From startup boom to war challenges: How venture capital market in Ukraine changed over the decade — AIN research

AIN has investigated how the venture capital market in Ukraine has developed since 2014, how it has been affected by the full-scale invasion of Russia, and which startups now have a better chance of raising funds.

Venture capital market in Ukraine before 2014

With the development of the IT sector in the mid-2010s, Ukrainian startups began to draw the attention of foreign investors.

Two main factors made an impact:

1. The increase in the US Federal Reserve System’s discount rate from 2022-2023 to the highest level in 23 years at 5.25-5.5%, which led to a correction in investments around the world, including the US (on September 18, 2024, the first reduction in discount rates in four years by -0.5% took place);

2. The war with Russia: in 2014 and 2022, the investment climate deteriorated. At the same time, in the second year of the full-scale war, Ukrainian companies continue to attract investment, opening new development niches, such as Defense Tech.

The European and, in particular, Ukrainian venture capital markets are much younger than the American one, which has been actively developing since the middle of the last century — for example, in 1946, one of the first investment companies, American Research and Development Corporation, was founded.

The development of the Ukrainian venture capital market began during the cadence of fugitive President Viktor Yanukovych. However, it was not due to government support but rather in spite of it.

“Under Yanukovych, investments in startups were far from state influence, as he was busy dividing other assets — the government attacked businesses,” says Oleksandr Yatsenko, principal of SMOK and chairman of the board of Techosystem.

Raiding flourished during the cadence of the Party of Regions’ term: 7,000 Ukrainian companies were affected by it. Yanukovych’s “family” was most interested in large, profitable businesses, such as Rozetka. Startups, which did not have a large share in the country’s economy then, remained out of sight of the corrupt government, which is probably why the venture capital market got a chance to develop.

The industry peaked in 2011-2013, says Yatsenko, adding: “In a discussion with colleagues, we agreed that we have not yet managed to surpass this peak. Back then, more teams, investors, market events, and local investment firms started appearing.”

Among the first Ukrainian venture capital foundations were TA Ventures by Viktoriya Tigipko (2010), which focused more on investments outside of Ukraine, and AVentures Capital by Yevgen Sysoyev and Andriy Kolodyuk (2012), which focused on startups from Ukraine.

Sysoyev says that in its first year of existence, AVentures made four investments, including Augmented Pixels, which was bought by the American microchip maker Qualcomm a month before the full-scale invasion. AVentures has focused on working primarily with Ukrainian startups, particularly IT businesses that could potentially enter the US or EU markets.

One of the key moments in the development of the venture capital market was the emergence of incubators, accelerators, and specialized foundations that supported startups at pre-seed stages. In 2014, the Ukrainian Venture Capital and Private Equity Association (UVCA) was founded, bringing together investors and driving the industry’s development.

The same year, the investment company Digital Future was launched, focusing on projects in e-commerce, digital marketing, mobile technologies, and high-tech solutions for businesses and consumers.

“The Ukrainian teams that started in 2012-2016 managed to have a breakthrough: we know a number of names that are trading for tens of millions of dollars in their niches,” says Oleksandr Yatsenko,” Since 2022, there has been a new wave of teams that will show the same result in two to five years. We can have 5-10 really powerful, big players with half a billion or a billion dollars valuations.”

Following the outbreak of the war in 2014, market growth experienced a slight slowdown but later rebounded, driven by new waves of innovation and support from international investors.

Startups of Ukrainian origin that raised large investments in the period from 2014 to 2024

• Creatio, $268 million in investments, the company is valued at $1.2 billion.

• Grammarly, $400 million in investments ($110 million in 2017, $90 million in 2019, and $200 million in 2021). Founded in 2009, the platform for checking the grammar and style of English texts using AI is valued at $13 billion.

• People.ai has almost $200 million in total investments (including $100 million in 2021). The platform for analyzing the efficiency of sales departments using AI was created in 2016. The company was valued at $1.1 billion.

• Preply, $170 million in investments (with the majority — $120 million — raised in 2022-2023). The online learning platform that connects tutors and learners has been operating since 2012.

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The Russian invasion in 2014, the COVID and post-COVID period, and the full-scale war. How the global and Ukrainian venture capital markets have transformed

Globally, 2015 was a record year for venture capital, with $128.5 billion in investments, 44% more than in 2014. Toward the end of the year, there was a decline: the number of deals and total investment fell sharply from $38.7 billion in the third quarter to $27.2 billion in the fourth.

