Likely, you have all heard of a successful startups with Ukrainian roots. Grammarly, DepositPhotos, Looksery. Ukraine's rich technical tradition and one of the highest number of developers makes it unsurprising that some of the startups originating from this country become renowned globally. What is surprising is that so very few do. Ukraine dwarfs most of its fellow Eastern European neighbors when it comes to sheer talent volume and yet lags embarrassingly behind when it comes to the number of successful startups. What holds this sleeping giant back?
I am lucky enough to have had a front-row seat, among others as part of the team that launched the first British startup accelerator in Ukraine - the Blue Lake Accelerator that allowed me to first hand observe the development of this exciting ecosystem. I would like to share what, in my opinion, are the most significant challenges and what makes Ukraine's nascent ecosystem truly fascinating. I will from time to time refer to the UK tech scene as a benchmark to offer contrast or similarities to Ukraine.
Ukrainian Startup Ecosystem
Ukraine's tech sector has shown a remarkable growth over the last few years. Ukraine is among TOP 10 markets with the largest number of high-quality developers in Europe - 184,700 professionals in 2018. Over the past decade, this concentration of talent leads to the rapid growth of new tech startups, which in its turn attracted the attention of the investment community. Total capital invested in technology firms in 2018 was $336.9m a 30% growth compared to the previous year. The same pattern is followed by the total number of deals - 115 in 2018 compared to 89 a year before. Ukraine has given rise to its own unicorns like Grammarly or GitLab. With so much going for it, why isn't then Ukraine, not a true European startup powerhouse?
Founders Flee Abroad
There are several significant restraining factors including quality of the local legal and financial systems that are some of the main culprits that prevent investors both local and foreign from becoming more active.
Most of the investors that get involved in Ukraine's tech scene are foreign, which, on the face of it, should be a positive sign. In reality, most (read all) investments in Ukraine's startups are made into the legal entities based outside of the country. There is a good reason for that. Investors who would try to implement a direct investment into a Ukrainian entity, would be subject to the Ukrainian judicial system that few (local or foreign) have much trust in. Barriers to dividend and profit repatriation (recently relaxed) have not helped in inspiring confidence in Ukrainian jurisdiction. There is a good reason why even the Ukrainian oligarchs prefer to settle their difference in the European courts and not at home.
It is not surprising then that one of the first questions UK investors ask when discussing a potential investment in a Ukrainian startup ‘Is the company registered in Ukraine?’, with the only acceptable answer being ‘no’. In those cases where a startup does manage local seed level funding, follow on investors in larger rounds would inevitably require a foreign jurisdiction to safeguard their investments. It is hardly a surprise that the unicorns mentioned earlier are both registered in the US. Consequently, this leads to outflow of intellectual property right, which is transferred outside of Ukraine, if the entity is registered abroad.
Insufficient Pre-Seed Startup Funding
A separate question is funding. In the UK £10K-15K initial investment from family and friends is not unrealistic. The average income in Ukraine is far lower, credit rates are non-affordable, the local venture investment market does not exist yet leaving startups with few, if any, funding options. There is a lack of real startup accelerators, that provide not only expertise but also funding. There are around 200 startup accelerators in the UK, in Ukraine, the number barely reaches 10.
More information about available funding opportunities in Ukraine may be found at the national tech platform and the latest market surveys.
Ukrainian Startup Ecosystem Infancy
The startup environment in Ukraine is still rather isolated. Comparing say to the UK, information, opportunities, high-level expertise, peer experience is far more available. Government level, international and other support, while present, is still a far cry from the opportunities I see startups obtain in the UK.
There is also a distinct lack of support offered to the startups. Though several local and international organisations do implement some high profile initiatives, these tend to be fragment and short term. For these to take hold and have a significant impact, a far longer and more strategic view needs to be adopted.
A more subtle but, in my opinion, a critical factor is an attitude to failure. More developed ecosystems have a far healthier, mature and productive attitude to startup failures and most importantly they are able to learn from them. Ukraine's ecosystem sometimes feels like a non-stop celebration with a little critical examination or attention paid to what goes wrong.
Product-Market Fit Needed
It’s all starting from the ideas in the founders’ head, but to kick things off it’s important to build further hypotheses on the relevant market data, not assumptions. Market reports, best practices, events, experts all are the standard toolset for startups in the developed ecosystems.
Most of these are ignored by Ukrainian startups with founders (typically technical specialists) rushing to skip all the steps and jumping straight to a world-beating product. This leads Ukrainian startups to a very uncomfortable position where the problem they are trying to solve doesn’t really exist.
In contrast in the UK - a typical startup is being launched by people who are far more immersed in the market. The company’s strategy is most likely built on the clients' needs, leaving the technical implementation to tech specialists.
In my experience, many of Ukrainian founders substitute their own experience, gut feeling or high-level general stats for the thorough Market Validation process, systematic gathering and analysis of the unbiased potential clients’ feedback and making the necessary adjustments at the early development stages.
Sometimes market validation results may not be what startup expects, and that's ok. It is better (and cheaper) to make changes sooner rather than later. Product development, extending the service offering, entering new markets, convincing an investor - all requires a clear understanding of the actual clients’ requirements and how the product can meet them (or not). Making the wrong decision can be very costly.
The Power Of The Network
The importance of the relationships, particularly with the future clients in foreign markets, is one constant that remains across countries, company sizes, and industries. This axiom proves to be real kryptonite for many of the Ukrainian startups. The reasons are different - from the language barrier to personal negative experiences. Overall business culture in Ukraine is still based on the principles of ‘I, me and myself’ rather than the power of the network.
It's surprising how many of the founders feel they can just base their assumptions on desk research. All kind of networking events and conferences provide priceless market insights and those vital future connections. Ironically, I often see founders spend time and effort on an international trade mission, conferences, expos and forgetting the most important part - relationship development with the newly generated contacts. This is particularly the case with Ukrainian entrepreneurs who are often focused on quick wins, which differs significantly from the UK business culture, where relationships are built carefully over the years. If finding a contact requires a lot of time and money and it does not offer an immediate 'benefit', it can be simply discarded. This, of course, is a huge mistake. It will take time to change the mindset of this still very young ecosystem. Exposure to other markets and cultures will go along way to help with that.
What's Next With Ukraine Startup Scene?
I work closely with investors from all over the world, many of whom are actively searching the opportunities in Ukraine. The feedback I get is that while emerging markets are untapped promising niche investments, it’s a challenge to find projects with the validated market, good traction and clear strategy of scalability. On the other hand - 9 out of 10 startups in Ukraine don’t understand what investors expect, how to make them happy and how to reach them.
It's time for this situation to change. This is a chicken and egg situation, investors have to be prepared to invest the time and money to bring Ukrainian startups out of their shell and startups have to do much more to attract investment interest. With these in place, we can be sure that a new startup powerhouse will emerge.
Related Posts:
The Biggest Mistakes Startups Make In Getting To A Product-Market-Fit (by Lyubov Guk, Partner, Blue Lake Accelerator)
How Is Coronavirus Affecting Startups And Their Valuations? (by Magdalena Balcerzak, Manager, Vestbee)
VC Tips For Successful Startup Fundraising (by Magdalena Balcerzak, Manager, Vestbee)
