By Sergey Tokarev, partner of Cyprus IT Forum.
The Ukrainian venture capital market has showed steady growth in the last few years and reached the half-billion-dollar mark in 2019 with 1.5 times higher year-over-year growth with more than 100 new deals.
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At the same time, the situation in the Ukrainian venture capital market is similar to that in Europe. Unlike the U.S., there are almost no participants who invest more than $100 million in projects. The largest single investments in Ukraine barely reach $10 million to $20 million. Funds and private investors tend to invest in early-stage firms, i.e. so-called seed and and Series A funding. On the contrary, pre-seed funding is quite unpopular here.
This approach significantly affects the position of Ukraine in the global tech arena. Ukraine has a constantly growing developers base that has this year reached 200,000-plus specialists. For comparison, in most Eastern European countries, this indicator is four to five times lower.
A solid base of qualified developers and a relatively low labor cost, however, attract foreign tech giants to Ukraine. According to statistics, in 2020 Ukraine offers IT specialists three times lower cost on average than IT specialists in the U.S. on similar positions. Today, Ukraine hosts research and development centers for Microsoft, IBM, Oracle, Amazon, Datarobot, Samsung and other large companies. Moreover, Ukraine is also becoming home for unicorns, including projects such as Gitlab, with capitalization of $2.75 billion, and Grammarly at over $1 billion, both of which are are well known all over the world.
However, only a few companies can reach this level in Ukraine. There are hundreds of startups born in Ukraine every year and many of them successfully raise early-stage venture capital. While only a small part of them achieve success at the local level, even fewer enter the international arena. And once they do, they often decide not to identify themselves with Ukraine.
Most of the successful late-stage startups tend to move to the U.S. or Western Europe and attract most of the funding from international investors, with 90 percent of that interest from the U.S. Ukrainian investors are not ready to bear the high risk and write big checks. Another reason is poor marketing and storytelling. There are very few investors here who are capable of helping founders create product stories/startups and provide a gateway to a global network and capital market.
As a result, there is a large gap in expertise and capital in the deep tech sector, including machine learning and artificial intelligence. However, there are exceptions to this as well.
Today, the Ukrainian IT community is on course to make such success stories no exception. Its aim is to help large projects feel comfortable in Ukraine, to attract international funding, to develop the IT market, and to attract more unicorns.
To meet that goal, the country has begun creating a large IT center similar to the High-Tech Park in Belarus and Silicon Valley in the U.S. It will be a base that gathers the maximum number of creative ideas, qualified specialists and investors willing to develop IT.
At the same time, Ukraine is developing legislation loyal to the tech sector, so it will reduce the tax burden on the entire sector. The synergy of these actions will allow Ukraine to take a fundamentally new position in the global IT arena, bring tech projects to a new level, and increase their capitalization.
Sergey Tokarev is a partner of Cyprus IT Forum and investor in Reface, a Ukraine-based startup that replaces faces on GIFs and videos.
Illustration: Li-Anne Dias