Growing despite everything: The main challenges of Ukrainian defense tech in 2025

Ukrainian and foreign media love dramatic headlines like “Innovative development from Dnipro transforms war forever” or “Ukraine is now deploying robotic dogs on the frontline.” But behind these headlines are real startups run by real people who face real and often overlooked challenges. These difficulties rarely attract public attention — until they escalate into crises.

So, how can we prevent these crises? By talking not only about the successes of Ukrainian startups but also about the challenges they face and how to support them.

AIN interviewed 11 Ukrainian defense tech startups, investors, and industry representatives from the Technological Forces of Ukraine. While it’s impossible to rank the challenges in order of importance — since every aspect of development is interconnected — we can group them into three key categories:

• Production challenges

• Development challenges

• Challenges specific to SaaS startups

Potential solutions accompany each challenge. Given the complexity of the issues, these suggestions aren’t exhaustive, but they provide a starting point.

1. Production challenges

1.1 Human capital

Challenge: A complex and slow process for obtaining critical enterprise status, making hiring difficult.

For years, Ukrainian defense tech developers have struggled with the bureaucratic process of securing critical enterprise status, as AIN reported in 2024. This issue resurfaced in January 2025 when Oko Camera, a startup producing thermal imaging cameras for drones, reported that the Pechersk Military Enlistment Office had detained its production manager. The company insisted it had critical enterprise status and was fulfilling a state defense order, meaning its employees should be eligible for deferral from mobilization. However, the enlistment office denied this.

Ukraine’s Ministry of Digital Transformation gave AIN an order confirming Oko Camera’s critical enterprise status. The startup later confirmed that their employee eventually received the necessary military registration documents and deferral.

The root of the issue? The employee wasn’t registered. In such cases, companies must send an official letter to the military enlistment office explaining the situation. In January 2024, Oko Camera CEO Denys Nikolaienko did exactly that, but delays still occurred.

“When a person arrives to register, they can receive a summons, undergo a medical exam, and be sent to a training center the same day,” Nikolaienko explains.

He acknowledges that, from a legal standpoint, enlistment offices are justified in their actions if an employee isn’t correctly registered.

However, bureaucratic hurdles aren’t the only problem. Constant changes in booking regulations have made securing deferrals even more difficult for startups.

“While we were preparing documents, the criteria changed,” says Andriy Poberezhniuk, COO of Kara Dag Technologies, which manufactures drone detection systems.

Ailand Systems, a manufacturer of mine detectors, faced a similar issue. Initially, they submitted paper applications for employee deferrals, but the government introduced an electronic system midway through the process, forcing them to start over.

Even when companies secure deferral documents, they don’t always carry weight at military enlistment offices. Ailand Systems founder Dmytro Titov recalls that his company’s key engineer was mobilized, and other employees spent weeks in line trying to prove their deferral status.

Kara Dag Technologies also had an employee mobilized, delaying an important new project. Despite these setbacks, Titov sees deferrals as a “great luxury” and acknowledges regulators’ efforts to improve the system. Poberezhniuk of Kara Dag Technologies remains optimistic as well: even if key employees are mobilized, the company will slow down but won’t disappear.

Not all startups face such difficulties.

“We don’t have a threat of key employees being mobilized,” says Misha Rudominsky, co-founder of HIMERA, a communications systems manufacturer.

Close cooperation with the Ministry of Strategic Industries and the Ministry of Defense helped secure deferrals for their team.

Nikolaienko of Oko Camera agrees that, despite the challenges, “there is already progress in the reservation system,” especially compared to 2022.

Solution: A simple and stable reservation system that enables defense tech startups to fulfill defense contracts.

Startups acknowledge that digitalization has improved procurement efficiency. However, unpredictable enlistment office decisions remain a significant issue. Public awareness of these enterprises’ importance to national defense must be increased.

Challenge: A shortage of qualified candidates.

A 2024 survey by the Institute for Economic Research and Policy Consulting revealed that labor shortages had become the biggest obstacle for businesses for the first time since the full-scale invasion. This problem is even more severe in the defense tech industry due to the need for highly specialized skills.

As his team grows, the shortage of skilled professionals becomes more apparent.

However, another challenge complicates recruitment: defense tech startups must remain discreet to avoid attracting enemy attention. The result? “People don’t know about us,” says Olesia Diachyshyn, co-founder of LifesaverSIM, a first-aid training app.

