Investing in Ukrainian defence tech: Why investors are not ready to buy into Ukrainian miltech developments

The russian-Ukrainian war has been repeatedly called the most technologically advanced conflict.

"Where we lack superiority in manpower or equipment, we must excel in innovation," says Sergiy Prytula.

Since the beginning of the Great war in Ukraine, there has been a significant increase in developments in defensive technologies. The defence tech cluster BRAVE1 data confirms this boom: 412 projects have been registered on the platform, with 200 of them already having undergone military expertise.

"Our task and vision are that by the end of the summer, we will finance projects totalling almost a million dollars," says Nataliya Kushnerska, the COO of the cluster.

While the government seeks to financially support the development of defence tech, investors are still cautiously observing Ukrainian developments. What deters them? Why hasn't there been a boom in private military-tech deals in Ukraine yet? How do charitable funds assist Ukrainian developers in scaling up? And why might investments in analytics become one of the factors in victory?

These and many other topics were discussed by the speakers at iForum. Mind noted down the most interesting thoughts.

Sergiy Prytula, founder of the Sergiy Prytula Charity Foundation:

– Five hundred years ago, two hundred Spanish conquistadors armed with muskets and a few cannons conquered a vast empire whose army lacked firearms. Even then, the understanding was laid down – technology outweighs numbers.

Ukraine was attacked by a state with an unlimited human resource, a lot of armoured vehicles, aircraft, ships, and long-range missiles. In none of these components we have an advantage or parity, so we must win through international support and the development of advanced military technologies.

Where we lack superiority in manpower or equipment, we must excel in innovation: reconnaissance, adjusting artillery fire at a depth of tens of kilometres, drones, and kamikaze UAVs capable of hitting enemy targets hundreds of kilometres away. All the aforementioned equipment is now being contracted by our foundation. I know cases where a well-trained group of drone operators halted enemy assaults on our positions composed of five or six armoured vehicles and dozens of infantry.

But can we be called investors in military tech? Rather no than yes. We are not an investment fund, but a charitable one. We don't invest in R&D and startups; we purchase ready-made products.

Can it be said that we influence the development of military tech in Ukraine? Absolutely. After the start of a full-scale invasion, when the state was just working out defence procurement protocols in the new reality, it was the large funds that were already contracting UAV systems from existing manufacturers for the future. This allowed manufacturers to accumulate sufficiently large budgets, putting the production process into motion.

Unlike the government, a fund can afford the luxury of purchasing specific items from manufacturers that don't have series manufacturing.

If the military verified their product as valuable, we buy it. Manufacturers reinvest the funds in their business, which allows them to scale up and improve technical specifications.

The philosophy of the fund's operation is that we can't risk our donors' money. A person who donates knows that 100% of these funds must go to support the army. Therefore, we buy ready-made items.

However, the fund does communicate with manufacturers who don't have series manufacturing. We engage with them, study their products, request test samples, and deliver them to combat units on the front lines. There, they undergo testing in real battle conditions. When the military confirms that the product is good, then we can start contracting.

It's evident that what proves itself well on the battlefield in Ukraine will have demand in armies worldwide tomorrow.

Orest Bilous, co-founder of the NGO Boryviter Centre of Excellence:

– It's always hard for us to explain to foreign partners the essence of our organisation: we train military personnel. From their perspective, this should always be the state's responsibility. Since its creation, we have trained 13,000 troops.

We believe that investing in people and education is crucial right now. Let's imagine that we have an ample number of drones, but knowing how to use them is equally important. Investing in commanders who lead groups of pilots means that tasks will be completed more effectively. Military personnel will have a much higher chance of remaining unharmed.

Furthermore, investing in education solves more than one problem. Of course, we will obtain quality use of drones or radios. As an additional factor, people trained during the war will acquire knowledge that will help them integrate into society when the war ends.

We know many technologies in our civilian life that originated from military personnel and the army: GPS, satellite communication, and tactics for providing first aid.

