UKRAINE’S TECH SECTOR WON’T BACK DOWN

UKRAINE’S TECH SECTOR WON’T BACK DOWN

The top global news story of 2022 is Russia’s invasion of Ukraine on February 24, 2022. The still-ongoing war has caused unimaginable mayhem and devastation for Ukrainian civilians as well as businesses.

Ukraine has always had a notable IT sector, and we wanted to learn how the country’s tech businesses—and their employees and their families—were faring amid this catastrophic event.  We spoke to Valeriy Kutsyy, CEO of Miratech, a leading Ukrainian tech company and Lenna Koszamy, Founding Partner of Horizon Capital, a private equity firm that launched the first fund in Ukraine since the invasion.

Archie: Valeriy, did you prepare in advance of the February invasion, and did you see this coming?

Valeriy: Ever since the first Russian invasion in 2014 of Crimea, we have been carefully monitoring the Russian threat posture, which increased greatly in the six months prior to February 24. The safety of our workforce and their families has been paramount, along with continued support of our clients, the protection of their data and the support of Ukraine and the cause of justice and peace. 

We have always had a Miratech Business Continuity Plan that involves an active assessment of various threats that include the pandemic, cyber threats and other business risks. Miratech had long planned to expand internationally, but after 2014 we aggressively accelerated our plans to diversify our business, clients and revenue base. In 2013 our revenue derived from Ukrainian clients was 54%, and by 2022 it was just a few percent. Likewise, we established legal entities in 12 countries and, as of today, two-thirds of our revenue is generated from our US subsidiary and associated clients.

In 2013 every Miratech employee was located in Ukraine, and today, while we continue to grow in Ukraine, in 2022 our Ukrainian team is 34% percent of our global population. We also expanded our leadership team in terms of international representation and location. In 2013 our leadership was 100% Ukrainian citizens, located within Ukraine. Today our international leadership team is located in five countries. However, our DNA and hearts remain Ukrainian, and we derive great strength from this asset and we are dedicated to building on these strengths and values.

Archie: Did any of your customers or investors state concerns with you directly in the months leading up to the invasion?

Valeriy: Only a handful of customers expressed sufficient concern that they required us to move their teams outside of Ukraine as early as 2021. However, the vast majority of clients did not require any physical movement of their teams, though they were laser-focused on closely managing their exposure and we collaborated closely on risk mitigation strategies.

After the full-scale invasion we were having daily conversations with many of our clients and reporting on the status of their support teams, their IP, and the status of their R&D projects. Our teams were in a high state of flux in terms of working hours, physical locations and the stress and demands to meet their needs for personal safety and well-being, as well as that of their immediate and extended families.

As you can imagine, many of our projects were temporarily disrupted by the mayhem inflicted on our teams. However, in spite of this, we worked with our clients to assure them that we would meet our obligations, and we committed that we would more than make up for any disruptions. In retrospect it is remarkable that, within 60 days after the invasion, our teams had met or exceeded all of our obligations to those clients. This is an amazing testament to the dedication of our managers, our workers, and their families. It is also important to recognize the support and goodwill expressed by our clients. 

Archie: How have any reputational challenges you might have faced previously as a Ukrainian company changed after the invasion, especially with companies unfamiliar with the region?

Valeriy: In the years prior to the war we faced several reputational challenges due to our Ukrainian identity. After the first invasion of Crimea, much of the world was either unaware of various aspects of the invasions or unappreciative of the fact that, for the first time since World War II, one European country had transgressed the territorial integrity of another. It is a challenge to manage ‘bad news’ that appears in the mass media.

At the time, there were a surprising number of business executives who still thought that Ukraine was part of Russia. There were also misperceptions that Ukraine was rife with hackers, and as such, some questioned the integrity of software developed in Ukraine. While we could explain the facts, we determined that we must strive to internationalize our business model and build an international identity.