She recalls attending two job fairs in 2024 where students approached her booth asking, “What is the defense tech industry about? What kind of simulator is this? Tell me more!” Diachyshyn believes these students could contribute to her startup if they were more aware of the industry’s opportunities. Kara Dag Technologies also engages students, according to Poberezhniuk.

Solution: Expand outreach to new audiences while balancing security concerns and limited HR budgets.

1.2 Material supply

Challenge: The US-China trade conflict could disrupt supply chains, leading to shortages of crucial components.

Headlines like “China bans exports of…” regularly appear in news feeds. Ukraine not only relies on Western support but also on China’s continued willingness to supply electronic components. If geopolitical tensions escalate, export restrictions could severely impact Ukrainian defense tech startups.

Moreover, even friendly countries may impose export restrictions in times of global crisis, as seen during the pandemic when medical supplies were stockpiled domestically.

HIMERA co-founder Misha Rudominsky highlights another issue: “In 2024, supply in the electronic components market decreased as manufacturers scaled back production due to lower profits.”

This trend, he warns, could lead to longer delivery times in 2025.

Solution: Diversify supply chains and localize production while maintaining cost efficiency.

Many startups, including HIMERA, have developed risk-minimization strategies, such as securing multiple suppliers for each component or signing direct contracts with manufacturers. Meanwhile, Oko Camera is actively working to localize component production.

Government support is crucial. “More attention should be given to stimulating Ukrainian production,” says Poberezhniuk from Kara Dag Technologies.

Executive Director of the Technological Forces of Ukraine, Kateryna Mykhalko, raises an important question: “Is the government willing to pay more for products that don’t contain Chinese parts?”

Otherwise, situations may emerge in which players with localized components will lose out in terms of price to projects that will continue to use parts from China.

In late 2024, the government approved the Weapons of Victory program, prioritizing defense goods with at least 50% localization. The specifics of this initiative will be outlined in a forthcoming resolution.

1.3 Financial capital

Challenge: Inability to supply defense technologies abroad due to government bans and concerns over the consequences of such a decision

Ukrainian defense tech startups have rather limited revenue sources. They primarily rely on state defense orders, which remain highly unpredictable. The funds received through these contracts are often insufficient to utilize enterprises’ production capacities fully.

Initially, the 2024 budget allocated UAH 43.3 billion to the State Service for Special Communications and Information Protection for drone procurement, with an additional UAH 15.5 billion allocated in April. In parallel, the Defense Procurement Agency (DPA) of the Ministry of Defense also made purchases, spending over UAH 114 billion on drones. Ukrainian special services also procured drones but in significantly smaller amounts.

Despite these allocations, the Tech Forces of Ukraine, whose members predominantly produce drones, estimates that in 2024, nearly two-thirds of manufacturers’ production capacity remained underutilized due to a lack of government orders.

“An additional 1.6 million FPV drones and over 80,000 other types of drones could have been produced,” said Kateryna Mykhalko during the presentation of TFU’s Counter of Unproduced Weapons on February 6, which was attended by an AIN journalist.

For 2025, the budget for the State Service for Special Communications and Information Protection allocates approximately UAH 47 billion for unmanned systems. Meanwhile, the Ministry of Defense plans to increase its spending on “development, procurement, modernization, and repair of weapons, military equipment, and infrastructure” from UAH 265 billion in 2024 to UAH 488 billion in 2025. The key question remains: Will this increase in funding lead to a higher workload for Ukrainian manufacturers?

As of late 2024, most members of the Tech Forces of Ukraine were not engaged in negotiations with government customers. Additionally, early 2025 saw a crisis within the Defense Procurement Agency, which “also makes us anticipate delays in contracting,” says Mykhalko.

Thus, the challenge has two primary causes: Ukraine’s budget constraints and the instability of government orders for startups.

The lack of financial capital also has strategic consequences — startups are unable to reinvest in R&D.

“Over the past three years, we have implemented most of the available simple or medium-complexity solutions in the defense system,” notes Oko Kamera CEO Denys Nikolaienko, emphasizing that further progress requires additional resources.

Meanwhile, the enemy continues to develop its capabilities with relatively greater resources.

