A new startup inception pattern is developing in Ukraine. The London-based research firm RA Capital and Kyiv-based eō Business Incubators have published their first Ukraine as Number One (UNO) report surveying the Seed Stage Ukrainian startup ecosystem. Its conclusions will surprise many.
The stories of many Seed Stage Ukrainian startups go approximately like this. Their founders more often than not work in outsourced software development firms, of which there are many in Ukraine, and gain insights into business problems and technology needs of their customers. Other Ukrainian startup founders, just like in the US, get their startup idea after a significant personal event — an illness, a hobby becoming something more serious, something they see on a trip abroad. They self-finance their startups in the early days or perhaps get a small check for less than $30K from friends or family or from one of still relatively rare Ukrainian business angels. These small checks, together with a general familiarity with the customer development methodology, allow them to tirelessly finetune their product until there is a resemblance of a Product-Market Fit.
The internal Ukrainian market favors a few technologies, including ecommerce, consumer, agrotech, but very often founders have to look to the Western markets in the US or EU to serve as inspiration. Focus on former Soviet markets (Russia, Kazakhstan, Belarus etc.) is almost gone now. If you are not in the few markets where internal Ukrainian demand can sustain you (e.g., ecommerce marketplaces), a Ukrainian startup needs to become global to survive and thrive. As one German VC fund says, “Ukrainian founders are hungry for global expansion because their local markets are small. Compare this to German startups that are satisfied with the large European market and tend to look inward.”
Seed Stage startup research study
Up until today, it was difficult to prove this theory, but a recent report by the London-based research firm RA Capital and Kyiv-based eō Business Incubators finally has some numbers to back it up. According to the UNO report, 60% of Seed Stage Ukrainian startups they surveyed were either registered abroad or had a foreign entity to help with fundraising, finding customers, and to get better legal protections. Of the remaining 40% of companies who were registered in Ukraine only, 65% were planning to register a company abroad in the future.
In case these numbers cause someone in the Ukrainian government to start worrying, we say, “Don’t”. Entrepreneurial ambition cannot be harnessed and limited to the national boundaries – it can only die there, especially if it has to deal with the realities of post-Soviet regulatory, legal, and fundraising frameworks in Ukraine. It’s a little sad, but the largest (by valuation) entirely home-grown technology company in Ukraine that focuses on the local market is Rozetka, an ecommerce marketplace. While they are successful locally, they have little chance of being able to compete globally with the likes of Amazon.
In good news for Ukraine, the absolute majority (82%) of interviewed startups still had their entire founding teams based in Ukraine. “It is easy to do sales and fundraising from Ukraine pre-series A,” one founder who raised $1.5 million was quoted in the UNO report. Another founder, who was able to raise $800K, explained: “The effects of COVID-19 were game-changing, as today it is more than enough for founders to keep in touch with investors via Zoom or any other video app”.
Emerging startup creation pattern
It looks like Ukraine is developing into a hotbed of Seed Stage startups that see initial traction, get a bit of local funding, and, in case of a breakthrough Product-Market Fit, raise growth funding in the US and EU and in many cases end up moving at least one founding team member to the centers of Western technology entrepreneurship in the US (California and New York top the list, excluding the registration placeholder Delaware), EU (Estonia was popular for registrations a while ago), and London, UK.
One of the enablers of this recent activity in Seed Stage startups is the government-funded Ukrainian Startup Fund (USF). What made USF effective were a consistent delivery of startup pitch competitions round after round after round (they are at Round 31 currently), as well as sizable (by Ukrainian standards) equity-free grants of $10, $25, and even $50K. Many if not most of the startups interviewed for the UNO report are graduates of the USF pitch competitions, and we at Ucluster have also used USF as a good source of interesting startups to interview for our publication. In addition to grants, USF also refers startups to various accelerators, including one of the authors of this report eō Business Incubators, which boosts their chances to get follow-on financing. Not surprisingly, 92% of surveyed startups agreed with the statement that developments in Ukraine’s startup ecosystem in the past 3-4 years made Ukraine a better place to seek growth for a startup business.
Still, 100% of startups in the report use English names, which is telling something about their ambitions. They also use technologies that are currently very popular with US and European startups: AI/ML, Big Data, IoT etc, which is a sign that they are staying in touch with the buzzwords of the startup industry, but could also be a yellow flag, because as Seed Stage startups, they should be looking ahead to 3-5 years from now, when these technologies won’t be the raging trends anymore.
A very good sign is that 100% of responding startups have their core development teams in Ukraine, and plan to keep it that way. Regardless of whether a startup has a Delaware entity they use to raise money with, as long as they keep R&D in Ukraine, the high value-add jobs will remain in Ukraine, grow the ecosystem, and enable the future founders of new startups. Not surprisingly, the top reason (36% of respondents) for maintaining Ukrainian presence was access to cost-efficient talent. A bit more interestingly, 33% of startups who decided to stay in Ukraine at least partially mentioned opportunities for growth within the Ukrainian startup ecosystem and 23% mentioned their focus on the Ukrainian market. These last 23% are the early seedlings of a future possible trend of startups when the Ukrainian market will be large enough to sustain them.
We encourage our readers to review the UNO report and learn more about the plans and desires of a batch of emerging Ukrainian startup stars. Then, come back to Ucluster to read our coverage of 8 of the startups mentioned in the report.
If you are interested in angel investing in Ukrainian startups, consider a new angel investing course designed by leading American academics and experts, Ukraine as Number One (UNO). It is produced by RA Capital in partnership with Silicon Valley Syndicate Club and eō Business Incubators. For tickets and course overview, visit the UNO site.