During my years at one of Central and Eastern Europe’s largest and most active state-backed venture capital funds, I had a front-row seat to observe the two main participants of the VC world: investors and entrepreneurs.

State-funded venture capital has long been a widely contested tool for stimulating economic activity – one that raised many questions in my mind.

• Wouldn’t fostering entrepreneurial spirit or creating a more favorable tax environment be more effective than direct intervention?
• Does the additional capital risk propping up projects that the market has already deemed unviable?
• Can investment decisions truly be shielded from political influence?
• And ultimately, does the presence of the state distort the market?

While experts continue to debate these questions, my view is this: entrepreneurs and the state, though seemingly an odd couple, can in fact work together successfully.

When state involvement happens within a clear regulatory framework and is guided by transparent decision-making processes, it can become a powerful, long-term instrument for driving growth. One that transcends individual economic or political cycles. We’ve seen this model work in multiple countries.

But before I dive into why I believe this collaboration can be both strategic and effective, let’s first take a brief look at how Hungary’s venture capital market has evolved over the past few years.

A SNAPSHOT OF THE HUNGARIAN STARTUP ECOSYSTEM

As for funding volumes, Hungary’s startup ecosystem experienced a dramatic shift between 2020 and 2024. While 2021 was a year of abundance – with a record-breaking €180 million investment into local startups, driven largely by massive state-backed capital injections – by 2023, this figure had plummeted to just €56 million, less than a third of the 2021 total. In 2024, the decline appeared to level off, with investment volumes hovering around €54 million.

This downward trend was the result of both global and domestic factors. Macroeconomic uncertainty, increasing caution on international markets, rising euro and dollar interest rates (which made less risky investments more attractive), the phase-out of several government- and EU-backed funding programs, and a noticeable decline in the appeal and competitiveness of the Hungarian startup ecosystem all contributed to the downturn.

To put Hungary’s capital access into regional perspective, the following chart illustrates per capita venture capital investment across Central and Eastern Europe in 2023—offering a stark visual comparison.

Source: dealroom.co, „Central and Eastern European startups 2024”

While the CEE region and the broader European startup ecosystem experienced a decline in funding, the drop was far less pronounced in Estonia, Lithuania, and Latvia. The difference in scale is clearly visible in the chart.

When we examine the share of startups that have raised at least €1 million and go on to achieve unicorn status, Hungary in 2023 ranks at the very bottom. With just 0.7% of such startups reaching the billion-euro valuation threshold, Hungary lags well behind both the Central and Eastern European (CEE) average of 3.2% and the broader European average of 2.1%.

Source: dealroom.co, „Central and Eastern European startups 2024”

In terms of startup success, Croatia, Ukraine, and Estonia stand out, generating unicorns at more than double the rate of the CEE average and nearly four times as many as the European average.

WHEN THE STATE SWIPES RIGHT: PUBLIC CAPITAL IN STARTUP LAND

And now, let’s take a closer look at the curious marriage between the startups and the state.

It’s a relationship that’s less about harmony and more about strategic tension – like ‘Mr. and Mrs. Smith’, but with pitch decks and policy briefs.

State involvement in venture capital, when conducted within regulated frameworks and through transparent decision-making processes, can serve as a successful instrument for promoting economic growth across political and economic cycles. But what justifies this involvement?

According to the renowned historian Yuval Noah Harari, trust is the raw material from which money is minted. The state, by placing trust in promising yet high-risk early-stage innovative companies, provides capital to support their launch. These startups often struggle to attract private investors due to their high-risk profiles. With state assistance, these ventures can survive critical early phases, making them more attractive to private equity funds and allowing them to secure further financing on more favorable terms.

Government programs that facilitate the emergence of such companies contribute to job creation, enhance competitiveness, and expand the scope of the information superhighway and its associated services. In short, they provide momentum for economic growth.

Furthermore, if state-managed funds establish strategic collaborations with private investors, universities, and incubators, they can foster the development of a sustainable and efficiently functioning startup ecosystem in the long run.

ESTONIA, THE STARTUP ENGINE OF THE BALTICS

Over the past two decades, Estonia has undergone a remarkable transformation, emerging as a key player in the global startup ecosystem. This success has been largely driven by the proactive role of the state, which has fostered investment in innovative and high-growth Estonian enterprises while creating a supportive business environment.