Archie: Despite the resilience of businesses in Ukraine, there is still a major war going on, with human toll and devastation. What are the setbacks for tech businesses like yours that still manage to operate there?

Valeriy: Ukraine is known for having a talented and highly educated population. Since the invasion there has been a demonstration of commitment, leadership, community and patriotism that applies to the broader population, not just the IT sector. It has been demonstrated that these attributes were grossly underestimated by Russia and much of the international community.

After February 24, the disruptions required our team members to work from bomb shelters, subway tunnels and many other unexpected and challenging locations. As a response to the pandemic, in June of 2020 Miratech had made a commitment to a fully remote working model for all employees. We fully extended this to a mobile work model as part of a business continuity strategy at the onset of the invasion and war.

When the war began, the Ukrainian government imposed Martial Law, which meant that men between the ages of 16 and 60 could not leave the country. As a consequence you saw that many women and children moved to the west of the country or had to leave the country altogether. 

More recently, the Russian military has directly attacked the power and water infrastructure that is necessary not just to work, but to live through the winter. This has an impact across the country, and Miratech is working to provide housing and work facilities with power generation, heat, light and water storage. But challenging times create heroes, and our facilities services and support team never thought they would be saving lives. This team is working 24/7, and they are now performing miracles by sustaining hundreds of co-workers who are now facing these newest Russian war crimes.

Archie: Lenna, your firm launched Horizon Capital Growth Fund IV, the first fund for Ukraine and Moldova since the Russian invasion. How did you make this happen amid a war?

Lenna: We are honored to make history by launching the first fund for Ukraine since the invasion, and we are the first fund to back both Ukraine and Moldova since they achieved EU Candidate Status in June 2022.

Horizon Capital launched fundraising for Fund IV in October 2021, and we were then forced to stop from February to March of this year. The invasion at the end of February spurred our team into action on ensuring the safety and security of personnel and families, evacuating women and children and supporting portfolio companies to the maximum extent possible, then contributing humanitarian aid directly and via our leading companies.

We were inspired by the bravery and tenacity of the Ukrainian people as well as entrepreneurs who protected their people, kept their businesses operational across the country and made significant humanitarian contributions to their communities. Three months into the war, we embraced Ukraine’s ‘Be Brave’ motto and re-started fundraising in May. Our investors who backed the first closing have made a tremendous effort to launch the Fund in record time. Four months later, we held a first closing of $125 million, exceeding our $100 million first close target.

There is extra inspiration for launching this fund in seeing the bravery of the Ukrainian people and their tenacity in defending their homeland. In our view, Ukraine needs investors who believe in the country and are also ensuring that investment capital is available now and not only once the war ends. We firmly believe that Ukrainians must have access to sufficient resources today to propel their economic rebound and the renewal and revitalization of their country.

Archie: What  type of investments are you making into Ukrainian businesses and others in the region?

Lenna: In the last 10 years, we have primarily invested in technology and export-oriented companies that are growing rapidly and can compete on a global scale, and that continues with these investments into Ukrainian tech businesses such as m, Ajax, Creatio, Genesis,  airSlate, Intellias and others.

The Ukrainian IT sector expanded nearly 60-fold through the last 20 years, generating $6.8 billion in exports in 2021, compared to $110 million in 2003. There are close to 80 companies in our pipeline that we are currently considering. This sector is also considerably contributing to the overall rebound of the Ukrainian economy. In 2022 the IT sector paid an estimated UAH 48 billion (US$ 1.3 billion) in taxes and fees.

In general, we strongly believe in Ukrainian companies founded and managed by this ‘new generation’ of visionary entrepreneurs in sectors with sustainable cost advantages and export attractiveness. We plan to continue investing primarily in the IT sector: IT services and IT product companies, e-commerce, fintech and other innovative industries.

Ukraine has already produced quite a few tech unicorns, and we’re confident that Ukrainian IT talent will continue to play an important role in the global tech ecosystem. Miratech, which we backed just this year, is a great example of such a company, delivering extraordinary growth during 2022 while taking a very active humanitarian role in helping their employees’ families and the broader Ukrainian community to cope with the challenges brought on by the war.

