Andriy Kolodyuk: "Ukraine is already more than a trillion euros of investment opportunities"

Over the past five years, the Ukrainian IT ecosystem produced many unicorns (companies whose capitalisation exceeds $1 billion). Countless Western companies, not necessarily even with Ukrainians among the founders, were opening R&D offices in Ukraine or hiring entire Ukrainian teams before the war.

This was, among other things, a merit of the Ukrainian community of IT entrepreneurs and investors, in particular united by UVCA (Ukrainian Venture Capital and Private Equity Association), who created an ecosystem that allows joint investments and supports projects at different stages of development.

Mind, together with the association, is preparing a report on venture investments and M&A deals over the last five quarters.

Just a few numbers: 200 deals totalling $881 million. More than half of these were grants and non-equity funds from the Google Startups and Flyer One Ventures funds, which supported young teams at early stages of development. And the top 4 companies attracted 76% of all investment funds.

It was very hard to accurately count the direct financing deals this year. The volume of public deals amounted to $436 million, which is less than 10% of the total volume.

A huge number of changes in beneficial ownership was technical – either due to risk associated with sanctioned individuals or due to the participation of beneficiaries in various criminal proceedings.

Mind talked about the results of the past year to Andriy Kolodyuk, the head of UVCA and partner of one of the most active venture market funds. What foreign investors expect from Ukraine, why there is a need to invest now and which projects foreign investors are investing in while the war is still ongoing. More about this and many other things – in our conversation.

– When looking at your Linkedin, it seems that you manage to attend all investment forums in the world. In one week you're in Abu Dhabi, Lugano, London. What connects these events?

– All investment events that I am invited to, are either related to Ukraine, or not, but I talk about Ukraine, its possibilities. I've been on an investment roadshow for the past year.

– What's the goal? Who are you advertising? Ukraine as a country of opportunities or the association as a partner for investors?

– Over the past year, I have barely been doing business, it's handled by partners. As the chairman of the Supervisory Board of the Ukrainian Venture Capital and Private Equity Association, I work on the economic front. Last year we started presenting our plan and vision for the redevelopment and recovery of Ukraine to investors in Davos.

And this needs to happen now, not after victory, and the implementation of this plan has already begun. What has to happen after victory, no one needs to explain. But we need to hold the line on the economic front, so my aim is very pragmatic. I represent an association of investors who continue to invest in Ukraine. We invest not just in projects, we invest in entrepreneurs who continue to work.

The narrative is very simple. And who will rebuild the country? The answer is obvious to foreign investors. Investors and entrepreneurs will rebuild it, because they have practical experience and all the opportunities to do this.

The second problem we have is that the war continues. Foreign businessmen and investors may come for humanitarian projects, but, of course, none of them will risk their lives and work in Ukraine. Hence our thesis: "Your help to Ukraine – is co-investment with us".

There have been more than 200 venture capital deals over the past year. New unicorns with Ukrainian roots appeared.

– How does this work in practice? We have projects that need, say, 100 million, you invest 10 million and invite foreigners to invest with you, to contribute the remaining 90?

– Yes, and we will share the risks with the investors. This is exactly how we have been building our industry for the past 20 years. We're not just attracting investments. We co-invest in projects with our own capital and experience, and we are physically present in Ukraine. This adds confidence.

We all understand that investors invest money not for patriotic purposes, but in order to make a certain profit. Of course, we have projects that do not return investments. They are related to support, but we tell everyone that we are not begging for humanitarian support, because these are different projects. We invest, and we invite you to join us.

– Could you explain this with the example of the Abu Dhabi event? What did you discuss? How is Ukraine perceived? What feedback did you get? As far as we know, there is demand for Ukrainian IT teams because there is a very emerging market for technology and innovation there. Earlier, investors from the Middle East were interested in our natural resources. Are there any specific things?

– It's a very tough audience. We deliberately became a partner of the event in Abu Dhabi for the first time because most of the world's countries are represented there, as well as Africa and Asia. But here there is the russian federation, and moscow separately, there's even Tatarstan, but no Ukraine.

I am almost the only one here among a few Ukrainians who attends meetings and goes to stands in order to change narratives about Ukraine. They are not as obvious to them as they are in Europe, for example, or in America. There they have more or less an understanding of what is really happening. But here they haven't got it so far. Our enemies also work here, in particular.