The Estonian government recognized the significance of digital technologies early on and developed an advanced digital infrastructure, including secure digital identification and e-governance services.

This has streamlined administrative processes for businesses and made the country an attractive destination for international entrepreneurs.

Beyond that, in 2014, Estonia launched the e-Residency program, allowing foreign nationals to obtain a digital identity and establish online businesses within the country. This initiative has also significantly contributed to the growth of the startup sector.

Let’s look at a few success stories that the reader has certainly heard of.

🚀 Bolt (formerly Taxify) founded in 2013 has quickly become one of Europe’s leading mobility platforms, offering taxi services, car-sharing, and food delivery. Today, it operates in over 45 countries and 500+ cities, primarily across Europe and Africa. Bolt’s founders cite Estonia’s startup ecosystem and digital infrastructure as key factors in their success.

🚀 Wise (formerly TransferWise) is a fintech company which soon became one of the world’s most recognized international money transfer platforms. Following its founding in 2011, Wise currently operates in over 170 countries, serving millions of users, including both individuals and businesses. A key element of its success lies in its ability to offer a faster and more cost-effective alternative to traditional banking systems.

🚀 Skype revolutionized global communication, particularly in business and personal interactions. While it is no longer under Estonian ownership, its founders included Estonian entrepreneurs, contributing to the country’s reputation as a technology hub.

Building on the above successes, the government of Estonia remains dedicated to digital innovation, with its startup-friendly regulatory environment further strengthening its position as a global hub for entrepreneurial achievement.

A TEST OF LOVE: THE ACHILLES’ HEEL OF STATE VENTURE CAPITAL

Despite the success stories, state-funded venture capital investment is a double-edged sword: while abundant capital can be a boon, it also carries inherent risks. How can the vulnerabilities of state involvement be mitigated?

Resisting Temptation. The most crucial safeguard is ensuring that investment decisions remain independent of political interests. Political affiliation and loyalty must not play a role—only business considerations should matter. The concern naturally arises: what would prevent state venture capital funds from making biased decisions? The answer lies in electoral incentives. The economic climate significantly influences voter preferences, making economic growth and job creation powerful motivators for selecting high-growth investment targets with the potential for international expansion

A Prenuptial Agreement. The rules of engagement between the state and startups must be clearly defined in advance. Rights and obligations, decision-making authority, and responsibilities must all be outlined. Moreover, the division of jointly acquired assets at the time of exit must be pre-established. And this does not even account for the complexities of “polygamy”—co-investor involvement and its regulatory framework. These parameters must align with market standards to ensure that the key to success—the founders—remain both comfortable and motivated within the partnership.

Economies of Scale. If state-managed funds are too small, they fail to stimulate the ecosystem, do not drive sector activity, and cannot reap the benefits of portfolio diversification. Conversely, excessive liquidity crowds out private investors and distorts the market.

Experienced Professionals. The success of state investments depends on selecting seasoned market experts and establishing an appropriate incentive system focused on long-term results. Merely increasing venture capital supply is insufficient. Investors must identify high-growth potential businesses with significant social and economic impact, support startups with expertise, foster entrepreneurial mindsets, and facilitate exit opportunities.

Market-Driven Approach. By nature, venture capital cannot predict which industries or regions will produce the most promising innovations. Thus, state administrations designing investment programs must refrain from artificially restricting the scope of potential investments.

MARRIAGE: PROS AND CONS

Given the considerations outlined above, if we get back to the question: can this peculiar marriage between businesses and the state work? – my answer is that the potential for success is certainly there. However, we must ensure that Karl Marx does not make an unwelcome return. Let the market rule the household.

The world of startups is more exciting than ever—and let’s be honest, it’s about way more than just foosball tables and beanbags. That’s exactly why I’ve decided to explore the most intriguing questions in a series of posts.

Next up: what really makes a startup succeed? A brilliant idea? Perfect timing? A rockstar team? Or is there something else at play? Don’t go far, part two’s coming soon.

The insight was written by Dóra Jánosi, Faculty member and Program Director of the Finance for Executives Program at SEED Executive School.