Investing in Ukrainian MilTech Startups: Opportunities and Risks
Since the outbreak of war in Ukraine, over 40 startups have approached me seeking investment, with the aim of solving military problems.
Despite my interest in supporting my homeland, I have only invested in one of these startups.
The reason being that investing in startups that are likely to fail DOES NOT BRING THE VICTORY ANY CLOSER.
I have therefore decided to only invest in startups with potential for success, while avoiding those with high risks or clear red flags. Here are the common red flags investors should look out for when evaluating Ukrainian MilTech startups:
1. Legal issues with data and intellectual property
Many AI startups have trained their neural networks on data that is either a state secret or obtained illegally. To mitigate this risk, it is important to have clear legal documents confirming the legitimacy of the data. Failure to do so could result in a criminal offense for violating state secrets.
2. Transfer of dual-use technologies and IP
Ukraine has outdated legislation regulating the transfer of dual-use technologies. If the technology was created in Ukraine, it is subject to regulation. Investors should ensure that the transfer of technology from individuals or legal entities in Ukraine to a foreign company is done legally to avoid legal and criminal risks.
3. Company jurisdiction
Due to the war, startups are mainly registered in Ukraine. However, I do not recommend investing in companies in Ukraine due to problems with protecting minority-shareholder rights and the judicial system. If investing, invest in a company registered in the US or EU, and ensure the IP is transferred from the old Ukrainian entity.
4. Founder shares
The entrepreneurial culture in Ukraine differs from the West, and founders of new military startups often lack entrepreneurial experience. Ensure all shares, options and other interests are clearly documented to avoid conflicts and project collapse.
5. Recruitment risks of founders and key personnel
Under martial law, co-founders and key employees can be drafted into the army at any time. Investors should ensure the startup can continue to operate in such a scenario.
6. Competition in the defense market
Founders often have a technical background and little understanding of global competition and how to compete with global monopolies in the defense market. Carefully assess the startup’s strategy for competing globally.
Summary
The purpose of this article is not to discourage investment in Ukrainian startups, but to help investors understand the risks and opportunities involved. I am encouraged by initiatives to create accelerators and training programs for founders in Ukraine, and improvements in Ukrainian legislation on IP, technology transfer and state secrets will provide a favorable environment for important technological solutions.
Invest in Ukrainian MilTech startups, but do so wisely.
Slava Ukraine!
Best regards,
Vitaliy Goncharuk
LinkedIn