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A lot or a little? The Ukrainian startup ecosystem

0 9 June 2013

During late 2012 and early 2013 Yevgeny Sysoyev, managing partner of Ukrainian fund AVentures, toured Ukraine, meeting with over 200 local tech startups and collecting data about a further 300. His findings were first published in Russian in Forbes Ukraine on 2nd April, while a full translation of his report was published by GoalEurope. This is a summary of his key findings. 

Outsourcing vs domestic IT-companies. 

For many Western companies, Ukraine is an ideal location for outsourcing. It has many talented maths and physics graduates, who are willing to work for significantly lower wages than equally qualified people in other countries. Outsourcing is important throughout the country, but it is particularly prevalent in the Lviv and Kharkiv regions.

In his interviews with entrepreneurs, Sysoyev was struck by the hostility many displayed to outsourcing, which they considered “evil for Ukraine”. They argue that outsourcing hinders the successful development of local tech startups. Although outsourcing can improve the competency of Ukrainian programmers, they are prevented from developing the entrepreneurial, marketing and sales expertise necessary to build a successful project because those aspects of business take place elsewhere, usually outside Ukraine. They also believe that the higher wages offered by foreign companies lure talented specialists away from local projects.

Sysoyev is concerned about this - he believes that only local projects can trigger significant growth in the Ukrainian tech sector. 

Kiev

Kiev is home to most of Ukraine’s successful tech startups, including software firms InvisibleCRM, Terrasoft and Starwind Software and e-commerce projects like all.biz, rozetka.ua, Bt.kiev.ua, ModnaKasta, sokol.ua, deshvshe.net and LeBoutique. One big advantage for Kiev firms is that they tend to be able to build strong executive teams more easily. 

Dnepropetrovsk

Ukraine’s fourth largest city punches above its weight in terms of startup success. It is home to Cupid, a popular online dating network with tens of millions of users, while PrivatBank, one of Ukraine’s largest IT-companies is also based there. Furthermore, Dnepropetrovsk also hosts the CIS headquarters of Allegro Group (part of global holding company Naspers).

Western Ukraine 

Sysoyev describes Western and Central Ukraine as “the motherland of successful gaming and mobile entrepreneurs”, with Lviv entrepreneur Maksim Gyring coming up with Nravo - the ipad “game of the year”. Successful projects have also come out of Rovno, Vinnitsa (e.g. RIA) and Zhitomir (Jelastic). 

Eastern Ukraine

Outsourcing dominates the tech industry in East Ukraine, with local schools and universities providing an army of young developers to work for outsourcing companies, particularly in Kharkov. While the focus on outsourcing means that young developers don’t get any experience in sales, building products or scaling, the experience of Vlad Voskresenskii, who used outsourcing as a stepping stone to build InvisibleCRM, suggests talented individuals can build their own projects. 

The South

Odessa is the most important tech-hub in the South. It is home to Shape Services and Computer Systems Odessa, as well as a number of projects started by former employees of these globally successful software companies. Ex-Shape Service employees developed Ar23d, which works with augmented reality, while former programmers from Computer Systems Odessa founded Readdle, which develops iOS apps. 

Overview

In his report, Sysoyev mentions 59 companies. Over half (56%) are already oriented on international markets, with significant revenue coming from outside the CIS. The sector is centred on Kiev, which is home to 44% of startups mentioned. Most startups (47%) profiled already have 20-50 employees, and are growing rapidly. 

However, raising funding continues to be difficult. Sysoyev estimates that, in terms of investment, the Ukrainian startup industry is at least 10 years behind Russia. In contrast to Russia, which has as many as 60 active funds, there is still not one fund investing in 2-3 early stage Ukrainian startups per year, and total investment in the Ukrainian tech sector is 100 times less than in Russia. 

Sysoyev values the entire tech sector in Ukraine at $1 billion, and predicts that it could easily reach $2-3 in the next 3 years, and $5 billion in 5-7 years. Is this a lot or a little? Well - compared to the Russian tech sector it is small, but there are a lot of opportunities for investors. Enough to keep Sysoyev “hoping and believing”. 

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