That's why we are changing not only narratives but also offering an alternative, so they understand that it is possible to invest in Ukraine. They are less knowledgeable about Ukraine and Ukrainian companies. Therefore, it's hard here, but we need to work.

Many colleagues from Europe and America work here. They are fundraising for their funds and their projects. And that's also our main goal. Because capital for restoration and development of the state will go to Ukraine specifically through funds.

There are already 17 funds that are fundraising for Ukraine. But I think there will be more, close to a hundred, with different foci, volumes, and types of capital.

– Are these Ukrainian or international funds?

– Not just Ukrainian. There are foreign ones that create new funds.

– Could you name the funds and the amounts?

– Horizon Capital, Black Rock, Aventures Capital, ICU Capital, Digital Future, FFVC and others.

The last one is a Polish-American fund that is raising $50 million. We all expect them to announce their first closing soon. All these funds together amount to $1.4 billion and Black Rock is separately raising $25 billion for the fund.

Horizon Capital invests in the real economy sector, all the others are predominantly venture capital. But a few more funds will also be investing in the real sector eventually. It's important that investors are looking not just at the IT sphere.

– Do they come and say: we are raising money here and will be investing in the restoration of Ukraine?

– The 17 funds are precisely those who focus only on Ukrainian entrepreneurs. Mostly they are venture funds, ranging from $20 million to $100 million. They invest in projects at different stages.

Black Rock is an energy and infrastructure fund for $25 billion, which they have already been fundraising.

It's good to have managers who have already made money, not just those who are raising a fund for the first time in their life. There are such funds, but there are those that are fundraising for the second or third time, the same Horizon that has already raised for the fourth time.

It is a very positive message for all other investors because they ask: "Fundraising is very good, but who has already raised?" And since mid-May I have been saying: "Horizon Capital has." Then they ask: "Who else is fundraising?" And we answer: "Black Rock."

And everyone knows what company that is, they understand that they are not fundraising just like that, so there are strategic and investment prerequisites for it.

We work with all institutional investors, with sovereign funds, which are located in the Middle East, by the way. They are very powerful and are looking at products because, of course, you can invest in American, European, or Asian funds. But we come and say: here are funds that are aimed at Ukrainian entrepreneurs, who are also successful.

A fund is a product that allows investors to look at the ecosystem and provides a tool for investing in this ecosystem.

At all the conferences, I talk about the figure voiced by the President of the European Investment Bank. He says that Ukraine already has more than a trillion euros of investment opportunities. Of course, it's clear why such a figure exists. And unfortunately, it increases after new infrastructure shelling.

– Yes, but the restoration of energy, infrastructure should ideally create jobs and projects for private investors, shouldn’t they?

– Absolutely right. The lion's share of this trillion is infrastructure projects, and they will be financed after the victory. But what can we do right now? Right now, we can do private projects; we are focusing on nine sectors: everything related to the venture capital’s technology sector, as well as all projects related to water, energy, healthcare, construction, and agrifood. We're not talking about grain exports, we're focusing on food processing, and everything related to construction – from the material production to the projects of building new cities.

– What about military-tech, military start-ups in general?

– All venture capital funds invest in cyber security, and this is part of the military (dual-purpose technologies). And there are no restrictions in this area. We also have new players, there's a new fund with $100 million. They are focused only on military-tech, looking at everything related to dual-purpose technologies.

And it's very good that they are entering the market. I know that they have already raised funds from the first investors. The demand for military-tech has increased not only in Ukraine but all over the world.

Now there are more such projects, but there are certain problems. It's very difficult to do hardware projects related to military-tech because it requires equipment and developed infrastructure.

We also, as an association, are working in this direction.

Many American funds plan to finance it. In Europe, there's a program called Invest Europe, which also invests in military-tech, defence projects. This is an opportunity to find funding for such projects, especially for Ukrainian entrepreneurs.

– If a foreign fund wants to invest in Ukraine, do you also help them find projects?

– We are an association of investors. We have certain mechanisms, even an internal project platform, which we promote for co-investment. Before the war, we had an investment club, the meetings of which we held, including in collaboration with Mind, where portfolio investors were looking for co-investors in their companies, which we have now revived.

Since March of last year, we have a grant aid programme for start-ups called Support Ukrainian Startups Now. The projects supported by it are further promoted for investments and we do this not only among our members.

We say: look at these cool projects. Some have already been invested in by our investors, and we invite you to do the same.

