Ukraine's startup ecosystem, today

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Biography

Elena Mazhuha is a partner at Flyer One Ventures, a seed-stage VC fund investing in European founders. F1V has invested in several Ukrainian startups and Elena is Ukrainian herself.

This article was conducted and written by Timothy Motte.

How has the war altered government support for the ecosystem?

Government funds earmarked for ecosystem support have understandably been diverted to the war effort. This has affected programs like the Ukrainian Startup Fund, which used to fund hyper-early founders. The government has renewed its focus on defense startups.

Apart from defense startups, are there still startups operating within the Ukrainian market?

Startups that were previously focused on the Ukrainian market are generally still focused on the Ukrainian market. But it has become near impossible for a Ukrainian startup to raise if they’re not selling in at least one foreign market. Investors don’t want to take the risk of betting it all on Ukraine.

A number of startups have maintained their operations in Ukraine, but without a profit motive. Liki24.com, an online pharmacy, operates in other European countries but its Ukraine operations focus mostly on humanitarian actions. Cargofy, a logistics startup, has a US presence but the company has been helping out with humanitarian logistics back home.

Today, why wouldn’t a Ukrainian startup relocate abroad?

Most Ukrainian founders would relocate, if they could. Running a company from Ukraine at the moment is far from ideal. Evidently, it would be easier to be based in London or Warsaw than in Kyiv.

Most men are legally barred from leaving the country, to support the war effort. So, even if they wanted to, many founders simply cannot legally leave.

The Ministry of Digital Transformation can help with special travel permits for important conferences, justified trips, etc… It does the same with artists. But people are expected to come back home.

A company can also “book” someone to not serve in the war, but war is unpredictable. Laws can suddenly change.

What other national, startup ecosystem is the Ukrainian one closest to?

Definitely the Baltics (Estonia, Latvia, Lithuania) and the Polish one. Shared historical context reinforces links.

A decent amount of Polish funds (SMOK, Inovo) have been investing in the ecosystem. Events and initiatives such as TechChill and Lift99 have included Ukrainian ecosystem actors.

With men at war, women have played a bigger role in the ecosystem. Has this reshaped gender dynamics?

Mechanically, yes. Less men in the ecosystem has led to more women in higher positions, both as founders and executives. As the law bans men from leaving the country, the ecosystem’s foreign representation (at conferences, etc…) has mostly been led by women.

I wouldn’t say it’s changed much on the VC side, though. Sifted reported on the exodus of women from VC, and the same reasons apply to Ukraine as well. The sector has been muted for a couple of years, as M&As and IPOs remain scarce. It’s hard to have a baby while traveling to conferences half of the year. Even harder if there’s no significant financial reward at the end of the tunnel.

VC sometimes still suffers from sexism. For women in VC, a career at Google looks more and more attractive. In VC, the glass ceiling seems thicker.

How do we solve this? While unpopular, I think quotas aren’t a bad idea. I don’t like them, but we need to force the sector’s hand. We need more women in middle-leadership positions: these are often filled by partners’ networks which, invariably, are overwhelmingly male.

What founded and unfounded worries do foreign investors have about the Ukrainian ecosystem?

The founded ones are two-fold.

First, it is indeed hard to operate in a country at war. VC as a concept is already risky, so GPs look to minimize other, exogenous sources of risk. The “war” factor is unnerving for many.

Second, while Ukrainian founders try to sell to Western markets, it is objectively difficult to do so from Ukraine. Especially the US market, which is tough to break into without presence on the ground, deep cultural understanding, established networks….

The unfounded ones revolve around misunderstandings.

I’ve overheard some foreign investors express wariness at “Eastern Europeans”. In other words: they thought that since the founders were from Eastern Europe, they would get scammed. That is simplistic and erroneous. You can get scammed by anyone, anywhere.

Local Ukrainian founders also have a hard time pitching themselves. They have different backgrounds from what foreign VCs are used to seeing. They aren’t Ivy League graduates, nor are they ex-FAANG engineers. Foreign investors struggle to value these alternative backgrounds, while local founders need to do a better job of pitching them.

That being said, we’re seeing an increase in US interest in the CEE region as a whole. I encounter more and more Americans at regional conferences. They aren’t doing much yet, but they’ve started their due diligence.

Talking about the CEE region: many praise its founders’ technical talent. Why?

Because our technical talent is really good!

The pool of quality, technical talent the ecosystem has today is the result of a decade-long domino effect.

First, the region has excellent, cheap higher education. Especially from technical universities, which is relevant to our context. A year’s tuition at Lviv Polytechnic National University is barely $500.

This has bred hordes of technical talent, which were then tapped by Western tech companies looking for affordable developers. In Poland alone, revenues from the IT outsourcing market were projected to reach 2.5B€ in 2023 and are expected to reach 4.5B€ by 2028. A study found that Ukraine ranked as the 4th country with the best developers in the world.

Finally, that talent figured that if it could build world-class products for others, it could probably do it themselves. This sprouted regional tech successes such as Grammarly (Ukraine), UiPath (Romania), Skype (Estonia), GitLab (Ukraine)...

You need those three steps, in that order, for ecosystems to take off.

Today, the CEE ecosystem is attractive because startups have cheaper cost structures and lower valuations, while selling to the same clients Silicon Valley startups sell to. The arbitrage opportunity is clear and foreign VCs are starting to notice.

Large European institutions and corporates are increasingly active in the region. As stated before, American interest exists but is discreet. I’ve also heard that large asset managers from Saudi Arabia want a piece of the pie.

The CEE region contains both EU and non-EU countries. How does EU membership affect an ecosystem?

Unsurprisingly, EU countries have it easier. Companies from EU countries have a smoother time expanding, raising funds… They also have access to larger and more developed capital markets.

Many CEE VCs, including yours, invest in “diaspora” founders. Why?

By “diaspora founders” we refer to any startup founder that has bloodlinks to the region. This can be a Silicon Valley founder whose parents are Ukrainian, for example. We believe they are a fantastic group of founders to invest in.

Not only do they operate in richer, more stable markets, but they also leverage what makes CEE attractive: quality, affordable talent. A Ukrainian founder in San Francisco will naturally gravitate to outsource some of their tech work to Ukraine. Or even, in an age of remote work, directly hire people from Ukraine. These founders tend to have an intrinsic attachment to their home country, even if they didn’t grow up there.

“National” startup ecosystems expand beyond borders. The Ukrainian startup ecosystem encompasses all companies with Ukrainian founders or of Ukrainian origin. This counts whether they are headquartered in Lviv, San Francisco or London. Depriving ourselves from them just because they aren’t “based” in Ukraine would be short-sighted.

Diaspora networks are also exponential: once you’re in, you can jump from intro to intro. Diaspora founders tend to hang out together, online and offline. That eases deal-flow curation.

The Realistic Optimist’s work is provided for informational purposes only and should not be construed as legal, business, investment, or tax advice.

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