"Money loves not only silence but also security": How war has changed the focus of investment companies
Fund managers discuss priority investment directions and trends
In the course of the great war, many startups were unable to adapt to the new conditions and “died”. As a result, funds experienced a percentage loss from their portfolios and had to change their strategies. How exactly did they do that? What investment directions are currently a priority? And which sectors are chosen by external investors? Speakers at the recent INVESTMAN forum discussed these topics. Mind took note of the most interesting ideas.
Igor Verkhogliad,
Managing Partner of the Soul Partners investment bank, shared the following insights:
– Before the war, we focused on working with projects for Ukrainian shareholders. We had almost no clients outside of Ukraine. There were only a few cases where an investor approached us with a request to find an asset based on their criteria. In those cases, we worked for the investor. It wasn't a Ukrainian client, but it still revolved around Ukraine. Now, our portfolio includes several projects that have little to do with Ukraine. Therefore, the war provided momentum to enter the export market for services.
As investment facilitators, we can clearly see what is happening in the market. It looks like this: domestic investors are present in the traditional sectors for Ukraine, such as agriculture, processing, and IT. External investors are interested in IT. The logic behind this is that IT is perhaps the only sector that doesn't have a physical asset present in Ukraine. There are people, software, and offices, but no physical plant. Consequently, there is no risk of its destruction. And that is probably one of the main reasons why there is some interest and small external agreements in this sector.
In the agricultural market, the main investors now are urban dwellers. Those who want to raise funds – sell, while those who have resources – buy, driven by the sentiment that prices will be lower during wartime due to a lack of competition from foreign investors. Another new trend is that medium and large Ukrainian businesses want to invest in related segments abroad to diversify risks. This trend is neutral to negative for Ukraine because it directs funds out of the country.
From my perspective, managing state enterprises and entrepreneurial activities definitely shouldn't be among the main functions of the government. Yet, we see such a trend. For several years, especially during the war, the state has become one of the most significant economic actors. Officials have many economic levers, which, in turn, create incentives for corruption. The most important thing that can be done quickly is to have the political will to reduce the role of the state in the economy, namely through privatisation, selling state enterprises, and reducing their number. Corruption levels will naturally decline in this way. The second aspect is judicial and prosecutorial reform. It is necessary to reform those areas that influence economic activity.
Yuriy Sereshchenko,
Managing Director of the QPDigital Venture Capital Fund:
– The main task of the previous year was to assist startups with relocation. Currently, teams are receiving a lot of support. For example, we have a startup that raised around $25,000 – $50,000 in direct investments last year and received assistance (grants, relocation programs) of about $800,000.
It is important to understand that if a startup wants to grow, relocation is necessary. 70% of our startups are alive and thriving. Our investors are Ukrainian businessmen. Liquidity is much more important to them than capitalisation in 5 years. Therefore, we are currently focused on projects that can achieve rapid operation traction.
Jane Klepa,
Executive Director of 1991 Open Data Incubator:
– About 20% of all the startups in our portfolio over the years were unable to survive. For us, it is a significant percentage. When it comes to projects that remain in Ukraine, we have strengthened our business support for them. We understand that some teams cannot physically relocate, at least due to legislative restrictions for men. For them, we have created separate support programmes.
Investment attraction has not stopped during the war. This applies to both projects that were already at a certain level and early-stage ones. For instance, a project in the field of misinformation came to our hackathon to test hypotheses. They did it and received $1 million from SMRK. This demonstrates how products continue to develop and can be successful not only abroad but also in Ukraine. They are establishing a public-private partnership format together with us.
Artificial intelligence may sound like, "Let's add AI here as well," to many people. But in reality, it's a story about simplification. If used correctly, it can give the product more speed. Only a few of our startups have incorporated it. We have increased our focus on cybersecurity and defence projects, paying more attention to algorithms and software. We also continue to invest in educational projects.
The principle of non-interference by the state is a fundamental principle, but it does not have to be 100%. When it comes to IT, it is the only industry in Ukraine that has been net positive throughout the entire period. It may be small, but it exists. It is an indicator that even the current conditions are possible for the functioning and development of the industry. Of course, additional opportunities need to be created after victory, but certainly not now. As for the level of corruption, it has become even higher. Such technological projects that can work somewhat productively offset the negative impact of corruption, bringing it closer to zero..
Artem Volkhonsky,
Founder of ZAS Ventures:
– The war has had a significant impact. We have reviewed the pipeline of startups we had. Many projects have ceased to show signs of life due to the war. Their metrics have plummeted. Some people have left, and it is unlikely that they will return to Ukraine. However, those who have stayed and wanted to survive have actually improved their results. They have effectively proven that they can create products and attract investments in extremely challenging conditions during the war, without electricity and internet. We have plenty of strong teams like that.
Currently, the trend is AI. It has heavily influenced the landscape and startups. All startups are trying to capture this trend, building their projects based on artificial intelligence because they understand its advantages. And our main challenge now is to make sure it's not bullshit. That within the next two months, a hypothetical Adobe doesn't do the same thing and put an end to the startup. Another constantly growing direction is everything related to remote work and models where people are given tools to earn money by selling content.
And the most significant factor that influences investment attractiveness is corruption. Money loves not only silence but also security. Nobody will invest in a limited liability company in Ukraine. I can't even imagine offering such an option to an American investor, aware that he will have problems with our “investment nannies” later. Tax reform has been long overdue. I believe that we won't be able to handle it ourselves because it's like performing an appendectomy on ourselves. Only under external pressure and investments can we change the situation. We are masters at missing our chances. We had two revolutions that partially shook up the corruption narrative. However, it recovered, incorporated yesterday's revolutionaries into its system, and became an institution. It's very difficult to eradicate it.