Beyond Military Tech: Emerging trends in Ukraine's early-stage startup scene for investors to look after

In this op-ed piece by Oleksandra Balkova, Partner & Head of Portfolio at Startup Wise Guys, she dives into the reasons behind the decline in Ukrainian early-stage startups since the war began.
Beyond Military Tech: Emerging trends in Ukraine's early-stage startup scene for investors to look after

More than a year into the war, many European and global investors are still considering how and where they can support the Ukrainian startup ecosystem. Much progress has been made, with various grant programs launched by governments and private entities, as well as special support programs for Ukrainian entrepreneurs.

Today, we can already see the results of these efforts, but it would be nothing without the incredible resilience of the Ukrainians themselves. They continue to create amazing things, even under fire or in the face of blackouts. Over the past year, our team has encountered a significant number of such talents. Some of them have relocated, but the majority have kept at least a part of their operations or team in Ukraine. Most Ukrainian startups (and all of the Startup Wise Guys portfolio) operate globally, serving foreign customers as a chance to survive a challenging situation in the country.

While we should undoubtedly support Ukrainian businesses passing through the crucible of war, we must also consider how to encourage the emergence and establishment of new early-stage startups to avoid a "demographic gap" in the ecosystem. To address this issue, current emerging trends need to be considered.

Ukraine's ecosystem need for more early-stage startups

In the past few months alone, several high-profile funding rounds have been reported, such as Finmap, an online money accounting service for businesses, and Zeely, which develops an AI application for the development of SMEs, raising €1 million each. Ukrainian crypto startup secured $2 million to develop a web 3.0 service. Other big names that have received investor attention and funding this year include Awesomic, Fintech Farm, Gradual, DressX, Deus Robotics.

However, most successes are attributed to Ukrainian startups that were on their way even before the war started. Shortly before the outbreak of war, from 2019-2021, significantly more entities entered the market than from 2011-2018. According to the Polish-Ukrainian Startup Bridge report, among the 83 surveyed companies, as many as 57 were founded in this period.

However, this positive trend was quickly stopped due to the armed conflict. In 2022, only 5 companies (among surveyed) were established, 4 of which were before the outbreak of war. Such results can be attributed, among other factors, to the emigration of ambitious and tech-savvy entrepreneurs from Ukraine to various countries. Notably, in Poland, Ukrainians have opened almost 10,000 businesses since Feb. 24, as highlighted by data from Business Insider Polska

While many investors state that they invest in Ukraine (with Polish VCs leading by example), unfortunately, the majority of funds see investing in Ukrainian startups as too risky and would prefer to wait until the war risks lower. Statistically, VCs from countries in the CEE region or bordering Russia, are more open to finance startups with teams located in Ukraine, unlike VCs from Western Europe. 

On the other hand, startups that emerge during times of crisis often display remarkable resilience, assuming they can successfully navigate the challenges they face. In particular, these startups have showcased their ability to endure the adversities of the past year by implementing bootstrapping strategies following substantial funding reductions from venture capital firms.

This statistical evidence highlights their valuable aptitude for survival. While it is true that not all of these startups will ultimately thrive, those that do succeed will emerge as formidable contenders within the market. Consequently, this presents an opportune moment for investors to take calculated risks and consider early-stage investments in Ukrainian startups.

Looking beyond Military Tech 

The Russian invasion has spurred the rapid development, updating, and export of new military technologies (MilTech) and government technologies (GovTech), inadvertently highlighting a global spotlight on Ukrainian products and their ingenuity. MilTech producers are leveraging the conflict to stress-test their products. Estonia, already a global leader in GovTech and digital public services, uses code from Ukraine's Diia government services application. Other countries are expected to announce similar partnerships with Ukraine soon.

Currently, the Ukrainian Startup Fund, together with the government, is focusing its efforts on projects in the field of defence and reconstruction. One of its programmes provides grants of $35,000 to startups in the defence, cybersecurity, healthcare, mental health, and education sectors. Another trend is the shift towards alternative energy sources, both in Ukraine and the EU, which will lead to an incredible surge in the deployment of new clean energy technologies across the solar, electric grid, energy storage, batteries, and electric vehicles. Startups in this area are expected to become highly successful.

