and credibility to establish “global standards” and they do not need to adapt to cultural differences. However, the ability of small companies to be successful on the global market is the greatest asset of small countries, because in the absence of a strong domestic market, small companies are forced to sell their products in countries with different cultures at an early stage.

Is it not often the case that, although a good idea appears on the local market in a small country, American companies can still dominate much of the world market by conquering their own large local market with a very similar idea? For example, Facebook, having its own large market in the background, was able to overtake other similar local sites, such as the Hungarian iWiW.

This is what the European Union is for, and why we think in terms of the EU market, since a truly single internal European market can compete with the American domestic market in terms of size. But indeed, it is a considerable advantage for American companies that, right from the start, they can work for a huge domestic market of three hundred million customers. If the European market was truly united—as it is not there yet—we would also be able to immediately think in terms of a market of five hundred million buyers. This could be an even bigger market than the United States has, but it would require much greater unity, for which we should give up a much larger chunk of our sovereignty: For example, we do have a common currency, but this would also require a common financial policy in which the countries would be subordinated to a common EU budget. The legal system, the regulations, and the tax system should also be much more uniform. A European federal tax would also be needed, to be paid not by the member states but the people so that they could feel they belong there. Taxes should be broken down to the level of taxpayers in order to enhance their sense of a common EU identity because, at the moment, people do not really feel part of the European Union. In other words, we should do more things together in order to be economically competitive with America. In the meantime, China is also catching up. There is an even bigger internal market there, so we are not only at a disadvantage to America but also to China because there is no real unity yet in the Union.

Do you find it problematic that global technology companies are often taking on state roles?

Of course, I do find it extremely dangerous. The role of the state is to represent the public. It is what the state does, whereas a private company must always represent a private interest. And there is nothing wrong with that. However, every time the public interest has to be represented, the active role of the state is inevitable. I basically believe in liberal economic policy, but there is one thing I am very conservative about: I believe in a very strong state. I do not at all share the liberal view that the state must be weak and withdraw from everywhere. Let the state be strong and fulfil its duties powerfully and well. But it should not appear in areas it has nothing to do with. For example, it should not act as a competitor in a competitive market—but as a regulator, in order to ensure that competition is fair, and monopolies cannot abuse their competitive advantage. This task is very complicated and requires a strong state to fulfil. In conclusion, I believe in a strong state that makes smart rules and enforces them competently.

And do you think the state should break the monopoly of big tech companies?

Yes, I think it absolutely should. From my own area, I can give an example of how big tech companies can abuse their market power and how the state can intervene and help. Our competitor is Autodesk, a US company that generates a multibillion-dollar turnover. Autodesk became an absolute global market leader with its AutoCAD product because everyone uses AutoCAD. Autodesk was able to foreclose competition and prevent new players from entering the market by protecting its proprietary data format as intellectual property. This means that anyone who could not draw in this format might as well have given up on the market because they could not exchange data with others. However, the US competition authority eventually ordered Autodesk to make their format public, thereby facilitating competition.

A slightly similar but perhaps more accessible, earlier example is the case of telephone exchanges. Initially, several telephone exchanges were established, and they began to compete with each other. At that time, networks were closed, which means that subscribers could talk to each other only within their own network but not with subscribers of other networks. So those operators that could gain advantage by having more subscribers were soon gaining a monopoly, as more and more subscribers chose them because they wanted to talk to more people. This, in turn, excluded competition. However, the state that regulated competition made it compulsory for the companies to open their networks to other operators. Competition can thus be maintained by such steps, as otherwise the firm with the competitive advantage may rely on tools that enable it to forestall further competition. And when that happens, no one wins, because there is no quality without competition.

Let me give you another example of how bad even a natural monopoly can be. Landline telecommunication networks still constitute a major advantage for their owners, and competition among them is still not as strong as, say, among mobile phone companies. As a result, a landline phone is not nearly as “smart” as a mobile phone. It could be, if the companies were up to it, but they are not, because there is no real competition in land line networks.

But will the breaking of the big US monopolies for the sake of creating a fair domestic market not give China – a country notorious for taking intellectual property rights lightly – a bigger advantage than desirable?

Protectionism is not really effective in solving economic problems, and maintaining monopolies for that reason would be a sort of protectionism. If you try to protect your own economy with such a measure, it might help for a while, but not in the long run. What helps in the long run is to be competitive and make better products than your competitors. Of course, there are two sides to every coin. If China does not act in the same way as the United States, then things will work unilaterally, and then trade wars like the present one will sometimes become inevitable. In the end, however, there is usually an agreement between the parties. It would be best if there was some worldwide regulation for such things. If Europe were united, it would have a bigger say in putting a regulation like this in place.

What do you think of the current economic changes, often called revolutionary, generated by information technology?

Personally, I do not like when people keep throwing around the phrase “Industry 4.0,” as it focuses on only one aspect of the IT revolution, namely, the potential for automation and robotisation, while far more profound changes are taking place today. Searching with Google has already transformed our lives to a much greater extent than, for example, Google’s car will. It is because the latter is only an automation solution, while the former is about how we gain access to information and how we control it. At present, we cannot even fathom how this will change our lives. The IT revolution is about information processing, management, and transparency. Thus, I believe that we are now experiencing the third IT revolution rather than the fourth industrial one. The first one was the emergence of information exchange, that is, the development of speech. It made man superior to animals, because with the help of speech and sophisticated information exchange, he was able to produce tools and arms. There is no animal that can give information to the other members of its species about how to make, say, a stone axe. The caveman, on the other hand, was able to do so, because he could communicate very complex information by speech. The next revolution was the appearance of writing, that is, storing information. It constituted an information explosion, since information became cumulative, and an extremely huge amount of it was accumulated. This lead to civilisations evolving. This, however, also became a big challenge, as storage generated so much information that was impossible to handle, and people could no longer find what they were looking for. And this is exactly what we have achieved in the ongoing revolution: an infinite amount of information has become manageable and controllable. We cannot stress strongly enough the importance of this. We do not know yet where the third IT revolution will lead the human species, but we can guess that the effect of this revolution can be much greater than the industrial revolution. We should be prepared for that.