The Ukrainian IT sector has been one of the country’s biggest economic success stories of the past few years, with bullish growth figures at a time of general recession helping to attract optimistic headlines and considerable investor attention. Nevertheless, there is still huge room for expansion as the industry diversifies and Ukrainian IT professionals become more sophisticated in their efforts to harness the country’s obvious IT strengths. Current priorities include better marketing of Ukrainian IT innovation and greater appreciation of what individual international investors are looking for. This will help to fuel the further evolution of the startup sector and transform great ideas into big business.
At present, Ukraine remains primarily known as an IT outsourcing country. There are numerous companies excelling in this field, many featuring foreign investment. According to research carried out by PWC, the Ukrainian outsourcing market is already worth USD 3 billion annually. This is expected to grow to USD 5-7 billion in the coming few years. Thirteen Ukrainian outsourcing companies featured in the 2017 version of IAOP’s annual Global Outsourcing 100. Ukraine’s flagship outsourcing companies include Lviv–based SoftServe and Kyiv-based Ciklum - the first Ukrainian IT company to attract investment from American billionaire investor George Soros.
This focus on outsourcing has become something of a market stereotype, but there is much more to the Ukrainian IT industry than competitively priced programming factories. At present, there are around 3000 Ukrainian startup companies active in the country at different stages of development. Given the catalyst effect of investors financing Ukrainian product developers, this figure is extremely promising.
Many Ukrainian startups have proven able to attract both local and international investor funding. The Investors Book project recently presented by the Ukrainian Venture Capital and Private Equity Association (UVCA) identified 34 investment funds currently active in Ukraine. This list includes 17 venture capital funds, six private equity funds, one corporate fund (HP Tech Ventures) and others. Alongside these market players, Ukraine also has its own investment angels – many of whom operate below the media radar and engage in strategic one-off investments.
Is the current figure of 34 active investment funds sufficient for a fast-growing startup market that already boasts 3000 projects? According to startup specialists Techstars, Kyiv currently has more IT investors than relatively seasoned global venture capital cities including Warsaw, Vienna, Oslo and Copenhagen. Clearly, Ukraine’s status as one of the IT world’s most exciting lands of opportunity is no longer a secret.
One of the biggest attractions of the Ukrainian market remains the low financial entry bar for investors. For the time being at least, Ukraine is a place where you can gain market positions and acquire startup stakes for a fraction of the price you would expect to pay elsewhere in the region. Recent research by UVCA found that investment funds in Ukraine tend to hold an average of 20 companies in their portfolios. Around one-third of these individual investments are priced within the USD 100,000 to USD 1 million bracket.
In practice, it is possible to build a successful startup in Ukraine and bring it to global markets for less than a quarter of the cost an investor would incur in countries with similarly sophisticated IT sectors. Understandably, the majority of investment funds prefer to engage with Ukrainian startups at the initial seed stage, with interest declining throughout the development cycle as margins begin to narrow.
Given the comparatively recent emergence of startup culture in Ukraine, education remains a major issue for everyone active in the startup sector. It is still common to see Ukrainian entrepreneurs focusing all their attention on the technological side of their startup, only to then have difficulty attracting the necessary investments. This reflects the uneven distribution of skillsets within the sector. Ukrainian developers have always had world-beating engineering and technological skills, but the art of smart marketing remains significantly underdeveloped in today’s Ukraine. As a result, potentially exciting projects are often misdirected or otherwise unable to generate the necessary investor interest.
Many of the funding problems facing the Ukrainian startup scene stem from an incomplete appreciation of the target audience’s needs. The goal for any startup should always be presenting your product to an investor who specializes in your field and has a record of working with projects at your present stage of development. All too often, Ukrainian startups trend to rely on ineffective marketing tools such as newsletter-style presentations sent out en masse to large audiences without filtering investors based on their suitability or tailoring the approach to match the target.
It is quite possible that startups will find numerous potentially suitable investment partners. There is a persistent myth among industry outsiders and newcomers that startup investment funds compete with each other for exclusive access to the most promising projects. In reality, this is not always the case. Syndicated deals involving numerous parties have been gaining in popularity over the past few years. These agreements are attractive for a number of reasons. They offer startups a bigger investment pot to play with, while the investors themselves are able to carry out more qualitative due diligence on the project in question. Research carried out by UVCA found that 48% of all startup investments in today’s Ukraine involved the joint participation of foreign partners, illustrating the high levels of readiness to engage in co-investment initiatives.
Ukraine’s startup entrepreneurs must now develop their knowledge of the investment environment and tailor their approaches in order to secure the most advantageous platforms for future growth. Ukraine’s IT boom has attracted the world’s attention, but the industry remains a long way from reaching its full global potential.