The European Innovation Council (EIC) has recently announced a significant investment of €20 million in advancing Ukrainian innovations. Through the Seeds of Bravery initiative, over 200 Ukrainian projects will receive support. Startups pursuing the goals of rebuilding Ukraine, fostering innovative entrepreneurship, providing innovative services, or commercialising scientific inventions (deep tech) will have access to these grants. While specific industries will receive greater attention, it is crucial to address the funding gap for startups that don't fit into the mentioned categories but still contribute to job creation and tax payment. 

Specific sectors have been overlooked during the war and require support to bring forward their business ideas. It is well known that Ukraine boasts a strong foundation in computer science and mathematics, which has led to the emergence of startups focused on artificial intelligence (AI) and machine learning (ML). Ukrainian startups are utilising these technologies to develop innovative solutions for various industries, including healthcare, finance, and e-commerce. The fintech sector is also rapidly growing in Ukraine, with startups focused on payments, lending, and personal finance management. Ukrainian fintech startups leverage blockchain technology to develop new financial products and services. Local ag-tech startups are developing solutions for precision agriculture, farm management, and livestock monitoring.

These are just some verticals where supporting entrepreneurial initiatives and incentivising new startups will have a meaningful effect. Therefore, it would be beneficial if VCs collaborated with the government to support these startups with funding, recognising their immense potential.

Getting to work with veteran founders

Startup founders who are army veterans are highly valued by VCs worldwide. For instance, there are several cases of Israeli or US ex-military established highly successful corporations and startups that transformed various industries. Due to their psychological features and discipline, veteran founders are able to lead teams to work in a high-stress context and have a unique attitude toward leadership since they understand that they are responsible for people's lives.

In March, the Ukrainian Veterans' Fund already began selecting applications for the #WorthDoingYourSelf funding program for veteran-owned businesses. The initiative was created to finance businesses run by veterans and family members of fallen defenders of Ukraine in the agricultural and agro-industrial sectors. There definitely needs to be more effort and attention from international investors and those who want to support the Ukrainian startup ecosystem now.

In addition to funding, there is a need for education and acceleration programs to teach entrepreneurship to such founders. The competencies of the project teams themselves are also crucial for startup development. Most frequently indicated were deficits in sales and marketing competencies, those related to obtaining investment financing, and business relationships and language skills for some startups. A good example is the EIC initiative mentioned above, which will not only provide grants but also provide acceleration, mentoring and access to foreign markets.

Female leadership became more visible

As men serve in the Ukrainian army to protect the country, women founders and top managers are stepping up and taking on a more active role in running businesses, including startups. Among the startups in our recent investment portfolio, we are proud to have  Akurateko, LetsData, and Adminix, all of which have female co-founders. It is worth noting that some investors prioritise founders who can travel abroad, even for brief meetings. This is where female-led and diverse teams startups are getting an advantage.

However, in Ukraine, women entrepreneurs most often choose areas of business related to the delivery of services, such as opening kindergartens and schools, developing online and offline stores, providing beauty services, tailoring clothes, and running confectioneries. According to Opendatabot, women most often run businesses in retail trade (43.6%), whilst in computer programming and consulting  - only 4.9%. Women are also increasingly choosing social entrepreneurship, creating jobs for people with disabilities, among other things. Furthermore, businesses run by women also create jobs for other women.

According to PricewaterhouseCoopers, 56% of Ukrainian women believe they lack knowledge in management, taxation, marketing, and other areas needed for business development. Additionally, 52% of women reported a lack of self-confidence, and 42% required more funding sources for business development. Special mentoring and education programs should be launched for Ukrainian women who want to develop their startups to address these issues. 

It is evident that women have shown increased entrepreneurial spirit during times of crisis, assuming leading positions and establishing new companies. This is a positive trend that highlights the resilience and capability of women in entrepreneurship.

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