The most significant decline was observed in North America and Asia, where economic forecasts, particularly in China, prompted investors to be more cautious. There was less interest in big rounds ($100 million+), and many IPOs fell short of private company valuations.

Investment activity declined due to general economic uncertainty and concerns about future interest rate hikes in the US.

In 2015, Ukrainian startups secured $132 million in investment in the second year of the war, three times more than in 2014. The year saw 66 deals, with about 52% of the capital coming from local investors. The average deal size was $400,000 at the seed stage.

Grammarly and Petcube are not the only Ukrainian startups that have gathered significant money on Kickstarter. In the first half 2017, Ukrainian companies raised almost $2 million through crowdfunding. Among those who secured the most money were Jollylook, an eco-friendly camera for instant photos ($377,000 instead of the $15,000 target), Senstone, a pendant for converting voice notes into text ($370,000), and Ugears Hurdy-Gurdy, mechanical musical models (over $290,000).

The venture capital market continued to grow. In 2018, total investments in IT companies with Ukrainian roots reached $336.9 million (almost one and a half times more than in 2017). The average amount of money raised at the seed stage grew to nearly $1 million, and the number of investment deals increased to 115 compared to 89 in 2017.

GitLab attracted a third of the total amount: with $100 million in investments, the company also received unicorn status.

Covid years and investments in Ukraine. Key figures:

• According to the UVCA, the total volume of venture capital investments in Ukrainian IT companies reached $510 million in 2019, which is 1.5 times more than in 2018.

• Notably, the number of deals remained almost unchanged. However, the volume of mergers and acquisitions increased 18 times. Business angel investments in 2019 increased sevenfold to $6.1 million compared to $0.9 million in 2018.

• Ukraine’s global venture capital market share remained at around 0.1%.

• In 2020, the volume of investments reached a record high of $571 million.

Before the full-scale war in Ukraine, several Ukrainian startups achieved unicorn status. In 2021, People.ai, a Ukrainian AI-powered platform for analyzing sales department performance, raised over $100 million, valuing the company at $1.1 billion. That same year, Grammarly, an AI-driven platform for checking grammar and style in English texts, also became a unicorn company.

Funding and mentoring: organizations that support Ukrainian startups

• The Ukrainian Startup Fund (since 2019) provides grants of up to $50,000 at pre-seed stages and up to $100,000 at seed stages. This is non-refundable financial assistance for startups in IT, medical technology, agro-tech, energy, etc. As of mid-2023, the fund has invested over $8.2 million in more than 300 startups. Reface, Let’s Enhance, and Esper Bionics are well-known startups that have received USF support. The USF also supports projects that can be used during and after the war, particularly in the Rebuilding Ukraine program as part of Seeds of Bravery.

• The Brave1 cluster (starting in 2023) offers a one-time grant of UAH 500,000 to UAH 2 million for Defense Tech startups. Priority is given to developments such as technical intelligence, automated control systems, missile and artillery systems, firepower systems, electronic warfare systems, UAVs, and medical support technologies and equipment.

• Also, since 2016, 1991 Open Data Incubator has been operating in Ukraine. It is a flagship project of the NGO SocialBoost, created with the support of the Prime Minister and the government of Ukraine. It is the first nonprofit incubator in Ukraine to support startups. In nine years, its team has conducted over 40 programs and graduated 250+ startups, one-third of which have received more than $10 million in grants and investments.

• In 2024, the Techosystem public union announced a new Techosystem Defense cluster. “The creation of the cluster was driven by the need to support and develop Defense Tech companies that are key to strengthening the country’s defense capabilities in the full-scale war,” explained cluster head Yegor Dudinov in his interview for dev.ua. The cluster includes Aspichi, Bunker UA, Buntar Aerospace, Deftak, Drill App, Falcons, Farsightvision, HIMERA, LifesaverSim, Molfar, Oko Camera, r-Machine, and another company that wishes to remain anonymous.

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Investment decline since 2022

With the outbreak of the full-scale war, the US Federal Reserve System began a cycle of raising interest rates, so investment in the Ukrainian market has dropped significantly. According to research by AVentures Capital, venture capital investments in Ukraine in 2022 fell by 74% to $218 million compared to $832 million in 2021.