– You mentioned that foreign funds, which are focused on Ukraine, also attend international forums to raise funds. How do they "sell" the idea of investing in Ukraine to non-Ukrainians, what do they promise? What is the overall strategy, what and how do they present?

– A fund is a management team that says: we are specialists in investments in certain verticals, we focus on Ukrainian projects, on Ukrainian entrepreneurs, and we are raising funds for this purpose.

Each sells their capabilities and what they have done in the past, the exits they have achieved, the returns they have generated.

– So they sell their expertise and history and show what happened last time?

– In each fund, you sell the opportunity to make money, because you have already done so in the past.

– Then, we sell not the country, but teams of people? But we add that we have gained experience in military matters?

– We sell two things. The first one is expertise. We have already created it over the course of 20 years. When you talk about Ukraine, everyone knows we have talented programmers. I say: that's very good, but we also have talented entrepreneurs who use this talent to build global companies. And if asked who they are, I name the most successful projects with Ukrainian founders. And they reply: "Oh, we didn't know they were Ukrainians."

For over 15 years, we have been positioning ourselves not only as outsourcing but also as product companies that can build a global business. That's what we are selling.

But, of course, the connection is very simple: these are either Ukrainian founders, or Ukraine is the place where value creation, people and R&D are located.

– This is if we are talking about technological teams. But what about regular projects in food, water, energy, they are more localised and there are greater military risks?

– Yes, there are military risks, but there are also tools to reduce them. We promote so-called war insurance. There are several countries that provide it to their entrepreneurs. For example, Germany and the US are already doing this, and France, Britain and others are also preparing similar products. They offer them to their entrepreneurs if these are joint projects located in Ukraine. These products cover the risks of losses from shellings or other business risks associated with the war.

This applies not only to purely financial investments. The European entrepreneur may not even come to Ukraine because there are many projects where they simply invest in equipment or know-how, and everything is done by our entrepreneurs on the spot because they already have such experience.

Moreover, in Europe there are not only 8 million Ukrainian refugees, but also thousands of Ukrainian entrepreneurs. For instance, a month ago in Brussels we held a conference for them with a very simple message. A lot of time can be spent motivating Europeans to come to Ukraine to carry out projects with us. But Ukrainian refugees are also Europeans in terms of legal status. And they can make use of European programmes.

We show Europeans the following. "You’ve got programmes that, for example, help European projects outside Europe, haven’t you? In Africa, Asia, anywhere. Businessmen make use of the programmes at the country level."

And we say, "Very good, here are European businessmen with Ukrainian passports. And they suit you because they are residents de jure." This is our main message: we don't wait for the Marshall Plan, while in Europe, we ask for access to your programmes.

Because the most important thing is projects and entrepreneurs. When they exist, all other mechanisms will work. When there are no projects, then political statements will continue to echo and nothing will happen.

– Who has already used war insurance in Germany?

– The German conglomerate Bayer received coverage of 60 million euros.

– Is this insurance for a new business or one that already exists?

– The insurance applies to both new and existing ones. But there is more emphasis on new projects. Information can be found on the Price Waterhouse website. It's a government program, but it's managed by PWC.

– You mentioned that German entrepreneurs are looking closely at Ukraine. What projects are they considering?

– Many German entrepreneurs are already coming to Ukraine and looking at projects in the field of renewables and energy.

Why? Because the main thing in renewables is to bring equipment on the Ukrainian soil and then sell energy for local needs. But of course, they have a strategic look at exporting energy to Europe, and this direction is important to them.

It's a very practical matter. But going back to what I said earlier. There are German entrepreneurs, and there are Ukrainian entrepreneurs in Germany who can also take advantage of this programme.

– Bayer is a huge conglomerate that the government supports at all levels. But can small and medium businesses get such insurance?

– It can be small, it can be big. The programme is designed for any size of business, but predominantly for SMEs. I was surprised that Bayer was the first to use this opportunity. I was looking at the programme and thought that the first to get insurance would be small businesses. But Bayer was already in Ukraine, of course, so it was easier and faster for them to use the programme.

– Have you personally invested in any projects in the past year?

– Personally, no, since the start of the war I have been providing financial support and only dealing with non-for-profit projects and the affairs of the UVCA association.

– And Aventures Capital?

– Aventures Capital invested in its portfolio company. Publicly, this was the cybersecurity company Spin. It raised $16 million. And it was very important because half the team is based in Odessa. This was very difficult. But it happened, and none of the investors withdrew their investment.

