(This article is reprinted and translated from Ukrainian newspaper Mind (original)

Venture Capital Has Missed the Ukrainian Market

by Ben Younkman

October 24, 2018

To anyone unfamiliar with the country, invoking the name “Ukraine” can conjure images of a nation in turmoil - from the downing of Flight 17 to a fiery protest in the capital to the smoldering buffer zone with a bellicose neighbor. The Ukraine, as portrayed in the news, does not inspire confidence.

It should be no surprise to learn that venture capital (VC) has not been actively seeking out deals in the Ukrainian market for some time - but it’s not solely because of the 2014 Maidan Revolution (and the political and economic reforms that are still unfolding in the aftermath). No, VCl as traditionally practiced is broken, and has been failing the majority of the world’s people. Ukraine is a perfect example of an overlooked market with enormous untapped entrepreneurial and investment potential.

To be sure, VC isn’t only missing out on Ukraine, but also on a lot of other places and people due to a myopia that has resulted in a diversity problem, exclusive networks, and disinterest in unfamiliar sectors or geographies. A few statistics on how VC is currently distributed shows who is being left out:

• Currently, more than half of all venture capital in the world goes to just three U.S. states: California, New York and Massachusetts. Only 14 percent of global capital went to Europe in 2017, with the CEE receiving only 0.2 percent.
• Less than 5 percent of venture capital goes to women, and less than 8 percent of European investors are women;
• Out of over 150 “unicorn” companies across the world, only 15 percent are solving problems in food, health, energy, agriculture, financial services or housing – which happen to be the top six areas where the majority of the world’s population spends its budget.

Internationally, VC goes overwhelmingly to major hubs in in developed markets, like the United States, the EU, China, and Southeast Asia. The map below helps visual the imbalance of VC geographically, and its message to entrepreneurs: if you’re not in one of these markets, you’re not getting real money.

In short, investors are often backing the wrong ideas for the wrong reasons, hoping to strike it rich by dumping billions of dollars into frivolous apps designed to benefit only a wealthy sliver of the world’s population. The billion dollar acquisition of Instagram by Facebook was great for investors and the founders of Instagram, but didn’t do anything for the billion people who aren’t even connected to the internet. People who don’t live in the ‘right’ countries, don’t have the ‘right’ networks, or aren’t working in the ‘right’ industry are consistently overlooked by investors. Innovative solutions to pressing global challenges that impact billions of people be underfunded.

Looking at the case of Ukraine, the fallout from the political and economic crisis that hit the nation in 2014 caused substantial damage, but also poised the country to initiate systemic reform that is starting to come to fruition. The ousting of corrupt president Viktor Yanukovych proved that the nation was committed to reform, and is currently realizing the changes unfolding as a result of the significant effort of the public and private sector to fundamentally rebuild how the financial sector works and shaking off the financial hangover caused by the Maidan revolution.

The shuttering of more than 90 banks was a painful but ultimately necessary process to get the Ukrainian financial sector back on track to a healthy recovery - a move that also has had unexpected positive outcomes for the entrepreneurial sector. Closing so many banks unleashed a wave of talented, ambitious IT and finance professionals into the labor force, leading to the creation of new fintech startups at an unprecedented pace. According to a report from East-West Digital News, “over the past years, the country has seen the emergence of a plethora of startup projects, especially in the fields of software, enterprise, online services and mobile, as well as agritech and energy efficiency.” One of the most promising sectors, fintech, is growing rapidly due to the technical expertise and past experience in banking - 65% of Ukrainian founders having an IT background and 30% in finance, not to mention 70% of senior management at Ukrainian fintechs comprising of ex-banking professionals, namely from Privatbank, FUIB, Raiffeisen Bank Aval, Universal and Alfa-Bank.”

