Photo credit: Flickr, Creative Commons License, Sasha Maksymenko, http://bit.ly/1hXA7uk

published 9 Apr 2014 by Mina Nacheva in Ukraine 7 minutes 3 seconds to read

‘Challenging times to create opportunities ahead’

The effects of the political situation in Ukraine on local entrepreneurship

Preply.com Torben Majgaard Ciklum Innovative Ukraine Eastlabs AVentures TAVenture

A native of Ukraine, Yegor Anchishkin is on a ten-day trip in the US, fundraising. His business back in his home country is among those affected by the political developments in Ukraine. While the visit to the States was a planned one, “the situation around Ukraine and Russia was a cause of speeding up our evolution,” he says. With a company that operates in three Ukrainian cities – one of which in annexed Crimea, his current plans for expansion into Russia have been put on hold.

Change of plans

Anchishkin is co-founder of GVMachines Inc. and its main e-commerce product Zakaz.ua since January 2010. With their platform, the current team of 25 works with existing supermarket chains to offer customers grocery delivery at shelf prices. “Our product is applicable to various developing markets,” says Anchishkin, and lists Moscow, Rio and Jakarta as examples. “The plan, however, was to roll into every city by ourselves – gradually.” St. Petersburg was next on the list.

With expansion to Russia now on standby, the next option is Brazil. “There we would have to start from scratch, and for that, we would need to raise capital first.” For him, Ukraine’s strained relations with Russia seem to have already had a negative impact on a strategic level. 

Viktoriya Tigipko, managing director of TAVenture, identifies the effect of the recent political developments and the conflict with Russia as “rather negative”. “The majority of foreign investors have put many deals related to our region on hold due to… the uncertainty of the current situation,” she says. 

The political set-up

Protests in Ukraine started back in late November when an Association Agreement between the Ukrainian government and the EU did not go through. What began as peaceful demonstrations against tightening relations with Russia was soon handled violently by the local police, and escalated to an uprising against the government. In February, the revolution led to the ousting of then President Viktor Yanukovych, and to the forming of an interim government. Russia, however, refused to recognise the new government, called the revolution a coup d'etat and seized control of Crimea in order to allegedly protect the interests of its predominantly Russian population. As of 7 April, pro-Russian activists have reportedly pushed for the independence of Donetsk in eastern Ukraine as well.   

Fostering the local startup scene   

The current political situation in Ukraine does raise concerns about the future of the country, yet Tigipko believes that “these challenging times for Ukraine will create many opportunities ahead.”

One of the outcomes of the revolution has been the new government’s willingness to show increasing support for the IT community and startup ecosystem. In an open letter to the current Minister of Economy Pavlo Sheremeta, CEO of Kiev-based Ciklum Torben Majgaard addressed some of the main points of the IT community, among which its need for strong government support and the investment of resources into the education system. As of 2 April, his proposal has become a joint project between the Ukrainian government and a number of leading IT outsourcers, according to a report by the local business website ain.ua. 

To add to that, in preparation for the presidential elections on 25 May, the IT/startup sector has proposed that all candidates include a so-called Fund of Funds in their programme, Eveline Buchatskiy, managing partner at Kiev-based incubator Eastlabs, tells inventures.eu. “The Fund of Funds would work in such a way that the government invests in existing venture funds,” she says. “This is a win-win scenario. The government would pump money into an area with a very promising future… and one that will generate tons of jobs.” 

This positive vibe coming from the government seems to be felt by entrepreneurs as well. Dmitry Sergeev is Russian-born but has spent the last 12 years living in Ukraine. He’s the founder of DepositPhotos, a stock photography company based in New York. “I believe that the newly elected government will make all the necessary efforts to support the investment climate,” he said. Yet, “it would take some time for investors to build up the trust for Ukraine.”

Raising funds from private investors

As far as non-governmental support is concerned, Anchishkin seems to agree with Sergeev. During his fundraising trip in the States, he has found out that "nine out of ten investors want to invest in the US," he says. "Ukraine is risky, and it's not the type of risk they're used to." For example, Zakaz.ua's development team is based in Ukraine and getting a US investor onboard might mean having to relocate. "We can move the team," says Anchishkin but admits that it would be a big decision. His business now operates in Kiev, Donetsk and Sevastopol, and although the team hasn’t seen a significant drop in revenues, the projections for growth are not very good, he says. “Our revenues have been growing three times year-on-year, which I’m not sure could continue [given the current political situation].”

The team has several investors on board, both in Ukraine and in Russia as well as in the rest of Europe, who have contributed “hundreds of thousands of dollars” to the company. Yet, “with the current developments, they’ve decided to wait with the expansion,” says Anchishkin. The difficulties with expanding into Russia will not influence the company’s performance in Ukraine, where they expect to break even in the next two to three months, he emphasises.

It seems, though, that the degree of difficulty of raising funds in the midst of Ukraine’s political crisis is relative. Kirill Bigai is a native of Kiev, and he’s co-founder and CEO of Preply.com, a marketplace for local and online English tutoring with teachers in Ukraine, Russia, Belarus and Kazakhstan, among others.

The venture was launched in January 2012, and already has a couple of initial investments behind – a 20.000-dollar financing round from Eastlabs, and another 175.000 dollars from a number of investors, among whom angel investor Semyon Dukach, and Torben Majgaard. At the moment, the startup is looking for another 100.000 dollars, which CEO Bigai expects to help them break even and scale in CEE. Negotiating with investors in Ukraine, Poland and Russia, he has not experienced any complications to date. At the end of the day, “startups and investors need to become partners, so it’s very person-specific.” 

Local vs. global target market

Preply’s monthly revenues are around 3.000 dollars a month and have been growing by 33% from January until March. “We had some bad months during the revolution,” Bigai admits, “so our revenue from Kiev was lower than usual. However, our revenue from Russia has been growing all that time.” In fact, many Russians are buying hours with tutors from Ukraine due to lower prices, he adds.

For Sergeev, on the other hand, things look slightly different. “From day one, DepositPhotos has been executing a global strategy,” he says, listing the USA and Europe as their main markets. “Of course, we also target the Russian and Ukrainian markets, in which we have a natural competitive advantage." Therefore, he believes, tech companies with a more local target market might be the ones to face difficulties during the political crisis. 

Reforms to boost IT companies

Another initiative from inside the IT community aims to raise the new government’s awareness of the support that the ecosystem requires. Innovative Ukraine is the working title of a National Project initiated by over 20 stakeholders from the startup scene in the country, among whom representatives of AVentures Capital, TAVentures, Ciklum and Eastlabs, to name a few. Their proposal can be found here, and it outlines tax reforms as a first priority.

“The tax reforms are very specific,” says Buchatskiy. “There is a pending project law to be approved by Parliament and the president on creating a “tax heaven” for developers and outsourcing companies. More specifically, the project law proposes reducing the income taxes for developers and IT companies to 5%.” What the initiators propose in return is an ongoing cooperation with the authorities. Yet she admits: “This is just a start.” 

At the end of the day, a lot seems to have changed in the way people think about the government and their country. “The Maidan movement has changed the way we interact with the government forever,” says Buchatskiy. “The Ukrainian society is now a continuous watchdog to make sure reforms take place.”

Sergeev can only agree: “There has been a huge shift in the people's mindset. It brings us closer to European values."

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