– Have there been exits from any projects for you or the company this past year?

– No, our last exit was just a month before the start of the war. It was the company Augmented Pixels, which we sold to Qualcomm. That was the last full exit. Very good.

– What was the result?

– The multiplier on the invested capital was more than 7.

– Over what period?

– We invested back in 2013. It was, by the way, the first investment in this fund that still exists now. For nine years, seven times return is a very good investment.

– Aventures has invested in a large number of well-known projects. Can you tell us what their current state is? For example, let's start with Pet Cube.

– It's a profitable project. This is very important because it is hardware after all. But they also have the Pet Cube Care service. And thanks to this service, they were able to cover operational expenses.

– Through subscriptions?

– Yes. This is very important, they worked on it for many years.

– Spin?

– There were even offers for acquisition for this project. But the company raised a new round, and we are very happy that it took place, because Spin now has funds for further development.

– Was the new round at a higher valuation and did your stake increase therefore in relative terms?

– Yes. There was an interesting valuation, and it's very good that they raised these funds. The last quarter was difficult for fundraising globally. The funds raised allowed them to hire key people, which they haven't been able to do for the last six years. And now it provides opportunities for acceleration and development of the company.

– Do you often use cash-outs when you conduct a new round in already invested projects?

– Almost never during a round. We had a small stake in Rallyware, we partially exited, as there was a big round of 20 million, and we sold our shares pro rata and got a partial cash-out. But this happens infrequently.

– So, the typical exit strategy during a sale is 100%?

– This is the strategy with almost all our portfolio investments.

– What happened to Divan TV? The project ceased to exist after the start of the military invasion.

– I can only talk about this after the war is over. There are several criminal cases, but more on that later.

– Was it a corporate conflict?

– It was presented as a corporate conflict. In reality, a few days before 24 February, the company was deliberately and completely destroyed as a service.

Because our competitors only had russian channels, and DIVAN TV since 2014 had been broadcasting 80 Ukrainian channels. And we proposed that we are ready to make this service free. But it needed the president to address the oligarchs and media groups.

Media groups took $1 from OTT services, and therefore for us, $4 was just the cost price, not including technological expenses. But we were ready to take them on if the media groups also waived royalties.

– Is it possible to restore the service in the future?

– Restoring is impossible. It was deliberately destroyed technologically.

– There seems to be a certain trend in investments. For example, it's trendy to invest in startups that use AI today. Blockchain was the thing before. Is there a certain pattern for a venture investor? What are investors looking at now? If someone wants to do a project, in which direction should they develop?

– Now, of course, everyone is looking at AI. Why? Because new technological capabilities have emerged, there is a breakthrough. But what is AI? AI is technology, just like blockchain. It is everywhere, but the main thing is how you use the technology for your competitive advantage.

I don't like to generalise. But other trends are also known. In addition to artificial intelligence, there is military tech, Cyber Security. The latter has become even more interesting. The market is growing, and the technologies used there are becoming important for new projects.

– Could you provide instructions for projects that have a prototype, for example. Or an idea. Let's say, a drone – either aerial or supermarine?

– The main thing investors will ask about is the product. If there is no product yet, it is very difficult to get money for its development. That's the reality, so often projects at this stage are supported by friends and family. There is also the possibility of fundraising for such projects during a war.

You also need to understand what is already on the market, what the competitive environment is. And, based on this, analyse your competitive advantage. The investor should understand why precisely this product? Because it has certain competitive advantages.

The third component is the market. Who will buy and why. Especially when the war ends. If the product is physical, not software, the investor will ask if it has buyers, other than the Army Headquarters.

The hardest part is to give the investor an understanding that this product is needed by someone else. And this understanding needs to be obtained from prospective customers. Ideally, this could be a memorandum or a preliminary order. This is called pre-sales – when you receive an order for a not yet produced item, but commit to deliver it with specified features.

This market, like any other, is structured through resellers and distributors. But getting an endorsement, that is, confirmation that this is a competitive product, is the most important thing. And not just from the founders, but from customers as well.

But the problem is that for the investor, on the one hand, this product needs to be in demand not only in Ukraine. On the other hand, there may be a question of why it is not being purchased domestically, as there is a war going on?

In general, for many years, Ukraine was in the top ten countries by the volume of arms exports. Therefore, the domestic Ukroboronprom defence corporation at least has the opportunity to approach those who previously bought Ukrainian.

