Not far from the Ukrainian front line, Finnish investor Jan-Erik Saarinen watched as a Ukrainian company demoed their latest drone—by bombing a Russian position.
The first strike missed by 26 feet. The second, delivered after an hour of repairs, hit the target. “It’s clearly not the most technical or the most beautiful UAV in the world,” he recounted about the 2023 demo “But it’s good enough.” Saarinen is still negotiating for a stake in the company, which is already flush with orders from its current customers.
Western investors like Saarinen are increasingly flocking to Ukraine, motivated by a desire to help the war-torn country, the chance to invest in battle-tested technologies, and a belief that peers are sleeping on an opportunity for profit.
Compared to the billions of dollars that Western governments are spending on the Ukraine war—most of which goes to buy weapons made in their own countries—investments like Saarinen’s are tiny, on the order of $100,000 or so. But these bets fund the homegrown, cutting-edge tech Ukraine’s commander-in-chief says is vital, such as drones and drone interceptors. The White House is also turning to venture capital for help delivering such items to Ukraine.
No one knows how many investors and investment consortiums like Saarinen’s are hunting for opportunities in Ukrainian startups, but they include at least four Western-backed venture-capital funds: Green Flag, ffVC, Koryos, and D3, the latter backed by former Google CEO Eric Schmidt.
These funds typically direct their defense investments to cutting-edge technologies, many based on commercial products. D3 partner Anton Verkhovodov, for example, espoused interest in drone production, communications gear, drone-hunting weapons, battle management software, and demining equipment.
“We need private initiatives to introduce new technologies,” said Verkhovodov. “The government presence in the defense industry means there is a ton of bureaucracy and the processes are slow.”
As governments struggle to get artillery shells to Ukraine, munitions production is beginning to look like a fruitful place to invest, said Belgian investor Alexander Beerts.
Helping a beleaguered country
In contrast to the often single-minded focus of venture capital in the United States, investors in Ukraine are seeking victory as much as profit.
Saarinen, a soldier-turned-financial manager, was shocked when Russia invaded Ukraine in February 2022. Two months later, he drove from Warsaw to the eastern Ukrainian city of Kharkiv to deliver medical supplies as Russia showered the city with missiles. He returned several times over the next months.
Last September, Saarinen helped judge a defense start-up competition set up by Brave1, a Ukrainian government organization that coordinates investment in domestic start-ups.
“I’m sitting in Lviv and listening to these pitches, and I’m thinking, ‘Why didn’t I think of this before?,” he said. “This is the best way I can help.”
D3 similarly emphasizes helping Ukraine win the war over immediate profits, which Verkhovodov said made good financial sense.
“Who needs war-losing technology?” he said. “We need war-winning technology.”
Green Flag and Koryos place less of an emphasis on winning the war, but nevertheless present their funds as supportive of the embattled country.
“If we really want to help them, we have to help them to be successful in the long term, which means the first investment needs to be successful,” said French investor Arnaud Dassier, a co-founder of Koryos.
In on the ground floor
The early investors in Ukraine believe the time is now. For one, the war means that there is a discount on Ukrainian technology, said Deborah Fairlamb, one of the co-founders of Green Flag. That trend is exacerbated by the global fall in venture capital investing, she added.
“If we’re lucky, we will have a six-month jump-start on other venture capital firms coming in,” Fairlamb said. “We don’t have a huge window.”
Investors also say that funding Ukrainian companies also gives them access to a workforce that is at the leading edge of defense technologies. Ukraine is “developing amazing skills and technologies right now,” said Dassier.
With the frontline just a ten-hour car ride away from Kyiv, the opportunity to vet new companies and technologies is also unparalleled, said D3’s Verkhodov. Technology-deployment times in Ukraine are estimated in days, not months or years, he said.
Just sitting in Kyiv can be useful to investors interested in air defense, he said.
“Because of a few projects I’m involved in, I go on the balcony and see exactly what we do against Shaheds,” he said, referring to Russia’s one-way attack drones.
Obstacles
Yet raising money for defense startups can be difficult in Europe.
First off, the largest pool of investors are institutional—think insurance companies or pension funds—which can be wary of defense firms or even forbidden by morality clauses to invest in them, Saarinen said.
The Finnish investor, consequently, is looking to wealthy individuals and family offices, a term referring to offices that manage inherited wealth and often have philanthropic goals. Family offices in Scandinavia were already heavily involved in donating to Ukraine, and are interested in “what’s next,” he said.
Even those investors who are willing to invest in defense technology are worried about corruption and security.
But financiers with experience in Ukraine call these concerns largely overblown.
For one, there are a variety of measures investors can take to secure their investments. Fairlamb said Green Flag is incorporated in the United States, so it can take advantage of U.S. arbitration. As investors are buying Ukrainian technology, rather than investing in production of foreign goods, there are also fewer concerns about losing intellectual property, said Dessier.
Dassier and Fairlamb also noted that investments in software are more secure, as there are fewer opportunities for bribes to be solicited and little to confiscate if a business is raided.
“If somebody wants to raid our company, you know, you just close the computers, you take the team, you go to another building, you buy a new set of computers,” said Dassier.
That said, Dassier never experienced corruption at his IT company in Ukraine, nor had Fairlamb. Beerts, a first-time investor in Ukraine, said he had experienced no evidence of corruption during a due-diligence trip to Ukraine, unlike experiences in Bulgaria.
In Fairlamb’s work for UkraineInvest, the office found that foreign investors who tried to hurry the system along with bribes ended up paying more bribes. Those who refused got business done, and had no more harassment, she said.
Pavlo Verkhniatskyi, an anti-corruption advocate and the director of COSA Solutions, a Ukraine-based strategic intelligence firm, agreed that operating transparently was the best solution. Foreign companies are particularly insulated from corruption, he said.
Still, investors said, local partners can be helpful while navigating Ukraine’s legal and business system. All investors interviewed had either an Ukrainian partner or worked with Brave1, the technology incubator founded in part by Ukraine’s Ministry for Digital Transformation.
Investors are also concerned about security, thanks to a deluge of videos, photos, and news that can leave some thinking every corner of Ukraine is under constant threat, said Fairlamb, who lives in Kyiv.
“The hardest thing, I think, is really overcoming this extraordinarily strong negativity bias that people have,” she said.
Fairlamb pointed to the strong record of Ukraine’s missile defenses. Some major cities, including Lviv, have experienced no strikes on its city center for the entirety of the war.
More meaningful for investors, perhaps, are more prosaic questions like the logistics of getting around a country without air travel, said D3’s Verkhodov. Fairlamb noted that many Ukrainian start-ups are dispersed throughout the country due to the war.
Yet another problem is a relatively undeveloped Ukrainian startup culture. Some startups try to build entire products when they should focus on a single component, said Justin Zeefe, a co-founder of Green Flag. Others are inexperienced in marketing, pricing, and pitching their companies. Fairlamb said Ukrainian founders tended to share far more of their backstory than might be expected by Americans accustomed to a fast-paced business culture.
Dassier said he had also experienced long-winded pitches, but said, “I’m French—I don’t mind spending two hours talking with Ukrainian [startups] at a good meal.”
And some companies, Fairlamb said, are so focused on winning that war that they’re uninterested in building a business case.
“Do I think there’s an opportunity? Yes, I do,” she said. “Is it gold coins scattered on the ground? No.”
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