If Ukrainian manufacturers were allowed to export their products, they could diversify their revenue streams and make the defense tech sector more attractive to investors. The investment companies Dare to Defend Democracy (D3) and Presto Tech Horizons confirmed this in comments to AIN.

While there is no official document outright banning exports, since the start of the full-scale invasion, regulators have consistently denied manufacturers permission to sell military equipment abroad. In some isolated cases, exports may have been permitted in the absence of strict regulations.

Discussions about lifting the ban intensified in the fall of 2024, but no concrete decision has been made so far.

“This is a highly sensitive issue,” explains the executive director of the Tech Forces of Ukraine.

Selling weapons that Ukraine itself relies on? To whom? NATO countries that are unlikely to use them in the near future? This situation presents a perfect opportunity for enemy disinformation campaigns. Moreover, Ukrainian society has historically been highly susceptible to conspiracy theories about exports — whether it’s alleged shipments of black soil by train or electricity sales to Romania during blackouts. Given this, there is a high risk that the enemy will exploit any policy change regarding defense exports for its own propaganda.

Additionally, such information warfare could target not only Ukrainian society but also European politicians. Just as some groups have mobilized opposition to Ukrainian grain exports with claims that they harm local farmers, similar narratives could be used to argue that Ukrainian weapons threaten European defense manufacturers.

Solution: Implementing a model of controlled exports to Ukraine’s partners, supported by a strategic communication campaign

Avoiding changes to the current policy solely out of fear of enemy narratives means falling into a trap of reflexive control — essentially harming oneself while believing it prevents greater harm. A compromise approach to exports could involve a model where regulators evaluate a company’s actual production capacity and the state’s ability to place orders.

If a gap exists between production capacity and domestic demand, allowing exports would not weaken Ukraine’s defense capability—because, without foreign funding, those products would not be produced in the first place. Controlled exports would also ensure that Ukrainian defense products are sold only to trusted countries, not to newly registered shell companies in offshore jurisdictions.

Regarding the potential backlash from misinformation campaigns, Mykhalko remains optimistic:

“People are smart enough to understand that controlled exports will strengthen us. Society must be informed about the realities of the industry. But more importantly, the state must have the courage to take responsibility for such a decision,” she says.

On February 4, the National Security and Defense Council (NSDC) met to discuss ways to reduce Ukraine’s trade deficit. The council decided to support increased defense industry capabilities and clarify the criteria for reserving key defense workers. However, did they consider the potential for defense exports as part of this strategy? AIN reached out to the President’s Office for comment, but no response had been received as of publication. The editorial team will publish any updates as soon as they become available.

2. Development

Production factors ensure the work of the defense tech industry at present. However, startups’ future will be determined by their ability to overcome the challenges of foreign sales and attracting foreign investment.

2.1 Sales abroad

Challenge: Transferring successful defense procurement experience from the Ukrainian context to a foreign one but remaining a Ukrainian company

The interviewed startups agree: although they are now almost entirely focused on the frontline, working in foreign markets will be extremely important in the future. For example, Frontline Robotics CMO Mykyta Rozhkov told AIN:

However, changing the export policy is not enough. If we imagine that controlled exports will be introduced, Ukrainian startups will find themselves in a completely new context of European markets. According to Anton Verkhovodov, a partner at the D3 investment company, EU countries expect Ukrainian players to localize production or involve local partners in sales under defense contracts.

However, localization of production abroad will mean that the model of controlled exports has failed: capacities in Ukraine will continue to stand idle, depreciation will become unprofitable, and companies will eventually reduce their capacities.

Solution: Cooperation of a Ukrainian startup with a foreign integrator company that has contracts and relations with the Ministry of Defense of their country

Cooperation with an integrator can be based on the following model:

• A Ukrainian startup produces components in Ukraine that it has high expertise in developing.

• The Ukrainian startup supplies these components to the company in the EU.

• The company integrates these components into its products.

• The Ministry of the EU member state purchases the products.

Potentially, this algorithm can be expanded to include products from one EU country being purchased by other members of the union. Despite the cooperation between EU countries in the defense sector, they currently mostly prefer their own products.

At the same time, at the end of January, at the European Defense Agency’s annual conference, its head, Kaja Kallas, and EU Defense Commissioner Andrius Kubilius called for a move toward a common defense market for all EU countries.