This is, by the way, a public offer. Many people in Ukraine worked in the defence industry. It was their task to sell weapons, and what kind of weapon it was is not so important. And I think, if they are now involved in our start-up ecosystem, it would be very beneficial. They have expertise, they have connections.

Our main goal is to find and engage investors who are focused on this direction.

– They've all requalified as buyers: they used to sell, now they buy. 

– Well, there has been a thought that Ukraine will become a sort of testing ground for the further marketing of weapons, which will prove effective.

– These companies then receive a huge influx of orders. We know several such manufacturers. For example, Roshel, a Canadian manufacturer of armoured vehicles. They initially donated a certain number of vehicles for free. But after they proved themselves in the field of battle, they began actively promoting their brand. And I think that's the correct approach. We see that states have given us all types of weapons, often in single copies.

– Yes, to experiment in the field of battle.

– But we don't see many Ukrainian developments that would massively use this for their promotion, promotion of their products. Why? And do they exist?

– We do not know the answers to this. That's the secret. And such projects cannot exist now. In particular, due to the risk of sabotage or missile attacks. By the way, Poland has made an agreement with our government to transfer the production of certain classes of weapons to them.

But, of course, all this is classified information, and no one will publicly talk about it. But there is another problem related to startups: how and by what to do this in Ukraine? Because prototypes are one thing, but how to move forward? For this, serious equipment is needed, there should be a laboratory.

But I have hope – and we are also working on this –  to provide our entrepreneurs with access to equipment that would allow them to set up serial production.

– How much have investor sentiments changed since the beginning of the war?

– The vast majority of investors have not stopped investing. In the first month, of course, everyone was dealing with their portfolio companies, not new investments. But now our members continue to invest, raising new funds.

The main problem we are solving now is precisely increasing the market capitalisation. And we say: we have professional fund managers, but an allocation of funds into their funds is needed. Because if there is no allocation of investments, fund managers will not be able to invest further.

In the last year, there were 200 deals in the venture market, so there are projects and there is where to invest. But the main problem is undercapitalisation and limited access to capital.

I also see a trend that many Ukrainian entrepreneurs are looking towards Europe, and Ukrainian companies are buying European ones. They also need capital so that they can grow and enter markets. And why is that clear? Because there are many Ukrainian entrepreneurs in Europe. There are also many Ukrainian programmers and people of other trades who can work there.

Ukrainian businessmen also follow our people who are now in Europe.

This allows, say, to focus on local markets, for example, Germany or France or England, where very powerful local markets are. There you can experiment and launch your projects.

– Can you give a forecast for the next few months, what should Ukraine expect in terms of investment inflow? Will this year be better than the last?

– Everything will depend on the dynamics of fund closing. It's very simple statistics. If Horizon capital raised 254 million, it means they are already investing now. There are already several deals that are closing now. They started preparing them half a year ago, knowing that they had closed half of the fund.

So how successful our year will be depends on the success of the first 3-4 out of 17 funds. If they can raise funds by the end of the year, then this will be one dynamic. If they do not collect funds, it will, unfortunately, be a much weaker dynamic.

– Is everyone expecting results on the battlefield?

– Yes, but not quite. When looking at who invested in Horizon Capital, it is mainly DFIs – funds from countries that invest outside their borders. They have limits on investment in various countries. And our task is to make them invest also in other players. To do this, we need to persuade them to redistribute budgets from other countries in favour of Ukraine.

They need to take it either from Africa, or from Asia, or other countries, and allocate it for Ukraine. We worked on this in London at the conference. We convince them that Ukraine is so large and there are many funds available in it. And therefore the allocation should be made under our funds. And this needs to be done now, not after the victory. Especially if it concerns projects that are possible right now.

The Ukrainian ecosystem has already released seven unicorns in a state of war since 2014, the latest, Airslate and Unstoppable Domain, received such an evaluation already after the outbreak of the war. But we see similar potential in another 50 companies. We have built a very large ecosystem over 20 years, which provides the potential for growing unicorns. That's why we need to invest in funds focused on Ukraine. They have got where to invest. But the question for all of us – investors, entrepreneurs – is how to make these companies really reach the unicorn level. This is what I believe in. Therefore, my main task over the past year is to attract capital for the entire ecosystem, as well as for the development and restoration of Ukraine.