Most of the investments (62%) went to AirSlate, Preply, Fintech Farm, and Spin.ai. AirSlate, Creatio, and Unstoppable Domains joined the unicorns of Ukrainian origin.

The decline in venture capital investment is not specifically a Ukrainian trend: support for startups has decreased by 20-30% in Europe and the United States in previous years. In the first half of 2023, according to PitchBook Data, the volume of venture capital investments in Europe decreased by 61%. KPMG Private Enterprise’s Venture Pulse report shows that in the first quarter of 2024, global venture capital investment totaled $75.9 billion, the lowest figure in the last five years.

The reasons for the decline include geopolitical tensions and the effects of the US Federal Reserve’s interest rate increases, which delayed companies’ exit from the venture capital market and reduced investment in the later stages of deals.

“In 2021, there was a peak of investment in the world, and the following year, the market fell in both the US and Europe,” says Sysoye. “Ukraine would have had a similar trend even if Russia had not unleashed a full-scale war. Tech businesses have started to grow more slowly. Investors have less appetite to invest. The number of M&A and IPOs has fallen both in Europe and the United States, so new investments have dropped sharply.”

Ukrainian venture capital firms that continue to operate

In 2023, AIN published a list of investment companies operating in Ukraine for over a year. According to media reports, six foundations continued to invest despite the full-scale invasion, while eight were added during 2022-2023.

The companies that continued to invest were SMRK, Horizon Capital, U.Ventures, TA Ventures, Flyer One Ventures, and N1 Investment Fund.

Geek Ventures, SID Venture Partners, and NetSolid Investments were launched a few months before the invasion; Angel One Fund, Burner, Hypra, hi5 Ventures, and Vesna Capital were launched after the full-scale invasion.

The foundations that have invested the largest amounts in Ukrainian startups since the start of the full-scale invasion include U.Ventures, SID Sigma Ventures, and Flyer One Ventures, notes Yevgen Sysoyev. Horizon Capital remains the largest Ukrainian VC firm supporting late-stage projects.

Data from some Ukrainian VCs:

Flyer One Ventures

Flyer One Ventures (2018) is one of Ukraine’s most active venture capital firms focusing on early-stage tech startups.

Investment size: $200,000 - $2 million at pre-seed and seed stages.

Partners: Vital Laptenok

Top-performing companies from the portfolio:

• Awesomic

• Mate academy

• Fintech Farm

Exit: Pinterest acquired Vochi, a video and photo editing app.

Roosh Ventures

Roosh Ventures (2021) specializes in Seed and Series A investments in enterprise SaaS solutions, FinTech, gaming, and AI-driven products. The firm also prioritizes co-investing in tech companies alongside globally recognized funds, with a focus on the EU and US markets.

Investment size: $100,000 - $1 million

Partners: Sergey Tokarev, Denis Dmitrenko

Top-performing companies from the portfolio:

• Reface

• Zibra AI

• Respeecher

Exit: Google acquired New York-based AI startup Alter.

SMRK VC Fund

SMRK (2013) is one of the first Ukrainian venture capital firms to support IT products, mainly financing companies at the seed and Round A stages.

Investment size: $0.5 million - $1.5 million

Partners: Andriy Dovzhenko, Oleksandr Kosovan, Vlad Tislenko

Top-performing companies from the portfolio:

• Osavul

• Deus Robotics

• Esper Bionics

Exits: Preply; Ajax, Apostera

SID Venture Partners

SID Venture Partners (2021) invests in tech startups with Ukrainian teams or founders at the seed and (rarely) pre-seed stages.

Investment size: $150,000 - $300,000

Partner: Dmytro Vartanian

Top-performing companies from the portfolio:

• Elai.io

• Finmap

• datuum.ai

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u.ventures

u.ventures (2017) is a foundation that invests in tech startups at the stages from pre-seed to Round A.

Investment size: up to $1 million

Partners: Jaroslawa Johnson, Olena Kosharna

Top-performing companies from the portfolio:

• Fintech Farm

• NewHomesMate

• Carmoola

• Esper Bionics

• Competera

• Mate academy

• Ability

• Turnkey Lender

• Instock

• Osavul

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TA Ventures

TA Ventures (2010) invests in technology startups in Eastern Europe, Ukraine, and the United States.