Archie: Your funds have received backing from well-regarded international developmental banks. What is your value proposition that attracted their support?

Lenna: Development finance institutions (DFIs) like the European Bank for Reconstruction and Development (EBRD) and the International Finance Corporation (IFC) have been our partners for many years, along with many others that have shown appreciation of our investment strategy and also take a proactive approach in supporting Ukrainian businesses in difficult times—like we do today by providing equity capital.

Our investments facilitate important economic processes for the Ukrainian economy, such as the creation of new jobs, supporting the IT sector driving the country’s economic rebound and lessening ‘brain drain’, promoting global gender finance initiatives, mobilizing private capital to the region and promoting private sector support and development. I believe that DFIs understand that there is no more critical time than now to support funds like this for investing in Ukraine now, and not waiting until the war is over.

Archie: What are the unique factors in Eastern Europe that showcase the region’s ecosystem of innovation?

Lenna: The Eastern European region is one of the fastest-growing markets for IT businesses. It has a large, well-educated base of IT professionals, with 285,000 IT engineers in Ukraine in 2021. The region has one of the highest ratios of IT graduates, resulting in circa 50,000 thousand new IT professionals joining the market every year. Together, with the deep strategic nexuses of Ukraine and its neighbors Poland, Romania and Moldova, our near region provides access to almost one million IT professionals, with a 2x to 3x cost advantage vs. the markets of Western Europe and North America.

Many IT services companies in the region have grown to a considerable size, delivering services to and partnering with multibillion dollar enterprise clients across the world. Ukrainian IT providers have gained a strong reputation based not only on competitive pricing but also on very high quality in delivery, characterized by a professional, diligent and honest approach to conducting business.

You can look at Miratech as a case study. We considered Miratech as a globally recognized next-generation digital engineering and consulting services company, which has been a trusted partner for various Fortune 500 clients and has been posting high double-digit growth annually; it now operates as a truly international entity with offices across the globe, including India, Canada, Spain and more.

Some regional IT services companies have turned public in recent years, gaining very encouraging sentiment from the global investment community, and trading at a premium compared with their Asian peers. More IPOs of IT companies from the region will certainly follow in the near future. 

Besides IT services, Ukraine has a track record of building global IT product champions. Many of them were backed by Horizon Capital, such as Jooble, Creatio and the most recent Ukrainian unicorn,  airSlate. These, and many more successful examples of Ukraine-born product companies, such as Grammarly, Preply, People.ai, encourage young people in Ukraine to launch their own startups, a trend which has accelerated in the last 10 years. A Ukrainian footprint among the founding team is also present in such global champions as PayPal, WhatsApp and GitLab, which illustrates a deep-rooted culture of focusing on born-global and scalable business models, which we often see in IT product companies from Ukraine. The Ukrainian ecosystem of tech businesses continues to expand rapidly, raising $350 million in the first half of the year, and additional capital will enable them to scale even faster.

Finally, many government enablers have been implemented to foster the IT industry in Ukraine. In particular, Ukraine has launched Diia.City, a special legal and tax regime that creates favorable conditions for the development of IT business and introduces a set of incentives for Ukraine to become a high-tech digital state. Led by the Ministry of Digital Transformation, Ukraine is on track to become a leading digital state with 18 million users, nearly 50% of the population, currently using the Diia app, which provides access to 20 services and 11 ID smartphone documents. Ukraine has become the first country in the world with a digital ID that is valid and can be used everywhere within the country, and the fourth in Europe to launch a digital driving license. Multiple basic state services were digitized, including digital signatures, social payments and vehicle registration. Digital tools can also provide assistance during the war, such as eVorog (which means eEnemy), which uses AI to recognize and report Russian equipment or invaders. Also, the business registration process was optimized from 30 steps to just three, and can now be completed fully online in 10 minutes.