Introduction to Ukraine's IT & Tech (Re-upload of 2016 archive post)

Updated: Jun 29

The Ukrainian IT market is touted as one of the country’s shining stars and for good reason. Already a world-class outsourcing hub with a market size of $2.5b in 2015, Ukraine is now becoming a hotbed for start-ups also. Grab a coffee in one of the many coworking spaces that have sprung in every major city and it is hard to escape conversations about the next big idea. Fuelled by the depth and quality of technical talent, there is an undeniable buzz around the IT and Tech sectors which has now started to translate into profitable start-ups. Unlike many of the traditional industries that rely heavily on economic ties with Russia, this sector is internationally oriented and now deservedly attracts the attention of domestic

and international investors.


Venture Capital in Ukraine Overview


According to the “Dealbook Report” prepared by the Ukrainian Venture Capital Association and AVentures, in 2015 $132 million were invested in Ukrainian firms via VC/PE deals, a near 50% increase on the previous high in 2013. To

appreciate how truly remarkable this growth is we have considered some of the challenges that Ukraine’s IT sector has faced in 2013 and 2014. In the midst of the conflict with Russia, the country experienced a 7% GDP drop in 2014 followed by a negative 10% growth in 2015, interest rates of above 15%, a record drop in foreign direct investments and restrictions in FX operations. The IT industry proved resilient given its international outlook, deep pool of talent and above average wages. This spurred the next step in its development – the start-ups phenomenon with an explosion of the startup scene, business incubators, co-working spaces and entrepreneurs willing to take chances. We are still in early stages, in 2015 out of the 66 deals completed around 62 were early stage “seed funding”. The source of funds was fairly evenly split between foreign and domestic investors with 60$ million and 68$ million

respectively although “foreign” is a relative term with much of the funding coming from Ukrainians operating through offshore accounts.


The majority of the deals represent early stage/first round funding reflecting the infancy of the industry. Average ticket size is around $400,000 doubling from 2014 in line with the global trend with investors preferring larger size deals and somewhat maturing of the industry. Now that we looked at some data we should insert the inevitable caveats. Gathering VC and PE information in most of the countries is a mix of art and science. This is absolutely the case in Ukraine. Candidly, the tax and revenue collection services have less than a sterling reputation. Furthermore, several angel and venture investors that VimesVC spoke to would prefer to remain anonymous and not attract attention by publishing their involvement in any of the deal making.


Players


The Ukraine start-up scene has followed a similar trajectory to its more advanced peers, in a much shorter space of time. 2012 saw a spike in IT incubators, many of whom were floundering by 2014. The new generation of firms has more fully embraced the investment community (VC funds and angel investors) as a viable source of funds and growth and rely on “flexible” work policies such as coworking spaces to keep costs under control.

Larger deals are being supported by a number of investment funds, the most active being

Horizon Capital, AVentures, Almaz Capital and Imperious Group amongst others. Foreign investors are also showing renewed interest in Ukrainian start-ups. Most notably in 2015 George Soros established the Ukrainian Redevelopment Fund and acquired a large stake in one of the leading Ukrainian IT services providers – Ciklum. While the exact figures have not been disclosed, Soros had separately mentioned his commitment to investing as much as $1 billion in Ukraine.


In July of this year, HP Tech Ventures announced its entry into the Ukrainian market seeking promising start-ups. It is highly likely that this is the beginning of a strong stream of VC investors coming into Ukraine.



Deals


The total volume of Ukrainian VC investments in 2015 reached $142 million with the vast majority of deals (in terms of volume) focused on early growth and seed stage funding. Dollar-wise 2015 gives a slightly skewed view of the market due to two large deals within the e-commerce and software development segments. The common theme is that most of the firms seeking investments are now internationally oriented no matter what sector they originate from. An increasing number of Ukrainian start-ups head for European business incubators. Ukrainian 3D-printing technology start-up Kwambio is supported by Techstars and Ecoisme, an energy-saving platform, joined Virgin Media Accelerator in 2015.




Ukrainian entrepreneurs and startups have done well on international crowdfunding platforms raising around $1.6 million in 2015. Notably, the crowdfunding approach is being used not only for fundraising purposes but as a marketing strategy oriented both at consumer and investors. The largest completed transaction was a $150 million buyout deal for Looksery (face tracking and modification for real-time videos) by Snapchat.


Buyouts


Despite the limited track record of the IT industry in Ukraine, some larger technology companies have now started to attract attention from international firm creating exit opportunities. Looskery video face tracking app was bought by Snapchat for $150 million, Jeapie by Canadian Mobify (undisclosed amount), Ciklum a leading IT developer sold a large stake to Soros fund for an estimated $30 million, Maxymiser cloud-based web and app optimization software was bought by Oracle.


Early 2016 has already shown some very promising activity with notable deals, including Digital Future and Wannabiz investing $400,000 in ReplyApp, an email marketing service. Other companies raising seed money include Highbrow, Tapland and inCafe from angel investors; Ecoisme from Virgin Media Accelerator; and Moggie from The Springfield Project accelerator. The biggest disclosed deal of the year so far is TMT Investments’ sale of its 7.1% stake in Depositphotos, a royalty-free online photo stock service, to a private investor for $5.85 million.




Conclusion


The Ukrainian IT market is growing up. Fuelled by the unparalleled depth of talent and technical expertise the industry is giving rise to innovative start-ups. The most significant constraint – expansion funding – is being removed by the international appeal of the market. We expect 2016 to be another record-breaking year across both seed and more mature investment stages. The important question that we have not touched on is how can a foreign investor or a venture fund enter the market? This is not a straightforward question and its scope is beyond this Brief. As such we would encourage you to contact us directly should you like to find out more about practical means of investing in Ukrainian start-ups.


Tags: Blue Lake Accelerator. VimesVC. Ukraine. Ukrainian Startups. VC.


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