Ukrainian Venture Investment Market Is Immature and Needs Growth

emerging europe ukraine

Read the Outlook on Ukraine special report

Denis Dovgopoliy

About Denis Dovgopoliy

Denis Dovgopoliy is a leading member of the Ukrainian Venture Capital and entrepreneurial community. He is the managing partner of GrowthUP Group, as well as a co-founder and president of the GrowthUP Accelerator, which focuses on acceleration and investment in Eastern European startups looking to enter the global market. Since 2007, he has been one of the most popular blogs about high-tech and venture capital in Ukraine. He is also a co-founder or executive committee member of various events, including iForum, Silicon Valley Open Doors, IDCEE, Startup Crash Test, Kyiv Startup Week, SVOD Europe, and others.

The Ukrainian market for venture investment and business innovation has been actively and systematically developing since 2005. That is earlier than in most European countries. Despite the fact that it has seen significant growth, however, it still has not formed a self-sufficient ecosystem. Why? Of course, the main reason is the economy.

In the last two or three years the prevailing conditions of permanent economic, political and military crisis have killed any surge in the internal consumption of innovations. Besides that, the e-commerce market and internal innovative products in Ukraine are almost not developing at all. The GDP per capita is very small and the size and resource orientation of the economy makes it impossible to stimulate an internal demand for innovations (both B2B and B2C).

The war and political instability have greatly increased the risks in the country, creating a backdrop against which business models for investments in technology projects have become unbalanced. If we look at the internal economy venture capital fund, we see that in different periods, only 20 to 40 per cent of venture capital funds returned positive returns. The percentage of successful funds (which went up from 1:2 to 1:4 for cost of capital in 10 years) increased from five to ten per cent.

Ukrainian entrepreneurs and investors are not satisfied by the current risk-return ratio. The high potential of the country (stemming from the backward economy and an underdevelopment of the majority of sectors in the economy) can expect profitability that is commensurate with, or even superior to, a possible venture fund. The risk could be disproportionately lower for innovation risks that can be hedged by various financial instruments in the traditional economy.

So, we see great difficulties with the formation of a system and a wide pool of investment, both inside and outside the country. Actually, the complete absence of national institutional investors in venture capital, in the presence of the initiatives that have occurred in this area since 2005, supports this hypothesis. The majority of active investors in our market are the venture arms of IT companies or angel investors.

A major local entrepreneur told me, “My investment in my business brings me a profitability of 100 per cent per annum. I see no need to place money in alternative financial instruments, and especially not in such risky ones”.

In most developing countries, this gap is filled with international financial institutions, but in its current condition — war, economic and political instability — and even in the face of competition for this funding from the younger European Union countries, as well as the fast-growing markets in Asia, Africa and Latin America, our economy actually can’t get access these tools.

Well, we are done with the economy! Let’s take a look what is going on in the local ecosystem. In fact, we have 17 funds and super angels, that can invest around (either alone or syndicated) anything from $200,000 to $1 million.

Our experience of Europe and Silicon Valley suggests that in order to make one investment in the United States you must look at 100-200 projects, meet with 20-30 companies make due diligence on five-six companies. These numbers are lower in Europe.

In Ukraine, 1,000 start-ups are created per year, if we accept Steve Blank’s description, of which around 20-40 of them can claim to make $200,000-1 million per year. These numbers are too small for 17 funds and the super angels. If we look at the start-up market, in order to attract 200k — 1 million, start-ups would need to build a funnel of 50-60 investors, which in the end would provide a term-sheet of two-four.

If we look at our market through the prism of these numbers, we can see that the market is not self-sufficient. The market cannot give investors a sufficient deal flow to actively shape their portfolios. Plus, in order to observe 200 fundable projects a year, it is necessary to collect them, first, in foreign markets. The situation is the same on the start-ups’ side. It is necessary to go beyond the limits of our geography in order to obtain the necessary funnel(s).

Experience shows that many more interesting start-ups can be found outside of Ukraine, than internally, and the investors that operate in larger markets are much more experienced and professional than they are in this country. In fact, their work processes have years of experience of working with start-ups on large stream projects; many times more than Ukrainian investors.

At the moment, we see the future of Ukrainian industry venture capital investment and technological enterprise exclusively in terms of its integration into the global infrastructure. Most likely, it will have to face competition for capital, but I’m sure it’s the only thing that will push the industry.

These same problems are faced by any developing market. It is obvious that our eastern neighbours (Poland, the Baltic States, the Balkans, the Czech Republic, Romania) are addressing these issues more easily than we are, but they have highest number of start-ups in their portfolios (20-30 per cent are actively looking for money in Germany and London, and more than half of early stage investors have foreign start-ups on their books).


The views expressed in this opinion editorial are the author’s own and do not necessarily reflect Emerging Europe’s editorial policy.


