The current turmoil will stimulate high tech investment from large Ukrainian groups

Many oligarchs as well as financial and industrial groups are beginning to understand that physical assets will be hard to preserve. Considering the demographic and cultural movements in Europe and the United States, we cannot consider our world stable in the long term. Looking at the dynamic political, economic, demographic, national and religious maps of the world, we cannot fail to see processes that lead to instability and perhaps war.

The majority of Ukrainian oligarchs and groups have faced the inability to preserve their assets to the current context of rebellion in Eastern Ukraine. They lost control of some of their enterprises and some were physically destroyed. That began to stimulate several processes.

I know at least six financial and industrial groups that have thought about assets abroad that, in case of disorder or wars, will be hard (or impossible) to take away. After talking to several emissaries, I learned that they see two scenarios:

  1. Investment in mature IT projects as a portfolio investor with an average check of 10 million or more, at the mezzanine (pre-IPO) stage. This approach entails minimal risks with soon coming income (dividend policy or expected growth). Moreover, one Ukrainian oligarch invested in Alibaba and is quite satisfied with the result. They are afraid to enter at an earlier stage, as they have no expertise in risk analysis at such stages and, more importantly, they are not seen as startup-oriented investors. At least two groups are creating “venture subdivisions” that will build up expertise and work as a family office or venture arm. But there are other examples which I don’t know about.
  2. Investment in funds. They entered here at earlier stages and became limited partners in the funds. Unfortunately, because of the immaturity of the sector, they negotiate with European or mutual funds (always requiring that the team have 10 years’ fund management experience + successful exits or successful funds). They are trying to gain entry with big checks (10 million to 30 million bucks) and expect first refusal right in later rounds (10 million to 20 million per deal). I don’t know of any case where they have been offered such a right. These deals are not advertised and the funds are very fearful of money from Ukraine.  It is possible that our people will be used at first as dumb money for co-investment. That’s bad, but it’ll do for a start. This can be seen as a hybrid scenario: LP in the fund + direct investment in later rounds.

What’s bad for us? Our venture seed fund GrowthUp is too small for them and we have been left without that money, even though there were negotiations (and some are still ongoing).

What’s bad for the market? Investment in Ukrainian startups is not being considered (of course, no one here can absorb such amounts).

What’s good for the market? The market will undergo expertise and, in two or three years, some of those structures will do round B, or maybe A.

I would like to point out that everyone is interested in high technology. The only criterion is relative independence from infrastructure and local law. No other business can provide that at the moment.

Denis Dovgopoliy contributed this comment as the first of a series of insights on the Ukrainian startup and venture scene. The Russian version can be found on his blog.

Topics: Analysis & opinion, Finance, People, Venture/Private equity
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