"Life still exists here. And the market, and money," said one of the investors, not hiding his surprise, after a recent visit to Ukraine. However, this is no surprise: despite nearly 2 years of war, people try to function normally, and entrepreneurs - to develop businesses. And the prospects are only better.
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On the eve of the Russian invasion, the Ukrainian startup ecosystem was one of the most dynamically developing in Central and Eastern Europe. According to the report Central and Eastern European startups 2022 prepared by Google for Startups, by the end of 2021 its total value had reached over 27 billion euros - the most in the modern history of the country. It was thus almost four times higher than at the end of 2020 and more than nine times higher than in 2017.
The excellent situation in the market was also evidenced by the good mood of investors - Ukrainian startups collectively raised 832 million dollars in funding from venture capital funds in 2021. Additionally, at the turn of 2021-22, entrepreneurs recovered from the pandemic stagnation and again began to successfully hire new people. At the same time, national investment funds, accelerators and business angels were fully operational throughout Ukraine, led by institutions such as the Ukrainian Startup Fund (USF). And it was in these circumstances that the blow from Russia came.
- Last year's invasion brought changes in all areas of social life. Business is no exception - wrote in 2022 Pavlo Kartashov, CEO of the Ukrainian Startup Fund, in the introduction to the report Russian Aggression in Ukraine: How do Ukrainian Startups Survive prepared by the Polish-Ukrainian Startup Bridge.
- The war has become the toughest of possible tests of the innovation industry's resilience: will the ecosystem be able to withstand, will it be resilient enough? And most importantly, will it be possible to reform work in such a way as to help defeat the enemy - Kartashov wondered at the time.
More than a year and a half after the start of the Russian invasion, it is already known that Ukraine has coped much better than everyone assumed - both with the defense of its territory and with maintaining the dynamics of the business sector. And it didn't have to be that way, because the first days of the war, obviously, proved to be a huge challenge for local entrepreneurs.
Let's start with a handful of data. According to the aforementioned report Russian Aggression in Ukraine: How do Ukrainian Startups Survive, the outbreak of war with Russia initially significantly slowed down the Ukrainian startup market. 12% of entrepreneurs ended their activity after February 24, 2022, 35% of companies had to lay off some employees, and 48% had to reduce salaries.
At the same time, 56% of startups found themselves in a situation abstract from the perspective of Europeans in the 21st century - they had to send at least one member of their staff to the front. The ranks of the Ukrainian Armed Forces or Territorial Defense were even joined by 7 thousand people working daily in the technology sector. In total, as many as 66% of Ukrainian companies that participated in the cited study felt the negative effects of the outbreak of war in some way.
– For the first 2-3 weeks of the war, it was hard to understand what to do. Our team quickly united and decided how it could be useful to the state […] - Kartaszow recalled. - The Ukrainian technology sector had to adapt to the realities of war, but it still shows colossal resilience and operates with almost full efficiency despite extraordinary conditions - he argued.
According to data from the Association "IT Ukraine", in the first six months after the outbreak of war, 95% of domestic technology companies retained their contracts. Meanwhile, an analysis by the National Bank of Ukraine shows that during the same period, the entire IT industry recorded over 3.5 billion euros in profit from the export of its services and products - 23% more compared to the same period in 2021. In the first 10 months of 2022, IT service exports increased by 9.9% compared to the previous year and brought in over 6 billion dollars in revenue. Moreover, during the war, two Ukrainian companies - airSlate and Unstoppable Domain – joined the ranks of unicorns, i.e., companies valued at over a billion dollars.
– We are still struggling with numerous problems, and the system, without a doubt, has suffered losses in every area. However, the war also opened up many opportunities: it forced companies to develop even faster and take on new challenges. This is a new competitive environment in the global landscape, based on
war-life balance - Daria Janijewa, Director of Investments at Sigma Software Labs, argued in the pages of Global Corporate Venturing.
After the outbreak of war, companies had to learn to operate in extreme conditions: select and filter quality customers and look for new ways to reach consumers and financing. According to the report Russian Aggression in Ukraine… of the Polish-Ukrainian Startup Bridge, only 23% of companies decided to limit their activity exclusively to the local market. The rest - had to open up to the world by necessity.
- The result of the invasion was a significant loss of earnings from customers in Ukraine and the need to adapt to international sales, which can provide local companies with a greater chance of scaling the business - argues Diana Koziarska, managing partner at SMOK Ventures.
- From the perspective of a person investing in technology and software products, I see how much this area has advanced and how it is becoming an important element of the economy. In the long term, these changes will affect the creation of a stronger business and technological ecosystem and will push towards faster adaptation to new conditions in industries that resist change more. I believe that Ukraine and its technological ecosystem will emerge stronger from this - adds Koziarska.
Meanwhile, in response to the crisis, new directions of market development began to emerge organically. Elena Malitskaja, CEO of the ISE Corporate accelerator, lists five such trends that "ultimately have a chance to lead to the recovery of the startup ecosystem and the building of solid foundations for the future".
The most important of them is the emergence of a new wave of company founders coming from the army and navy. These people - most often veterans of armed actions - are, in Malitskaja's opinion, highly valued by global VC funds, thanks to qualities such as discipline and mental resilience. Their knowledge and experience will be even more needed as the war has forced a turn in the Ukrainian market towards the development of military technology sector.
- About 30% of Ukraine's territory remains mined. According to some forecasts, demining it may take from 5 to 10 years. This is a new market, the value of which is estimated at 500 billion dollars - argues Malitskaja.
The remaining three trends are better integration with the global investment ecosystem, increasing importance of female leadership, and Ukraine's transformation into a new geopolitical center of Europe, which in the future may lead to further investments. And these are indeed already starting to flow into the country in a broad stream.
In December 2022, the European Commission announced that in 2023-24 it will allocate 13.5 billion euros under the Horizon Europe program for research and innovation in energy, environmental and digital solutions. It is already known that part of these funds will be allocated exclusively to support Ukraine and increase the access of local academic communities to European research units and scientific infrastructure.
At the same time, in May 2023, the European Commission announced the creation of a consortium called Seeds of Bravery, whose task will be to utilize the funds allocated by the European Innovation Council to support the Ukrainian innovation community and its integration with the European network. The Council has earmarked 20 million euros for this purpose.
– The development of innovation is one of our priorities – assured in a press statement Mykhailo Fedorov, Deputy Prime Minister and Minister for Digitization and Transformation of Ukraine.
– It is a way to develop the digital economy, increase GDP and strengthen our army. As part of the Seeds of Bravery program, we plan to help about two hundred Ukrainian startups. This is a chance to develop our innovation community. We believe in the ability of our entrepreneurs to implement revolutionary ideas. That's why we are grateful to the European Innovation Council, which also sees this potential and gives a powerful impulse to the development of innovation in Ukraine – added Fedorov.
All these actions have resulted in Ukraine still ranking high in the Global Startup Ecosystem Index 2023 by analysts from the Startup Blink research center. It currently ranks 49th in the world and 30th in Europe in terms of attractiveness from an investor's perspective.
Most importantly, the citizens of Ukraine still unwaveringly believe in victory over Russia and that their country will be reborn stronger after the tragedy of war. According to Roman Nikitov, director of ICU Ventures, the investment community should therefore take advantage of this faith and enthusiasm and start exploring and analyzing the Ukrainian market for future prospects - rebirth always brings a number of new opportunities.
– Is it too early to invest in Ukraine? Don't be those who will soon regret this thought – Nikitov stated.
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