Ukraine has long been a global leader when it comes to IT talent, as reflected by its status as an R&D hub to more than 100 multinational tech giants. This is in part due to Ukraine’s robust education system that graduates close to 40,000 students with technical degrees, with a goal to bring this number up to 100,000 by 2020. Ideally, Ukraine will be able to utilize this new crop of talent to become one of the leading IT export countries in the world. With an IT industry worth more than $5 billion usd, 500 outsourcing companies, 50,000 engineers, and 100 global R&D centers, investors should start building an in-country network to identify and direct the nations burgeoning tech talent to build solutions and products for the global market.

Perhaps commensurate with the growing talent pool, the numbers also tell the story of increasing amounts of VC directed to startups from Ukraine or with Ukrainian roots. In 2017, a total of $265 million was invested in Ukrainian technology and IT companies - a 231% increase over the previous year. Of this amount, 90% was from VC funds. What should be highlighted, however, is that most of these funds were directed towards a few large growth and secondary rounds (Grammarly, for example, received $110 million in investment). On the whole, Ukrainian startups still lack the early stage funding they need to grow, and continue to be overlooked unless they take additional deliberate steps to go international sooner rather than later.

Indeed, in order to gain access to the right networks and be noticed by investors, Ukrainian startups still need to actively thrust themselves into the traditional VC hubs of the world, such as Silicon Valley. Many of them have long applied the strategy of going international - mostly in the form of splitting their teams between Ukraine and the US (or a European country), establishing their management team in the later while maintaining their R&D team in the former. This is an approach that has been successful for a number of ventures in recent months - in addition to the aforementioned Grammarly deal, Amazon famously paid $1 billion for tech startup Ring which hosts its largest development center in Ukraine, and Viewdle received a $45 million check from Google. As recently as last month, GitLab - a San Francisco-based open-source software startup with Ukrainian roots - successfully closed their $100 million Series D round, the latest in several multi-million dollar rounds they have managed to raise in the US over the past few years.

The example of GitLab and many other Ukrainian-origin startups prove that Ukrainian entrepreneurs are among the best of the best - as long as they show up in the right geographies, appearing in investors’ direct line of sight. The question now, however, is how to support and invest in more startups in Ukraine itself, where entrepreneurs with lived experience are best-suited to propose solutions borne from the context of Ukraine and even of neighboring CIS countries.

Startups such as YouControl and hotline.finance, for example, are aiming to help the Ukrainian public make more informed business and financial decisions, boosting transparency and trust in the financial sector. Meanwhile, ventures such as bNesis and Creditor - startups that have already gained traction outside of Ukraine but are looking to count their home country amongst their operational countries - are responding to the recent consumer demand for greater control over personal data, finding a way to allow individuals to leverage their data to receive better, more tailored offerings on financial products.

Ukraine is armed with strong talent, a string of entrepreneurial success stories, and a series of startups with solutions for more inclusive financial health - the biggest piece missing is communicating the value the marketplace offers, and are linking strong companies to relevant investors. For the past few years, Seedstars has been running an annual startup showcase highlighting top entrepreneurial talent to global investors, and organizations like the Ukrainian Venture Capital Association has been steadily building coalitions with other European networks since its creation in 2014. While momentum in the region is growing, there still remains an enormous opportunity to highlight promising entrepreneurs solving critical problems for society.

Village Capital is proud to join the network of organizations promoting high-potential entrepreneurs in Ukraine and other overlooked areas, and support the development of a more robust and global network of support. At the end of October, Village Capital and MetLife Foundation are hosting a Financial Health Forum in Kyiv in an aim to take yet another step towards shedding light on high-potential startups in traditionally overlooked places. In partnership with the Ukrainian innovation park UNIT.City and UVCA, the program will provide investment-readiness training and convene a wide array of representatives from the burgeoning startup ecosystem in this country. Organizations and investors looking for some of the most impactful, scalable solutions around Financial Health are invited to join us during the Startup Showcase on Oct. 31, and see the true potential of the Ukrainian entrepreneurial ecosystem.

For more information on the public Startup Showcase on October 31: https://www.eventbrite.com/e/ukrainian-fintech-startup-showcase-tickets-50645466955