Investment size: up to $1 million

Partner: Viktoriya Tigipko

Top-performing companies from the portfolio:

• SumUp

• Gameto

• Mate Academy

Exit: 80 exits in the history of existence

More about exits

Venture investor Alex Vitchenko, referring to Crunchbase data, cites the following figures: the average percentage of exits in Ukrainian venture funds is 11.5%, while the median is only 9%. The global benchmark for exits (those that have generated x1+ revenue within ten years) is 25-30% of the portfolio.

In his op-ed for dev.ua, Vitchenko notes that Digital Future’s experience has been that the minimum exit period was a few months (FirstData), and some startups have been in the VC foundation portfolio for 5-8 years and are not going to exit. In general, he observes that the average return period for investors has decreased: it used to be 10-13 years, but now it is 5-7. There are also successful cases with a shorter term: for example, Flyer One Ventures’ first exit, the acquisition of Vochi by Pinterest, coincided with the third anniversary of the company’s existence.

In Ukraine, one of the first Ukrainian venture capital firms, TA Ventures, remains the leader in terms of the number of exits. The largest exit in the foundation’s history from the US manufacturer of innovative diapers, Coterie, was the 80th one. These data were confirmed in a commentary for AIN. Other leading VC firms in terms of the number of exits include Digital Future (8 exits), InSoft (5 exits), SMRK VC Fund, and Digital Future.

Problems in the development of the Ukrainian startup market during the full-scale war:

• Lack of a mechanism to protect venture capital investments. Risks include underdeveloped mechanisms for booking startup teams. “The situation with military startups is better, but in general, these founders can be mobilized at any time, so the risks for investors are enormous,” explains Andrew Zinchuk, managing partner of ZAS Ventures Group. 

• Lack of tools for investing in Ukrainian companies. “There is an angel club, United Angels Network, designed to teach IT entrepreneurs how to invest in startups, but they are at the beginning of their development, and now there are two or three dozen angels. In the case of Toloka.vc, it’s 500+ angels [Editor’s note: Toloka.vc reported “almost 1,000 investors today” after the publication of this article], in iClub — up to a thousand,” comments Oleksandr Yatsenko, noting that such support is not enough for the Ukrainian venture capital market. He cites Poland as an example, where the startup ecosystem and, in particular, government support are much better developed. 

“Poland is one of the largest beneficiaries of EU funds, while the local startup market is very competitive,” said Slawomir Roschenko, an expert at the Ministry of Investment and Trade in Kyiv, in a commentary to Mind.ua.

Andrew Zinchuk also mentions cases when foreigners come to Ukraine and implement investment instruments there. However, he adds that few such brave people exist, and investing in Ukrainian LLCs from abroad is quite tricky.

Ukraine is already working on developing the necessary tools.

• Registration of Ukrainian startups abroad. “Most Ukrainian unicorns are registered in the United States, work with the foreign market, and have more clients in America,” says Sysoyev.” The reason is, in particular, the size of the market. We have a limited domestic market, so the way forward for companies is to increase exports of intellectual products.” 

• Almost 100% of international startups starting in Ukraine are registered in the United States, in states such as Delaware, or in Cyprus, Estonia, or other jurisdictions with efficient courts, investment protection, and transparent conditions for international investors and future buyers of these startups.

At the same time, the disadvantage of registering abroad and exporting services is taxes outside Ukraine.

• Lack of plans for scaling and globalization. “I notice a tendency when companies’  don’t want to make money on the war’ and sell the product at zero or with a minimal margin,” says Andrew Zinchuk. “Such companies do not have the resources for innovation, R&D offices, new technologies, and they will not have the financial resources to survive difficult times.”

He advises entrepreneurs to think big and build businesses tailored to the global market. “It is important to understand who can become a potential client and how the product can be exploited in the global market,” he explains. For example, our leading partner is NATO, so military developments must meet their standards.

What will happen to the Ukrainian venture capital market: forecasts

Despite the full-scale war and the inability to predict its end, there are positive forecasts for the Ukrainian investment market. According to Zinchuk, 2024 already shows better venture capital investment dynamics than the previous year. 