Why is this model helpful for Ukrainian startups? In addition to the obvious — earning money by selling components — Ukrainian startups do not spend resources on studying the regulatory framework for defense procurement in another country. The integrator already has experience in cooperation with the Ministry of Defense of its country and active contracts.

In addition, the integrator is interested in helping its partner modify the product to meet the standards of that country.

There are no publicly known cases of such a model being used — in the absence of projected exports, the integrator risks not fulfilling the contract. If not for this, Oko Camera’s products would already be used in foreign drone systems, says Denys Nikolaienko, CEO of the startup, adding that he regularly receives such requests from players who manufacture drones abroad and supply them to the Ukrainian market.

At the same time, Bavovna.AI, a startup founded by Ukrainians in the United States, has already gained experience working with an integrator. The company develops an inertial navigation system for drones using artificial intelligence. Their system has been integrated into a drone made by the American company Aurelia and others that are subject to non-disclosure agreements. Maksym Prasolov, co-founder of the startup, explains in a comment to AIN:

“Cooperation with integrators will really lead to faster defense procurement. These companies are now on a ‘shopping spree’: they are going shopping and are interested in Ukrainian startups,” he says.

At the same time, his company continues to pursue direct cooperation with the US Department of Defense, but this path will take many years and require large investments.

2.2 Investments

Challenge: Lack of attention to Ukrainian startups from foreign investors

Kateryna Mykhalko confirms that interest in Ukrainian technology remains high, and the Tech Forces of Ukraine often receive inquiries from abroad about investments. “But it is not profitable for Ukraine to simply take and sell technology abroad,” she says.

Dmytro Titov of Ailand Systems also emphasizes that foreign investors are seeking to relocate companies to foreign jurisdictions to reduce military and corruption risks. However, as a result, explains Titov, “this will lead to the fact that when the war is over, it will turn out that most of our technologies no longer belong to the country and increase other GDPs.”

But foreign investors also lose from this practice, says Nikolaienko, CEO of Oko Kamera:

“Structuring an investment deal through foreign holdings in the early stages of the company’s development takes the founders away from developing the product needed at the front and developing the company because this process takes months.”

In other words, invest in the Ukrainian jurisdiction if you want a better product and a more stable team.

And that’s not all. Even when a company has both legal entities in Ukraine and abroad, as Farsight Vision does, investors are still cautious about the startup.

Farsight Vision is developing a platform that quickly converts drone footage into 3D terrain models to help with battle planning. The company is registered in Estonia in addition to a Ukrainian LLC. Co-founder Viktoriia Yaremchuk says that she has encountered genuine surprise from foreign investors when she evaluated her company “on a par with European or, God forbid, American startups, saying, ‘You’re from Ukraine, you’re at war there, [how can you create competitive developments?’

She is impressed by this because the use of technology on the battlefield is currently considered an indicator of quality in Ukraine.

Solution: Securing human capital, increasing production factors, and strengthening communication

However, this position of investors does not surprise Mykhalko.

“An investor comes and sees that a large number of the company’s facilities are idle that the only customer is the state without a sufficient procurement budget that international markets are closed, so there is no experience abroad,” says the executive director of the Tech Forces of Ukraine.

Matej Luhovy, an investor in the Presto Tech Horizons VC company, confirms that experience in foreign markets is an important factor in making decisions about investing in a Ukrainian startup.

He explains in a commentary to AIN that the presence of contracts abroad helps investors confirm hypotheses about the existence of a global potential market for a particular development, as “even if something works effectively in Ukraine and solves problems specific to Ukraine, it is not necessarily a good candidate for venture capital investment.”

His Presto Tech Horizons colleague Martin Le confirms:

“Investors are hoping for the export ban to be lifted. Therefore, it is impossible to overcome this challenge without overcoming the previous ones. However, even if the situation with production factors changes, it will not mean that foreign investment will flow into Ukraine.”

Anton Verkhovodov of D3 Venture Capital Firm emphasizes: “There is still not enough awareness of Ukrainian innovations abroad. We don’t just need the best information campaign about Ukraine’s defense technologies — we need something close to propaganda for key figures in NATO investment circles,” he says.

Therefore, the D3 investment company partner adds, “Startup founders must continue refining their pitching skills.”