For instance, crisis management – a crucial part of management: scenario planning, risk assessment, disaster response protocols. This also comes from the military. When the war ends, military personnel will be valuable employees who will help in rebuilding the country.

Around the fourth month of our school's existence, we thought about how to make our programmes more effective. The answer was analytics. We decided to observe how the process of event and mistakes analysis works in NATO, delved into all methodologies of Western partners, adjusted them to Ukrainian realities, and modified our training accordingly. As a result, the training programmes for military personnel are being updated according to the dynamics on the front lines.

A military graduate finishes the course, goes to fight, uses a drone, and writes observations. These observations reach our analytical centre, get processed, and are integrated back into the programme. The military personnel who come for training the following Monday already have analysed front-line events incorporated into the programme. People, training, and analytics – these are things we mustn't forget.

Denys Dovgopoly, member of the Supervisory Board of the Innovation Development Fund, Founder of Unicorn Nest:

– Currently, we have almost no investments in military tech, but there is donor assistance. Most of what is produced is bought by volunteers and supplied to the front lines.

We face a significant problem. To be effective in the arms market, two things are required: experience, which we lack, and compliance with military standards. Our entrepreneurs have a choice: invest a million dollars to comply with standards or invest in what will reach the front lines next week and destroy the enemy. And our entrepreneurs choose the latter. However, if a startup doesn't comply with military standards (which span four massive volumes), it won't be allowed into tenders.

For investors, the risks are currently too big. It’s not even about the war. It’s about technological risks, production, marketing, and intellectual property (IP). Nobody protects their intellectual property in our context.

Investors look in this direction but are still holding on. They are using Ukraine as a testing ground for their non-Ukrainian products. This is certainly happening, and they are willing to invest money in it.

But I haven't seen any interest in Ukrainian military products and their prospects on the global markets yet. That's why we currently exist separately from the global investment market in military tech because what we have is more like cooperatives producing something.

Recently, BRAVE1 emerged, through which some substantial funds were obtained, but private investors aren't investing. They donate, but to products that can go to the front lines and kill the enemy now.

This is a trap for us. I've been trying to figure out how to get out of it for half a year now. Speaking about international investors, their interest lies in investing in technologies that they can then integrate into their products to sell on international markets. And this presents an opportunity for our startups.

But this is the beginning of the food chain, the added value is created in sales to countries.

Pavlo Verkhniatsky, founder and Managing Partner at COSA Intelligence Solutions:

– Global corporations are announcing their entry into Ukraine. This means that the Ukrainian defence industry will thrive.

There were quite serious expectations that this might not happen. For local businesses, it is an opportunity to continue their production in collaboration with international players. At the same time, we need to understand that players entering Ukraine will primarily focus on working with the equipment that has already come to our country for countering the aggressor.

We work both with global players in the world and with medium-sized companies in the defence sector. These are two completely different approaches to the Ukrainian market. Huge companies are limited by the decisions of their own countries, as they are strategic. Medium-sized companies are more flexible in this sense. They seek opportunities and partnerships because they are unlikely to establish a permanent presence here on their own. They gladly collaborate with our local companies. Some are looking for solutions that can simply be taken and integrated into their systems abroad. This is not bad either, but strategically, it's less interesting for Ukraine.

Why does Ukraine need partnerships?

First, we need to understand that technologically, the country has lagged behind Western companies. There have been very few fundamentally new developments in Ukraine in the last 30 years or none at all. To quickly bridge this gap, we need to enter into partnerships.

Second, there's the issue of production scalability. This problem existed even before the war. It's challenging for Ukraine to produce a significant number of armoured personnel carriers or tanks. Therefore, partnerships are needed for scaling production. Collaborating with foreign partners will make it easier to revive the status of an arms exporter, a status that the country lost over the years of war.

Why do our partners need this? In most cases, they are seeking markets. They've seen that Ukraine has become an importer market, and they're either supplying their products here using their governments' funds or trying to tap into our budgets. This is a crucial aspect that directly correlates with whether they will come here, build something, and work together with us on a large scale.