“ZAS Ventures Group, an investment firm and syndicate, has already made seven deals this year, and another seven or eight are planned by the end of the year. Colleagues from other foundations are also very productive,” comments Andrew Zinchuk.

The recovery of the investment market is also evidenced by Ukraine’s return to the top 10 in Eastern Europe — the country has risen three positions and is now in ninth place, ahead of Latvia and Croatia (10th and 11th place, respectively). Overall, the CEE startup ecosystem has grown 2.4 times since 2019.

Six Ukrainian cities — Kyiv, Lviv, Kharkiv, Odesa, Ternopil, and Dnipro — are among the top 1000:

Ukraine, Poland, and Estonia remain the most prominent players in the CEE startup market:

• 26,000 startups from the region raised €2.1 billion in 2023

• with a total valuation of €213 billion

Ukraine also ranks second in terms of the number of AI companies (more than 240) among Central and Eastern European countries, second only to Poland. 

“Currently, our ecosystem is close to the Estonian one in terms of the number of cases and investments,” says Oleksandr Yatsenko, ”However, our potential is much greater and, in my opinion, we can show much better results than the Estonians over the next ten years, provided that the ecosystem works clearly and smoothly.”

The most promising industries for investment

Artificial intelligence. Most investors consider whether teams take advantage of artificial intelligence technologies, says Oleksandr Yatsenko. According to him, AI has changed the market paradigm like the transition from Web3 to mobile: “Artificial intelligence will be at its peak in 2022-2024. I am sure that, unlike Web3, this is not a hype story; AI is stabilizing at a high level. It is a game changer, just like the advent of the Internet.”

According to Crunchbase, more than $35.5 billion was invested in AI startups in the first half of 2024 alone. In the first quarter of this year, ten new AI unicorns appeared at once, each worth more than $1 billion, according to KPMG’s Venture Pulse report. These companies are based in the United States (Celestial AI, Together AI, Perplexity, io.net, Figure AI, and ElevenLabs), China (YueZhiAnMian and Miotec), France (Mistral, which announced its unicorn status at the end of 2023), and India (Kruti).

Potential Ukrainian unicorns using AI:

• Monobank built a support service (chatbots) based on artificial intelligence, and the technology helps determine whether to grant loans to clients;

• Preply uses AI to search for tutors (algorithms analyze students’ needs, language levels, and learning styles) and in online communications between students and teachers;

• Reface is the first AI application made in Ukraine;

• Ajax Systems released IP security cameras that recognize objects using AI.

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Defense Tech. Russia’s full-scale invasion of Ukraine, which has been repeatedly called a war of technology, has prompted other countries to pay more attention to technological weapons. “Defense Tech has become important because the world realizes that the risks of war are increasing [for other countries],” comments Yevgen Sysoyev.

“The world has intensified armed confrontation in a cold war-like manner, so the Defense Tech market will be on the rise for at least the next 10+ years,” says Oleksandr Yatsenko, estimating this market at millions of dollars.

The Venture Pulse report for the first quarter of 2024 shows a high interest in drone technology, satellites, and software solutions. Governments and intergovernmental alliances are likely to stimulate such investments. For example, in 2023, NATO launched a $1 billion Innovation Fund to provide long-term investments in DeepTech startups.

Experts say that the need for Defense Tech will not disappear after the war, and the technologies will remain relevant in the large NATO market. 

Already, 200 developments from the Brave1 platform comply with NATO standards, including UAVs, ground robotic systems, electronic warfare, communications, transportation, and others. The NATO codification allows the state to purchase technological solutions for the needs of the Security and Defense Forces.

“Ukrainian Defense Tech has become interesting not only in terms of technology but also as a business. More than 100 investment partners from more than 30 countries are now interested in Ukrainian developments. Among them are large venture capital firms, angel syndicates, and private investors,” Mykhailo Fedorov said in an interview with AIN. 

There is a less optimistic view of the demand for Ukrainian developments in the global market. “Some developers will definitely not be competitive abroad,” comments Andrew Zinchuk,“Much of what is being done now is assembled from Chinese components: such developments will disappear.” 

At the same time, he believes that the backbone of the most innovative projects will remain, potentially becoming giant corporations and selling products worldwide. 

The editors thank Techosystem, an open association of Ukrainian tech ecosystem participants, for fact-checking and consulting.