Presto Tech Horizons’ Luhovy agrees: “Self-presentation is the weakest link for startups — not only in Ukraine but across Eastern Europe in general.”

3. Problems of SaaS startups

When we think about the defense tech industry, we often imagine swarms of autonomous drones launched from a mother drone or robots independently clearing de-occupied territories. It’s easier for people to visualize something tangible.

However, many Ukrainian startups have developed SaaS products that can significantly impact the course of the war. These startups face unique challenges and often don’t receive the attention they deserve.

3.1 The codification dilemma for software

Challenge: The lack of a codification procedure for software applications.

For the armed forces to use and the state to procure certain weapons, these weapons must first go through a codification process. Codification applies to weapons, military, and special equipment (WME). However, software is neither a weapon nor equipment.

To complete codification, manufacturers must submit a series of documents to the Ministry of Defense, including a draft technical specification. This document typically details physical attributes such as length, width, or power source. But how does one define the “width” of a program code? How is it “powered”?

Once submitted, the Ministry of Defense reviews the documentation. However, verifying software is vastly different from assessing physical objects. How do they determine whether a program contains “traces of paint on unpainted surfaces” or meets military standards for “exposure to climatic environmental factors”?

Simply put, traditional technical specifications don’t apply to purely software-based solutions. Consider the Farsight Vision platform, which operates on a subscription model. This startup is somewhat fortunate: besides its digital platform, the team also offers a physical device that converts video into 3D models. They submitted this device for codification.

But what about the LifesaverSIM mobile application — a first aid simulator that runs on a user’s phone? Unlike the Kropyva situational awareness system, which is often supplied to the military pre-installed on tablets, LifesaverSIM has no hardware components, making codification impossible under current regulations.

On February 4, newly approved government amendments to the resolution regulating the adoption of WME (Weapons, Military, and Special Equipment) came into force. These updates make the regulations slightly more accommodating to software; for example, the term’ defense products’ has been broadened to ‘defense goods.’

Previously, only “an item designed to perform [its] specific technical functions” was recognized as an integral part of WME. Now, this definition also includes “computer programs.”

However, this shift isn’t complete. Software is still not considered a standalone product — it is only recognized as a component of a hardware solution. As a result, applications like LifesaverSIM remain outside the regulatory framework.

Solution: Software license transfers instead of codification, plus increased communication.

LifesaverSIM co-founder Olesia Diachyshyn is working with the Ministry of Defense’s legal team to determine an alternative path for the app outside the codification process. The most likely solution is a license transfer model.

However, this requires considerable effort, as there is currently no political initiative to create a standardized mechanism for such startups.

“We need a communication platform between the state and startups that brings together key stakeholders: the Ministry of Digital Transformation, the Ministry of Strategic Industries, the Ministry of Defense, the General Staff, and possibly the State Service for Special Communications and Information Protection,” says Diachyshyn.

3.2 The SaaS perception problem

Challenge: Software is not seen as a self-sufficient product.

Historically, wars have been fought with physical objects — from spears to hypersonic missiles. The military has always prioritized the material aspect of weaponry.

Of course, FPV drones have become a revolutionary technology precisely because their payloads can inflict physical damage on the enemy. However, software is playing an increasingly vital role in modern warfare.

In the past, software integration into the armed forces typically happened through volunteer initiatives — as in the case of Kropyva — or through the formalization of a volunteer team into an official military unit, as with Delta.

This makes it difficult for startups like Farsight Vision to convince potential clients to pay for their services.

Yaremchuk shares his experience with buyers:

“We can buy some American, Swiss, or European software — so why should we pay for Ukrainian software?”

Solution: Changing attitudes toward software.

Cultural shifts take time. However, military and non-state actors must actively emphasize the strategic importance of defense software to accelerate this transformation.

From the “Jungle” to the “Defense Valley”

Executive Director of the Tech Forces of Ukraine, Kateryna Mykhalko, poses an important question:

We can mention the IT industry, but its exports are declining: from $6.9 billion in 2021 to $6.4 billion in 2024. It’s no surprise that Andrii Poberezhniuk of Kara Dag Technologies calls the defense tech industry the new IT. However, to fully realize this potential, Ukrainian society and the state must support defense startups. Otherwise, the ‘defense valley’ may remain a ‘jungle,’ where only the strongest companies survive.