Funding sources for tech startups in Ukraine have fallen off a cliff this year, with investors (and their LPs) wary of taking the risk of backing potentially promising ideas and people who have stayed in the country amid the ongoing, persistent and getting uglier attack from Russia. But just like there are glitters that the tide may be turning in the wider war, an interesting story has also developed on the funding front.
Horizon Capital, an investment firm based in Kiev, is in the process of raising a $250 million fund that it plans to use to support tech startups in the country and neighboring Moldova. Horizon today announces the fund’s first $125 million close, its fourth, with the World Bank’s International Finance Corporation (IFC) raising $30 million as an anchor investor. The IFC and Horizon have been working together for nearly 15 years, but this is the IFC’s first investment in Ukraine since the Russian invasion in February.
Tellingly, others in the fund so far are not private VCs, but foundations and state-backed investors pursuing this as an impact investment opportunity, focused on reconstruction and soft diplomacy. They include the European Bank for Reconstruction and Development; Deutsche Investitions- und Entwicklungsgesellschaft, the Swiss emerging markets investment fund; the Dutch Entrepreneurial Development Bank; the Western NIS Enterprise Fund; and the Zero Gap Fund, a partnership of the Rockefeller Foundation and the John D. and Catherine T. MacArthur Foundation.
The fund comes at an opportune time to bolster confidence in technology, an industry that had a strong foundation and appeared to be gaining a lot of momentum in Ukraine in the run-up to the war.
The population of the technology sector saw a very immediate shock in the wake of the Russian invasion of the country. A number of Western tech companies that had operations in the country quickly mobilized to evacuate their teams to safer areas in the western part of Ukraine; or to move them to other countries altogether. Those who stayed behind did so for a reason, and it wasn’t to keep working at their old jobs: it was to get involved in the defense and resistance efforts. (Some of those efforts had a very technical focus, as we described earlier.)
Ironically, that played out in a slow way in terms of business output.
In May the National Bank of Ukraine (NBU) reported enthusiastically that the country’s IT industry — which has worked for years in a variety of roles, including homegrown tech companies and outsourced or satellite groups that support companies from other markets — reported $2 billion in revenue in the first quarter of 2022. compared to $1.44 billion the year before. Then in June, the New York Times reported on “Ukraine’s thriving tech sector,” detailing how the hundreds of thousands of engineers still in the country needed only the Internet and a laptop to keep working, despite rapid evacuations and other productivity disruptions.
But signals for what’s around the corner haven’t been strong, with a June survey of Ukrainian companies by the NBU who find a generally bleak outlook: a drop in productivity, pressure on the workforce, layoffs, inflation, expected declines in investment and more.
Ukraine’s startup ecosystem is in an even more precarious state if we consider all of the above. By nature, a startup needs a certain amount of stability and support to get off the ground. Those who bootstrap need customers to survive; those who build with no prospect of direct revenue, as is so often the case in technology, need external financing. And none of those revenue sources has been particularly strong in Ukraine lately.
Not all private investors have run away: ff New York Venture Capital wants a $50 million fund specifically to support Ukrainian founders ($30 million has been raised as of the middle of this month).
The goal is to try to regain some of the momentum Ukraine possessed before Russia invaded. ffVC notes that in 2020 it accounted for 57% of the total VC activity in the CEE region, totaling $1 billion. Just a year later, in 2021, ffVC noted that CEE investments rose to $3.6 billion, and Ukraine accounted for $832 million, with BlackRock, ICONIQ, Lightspeed, Tiger Global, Insight and Andreessen Horowitz among those who support the Ukrainian founders (admittedly, some outside the country itself). “Since the start of the invasion, this has decreased significantly,” it admitted, adding: “Where others see risks, we see opportunities.”
And that scenario is essentially also a calling card for organizations like the IFC to come into the picture.
It is noteworthy that William Sonneborn, the global director and chairman of the investment committee of the IFC, has worked at KKR years before, where he is said to have had particular experience with the opportunity to invest in something that appears promising, exactly in what appears at the most inopportune and unpromising moment.
“This investment is a testament to a new generation of visionary entrepreneurs in Ukraine who are leading high-potential companies that will help Ukraine’s economy increase its resilience,” IFC MD Makhtar Diop said in a statement. “Together with partners, we want to inject much-needed capital into the Ukrainian IT sector, boost innovation, create jobs and encourage investors to return to the market despite the ongoing war.”
“We thank IFC and all first close investors for taking this bold step alongside our team of dedicated professionals, to ensure that innovative entrepreneurs from Ukraine and Moldova have access to capital to drive growth, to contribute to the renewal and revitalizing their country, to provide high-paying jobs, pay taxes, be socially responsible and send a strong signal to others that now is the time to invest,” said Lenna Koszarny, founder and CEO of Horizon Capital, in a statement. “We are confident that this historic fund will be a resounding success, delivering both returns and impact.”