Ukraine Returns to the Fold

LVOV UKRAINE - APRIL 25: Workers masons laid paving stones in the repair of the main street on April 25 2013 in Lviv Ukraine

History as Destiny? Institutional Erosion in Ukraine and Poland

Sirin Software — A Ukrainian Firm Conquering Global Markets

The Human Factor is Boosting Ukraine’s Promising IT Export Sector

The Ukrainian Banking Sector Looks Set to Regenerate New Growth

The Dilemmas of Ukraine’s Economic Policy

Ukraine Continues to Make Waves as an IT Outsourcing Destination

Ukraine and Canada: A History of Settlement and a Future for Investment

Changes Are Needed in Ukraine’s Economy and Business to Catch up with CEE Growth

Ukraine’s Tech Sector Is Booming but Needs Awareness and Confidence

ukraine tech emerging europe

Ukraine Outsourcing’s Value is Now in its Technological Expertise and Reliability

Legal Reforms are Improving the Existing Problematic Situation in the Ukrainian Agro Market

ukraine agriculture

Ukraine Is Energy Independent in Some Sectors and Awaiting Change in Others

The Eurovision Song Contest Is a Perfect Showcase for Ukraine’s Talent and Warmth

Ukraine’s Talented Students Are Well Served by Its Diversified Business Relevant Education

ukraine IT

Energy Tariff Reform in Ukraine: Estimated Effects and Policy Options

Start Making Connections for the Opportunities Ukraine is Currently Offering

Kharkiv region Ukraine - July 29 2016: Combine harvests wheat on a field in Kharkiv region Ukraine on July 29 2016

Falling into Old Ways in 2017? Ukraine’s Struggle for Functioning Economic Institutions

Leszek Balcerowicz: Ukraine Can Learn from Poland’s Economic History

Danish companies Support and Assist Ukraine’s Economic Transition

President of Ukraine Petro Poroshenko and Prime Minister of the Kingdom of Denmark Lars Lokke Rasmussen during a meeting in Kiev Ukraine

Anti-corruption Efforts Are the Starting Point for Further Reforms

Ukraine’s NIX Solutions Expands to Israel and Beyond

Military Operations in Ukraine Have Had Some Surprisingly Positive Side Effects for Modern Businesses

Night city reflection on the river in Donetsk. Ukraine

FocusEconomics: Predicting an Increase for the Ukrainian Economy

Ukraine’s Government Declares Ambitious Privatisation Targets

Ukraine’s Gas Industry Risks Stagnation Without Investment

‘Viking’ is Yet Another Way to Annoy Ukraine

Office Space Remains Available in Kyiv

Kyiv’s Mayor Is Used to Fighting to Attract Attention and Interest

KIEV UKRAINE - SEPTEMBER 8 2016: The facade of Kievrada the City Council located in Khreshchatyk Avenue on September 8 in Kiev.

Past Troubles Belie the Opportunities for Investment

The Stalled Conflict in Ukraine Will be Formalised

Denmark in Ukraine: Fostering a Better Business Climate for Both Sides

Ukraine Is Offering Europe Unique Combat and Technological Experience

Europe’s Breadbasket Offers Opportunities for Investment and Diversification

Maidan Three Years On—What Has Changed for Ukraine?

SMEs Should Play an Important Role in the Economy and Export Development

Lviv Is the Pearl and the Soul of Ukraine

Ukraine’s Reputation for Cheap Labour May Not Ring True in the Long-term

Business Moving Forward with Cautious Optimism — Can Investors Win the Confidence Game?

Ukraine’s Economy in 2017 — When Dreams of Growth Meet Geopolitical Reality

Ukraine’s Pro-change Atmosphere Says “Welcome!”

lviv emerging europe

Steps to Stability Marred by a Failure to Attract FDI

Longstanding Early Investors Say Ukraine Offers Foreign Manufacturers Great Prospects

ukraine manufacturing

Governmental Support is Vital to Fight Corruption

European Volatility Makes Economic Development Slower for Ukraine

Changes Are Making Ukrainian Banking More Aligned with International Standards

The Political Economy of Independent Ukraine: Late Starts, False Starts, and Last Chance?

Thinking Big; Working Hard; Delivering Value to Clients and Building Relationships

quartsoft emerging europe outsourcing

See the New Ukraine and Benefit From the Best by Partnering or Investing in IT

Engineer proceeding to data recovery from computer

There Is a Move Towards Change in Ukraine

Western Ukraine Could Be an Entry Point into the Country

From a Small Family Firm to a Top 100 Global Outsourcing Company

A Roadmap for Reform in Ukraine and a Promise of EU Support

The Innovation District IT Park Will Help Lviv Become CEE’s IT Hub

IT park lviv ukraine

Finalising the DCFTA is Expected to Bring Multiple Benefits to Ukraine

Protecting Intellectual Property to Encourage Business Confidence

Between the East and West, Geographically and Politically

A Very Good Prospect for Future Biogas Development

Ukraine’s Banking Sector Reconstruction Brings Asset Sales and Opportunities in Equal Measure

Gavel and Ukrainian hryvnias on a wooden table

Ukrainian Start-up Projects Recognised in the International Market but Still More Investors Needed

Startup Diversity Teamwork Brainstorming Meeting Concept

Naftogaz: A Good Start Has Slowed But Optimism Remains High

Closeup of pressure meter on natural gas pipeline with people on the background

Poland’s Business Experience Makes it a Good Neighbour to Ukraine

Ukrainian Agribusiness — a Jewel in a Crown

Wheat ukraine agriculture ebrd

Leave a Reply

Your email address will not be published. Required fields are marked *