Editor’s note: Our 2019 Doing Business in Ukraine magazine is out. Get a PDF version online or pick up a copy in Kyiv.
Just 10 years ago, tech investors wouldn’t even consider Eastern Europe as an advantageous place to run a tech business.
But then there came tech startups like Prezi, Transferwise, Bolt, GitLab and the myriads of software outsourcing firms. They have drawn eyes east, marking the region a serious contender in the tech world.
The world’s attention converted into investment: financing of Eastern European startups has surged from $10 million to $400 million in just five years. And this is only the money that came from outside Europe, including Asia and North America.
With strong mathematics education that the country inherited from the Soviet Union, this investment converted into hordes of skilled tech specialists. Ukraine alone has 172,000 programmers, or 60,000 more than just two years ago. Neighboring Poland, in turn, boasts even a bigger crowd — 250,000 techies.
Seeing the opportunity, each post-Soviet country has been attempting to refocus their economies around the knowledge-based information technology industry — software and hardware producers. Ukraine tries to encourage IT development, too.
In 2018, Belarus, Ukraine, and Poland together exported tech services of a total worth of $13 billion. According to Ukrainian tech executive Yurii Antoniuk, the head of Ukraine’s biggest tech employer EPAM, the figure shows that natural resources like gas and oil will play a smaller role in the future, while intellectual capital will be growing its significance.
“That’s why nations are fighting for brains today,” he told the Kyiv Post. “The development of IT, science-intensive spheres — it’s the ticket to the future for countries that want to become and stay competitive.”
Same conditions?
Ukraine shares its southwestern border with Belarus, also a non-European Union which inherited a Soviet past. Its IT sector seems similar to the Ukrainian one.
But not similar enough, according to Antoniuk.
“There are no countries with similar conditions,” he argues. EPAM also has offices in Belarus. In fact, the company was initially founded by Belarusians and it hires as many as 10,000 Belarusians while only 6,600 Ukrainians.
Antoniuk believes the key difference between the countries is “obviously” geographic size: Belarus has 200,000 square kilometers while Ukraine — 600,000. The two countries also have different populations: Ukraine has 42 million residents while Belarus — 10 million.
This means both: Ukraine has “a bigger pool of talents” and its IT — because of the vast territory — tends to decentralize and form clusters, Antoniuk said.
Investment in Eastern European startups has surged from $10 million to $400 million in just five years.
The IT clusters spread across 20 Ukraine’s cities, including country’s largest Lviv, Kyiv, Kharkiv, Odesa, and Dnipro. The clusters have different regional specializations, some are more focused on improving technical education in their regions or promoting Ukraine abroad, others act as labor unions.
“And there’s no decisive leader — all cities are strong in IT,” Antoniuk said. Meanwhile, in Belarus, the only “gravitational center” for talents is Minsk, its capital.
According to statistics, however, Belarus has similar export volumes compared to Ukraine, despite the difference in population size. While Ukraine’s tech brings their $4.5 billion in export, Belarus’s techies make $3.1 billion. Thus, for Belarus’ economy, the tech sector secures 5.7 percent of its gross domestic product, while for Ukraine — 4 percent.
Very focused
All the same, similarities between the countries do exist, agrees Antoniuk.
“Ukraine and Belarus have just recently recovered from the post-Soviet period and they started looking for a “magic pill” to grow their economies,” he said.
And tech industry seemed to be exactly what they were looking for. This business is simpler to start than a classic manufacturing business, but most importantly — the tech sphere creates an intellectual product with high added value that trades abroad.
“Such products make a significant contribution to the development of the economy,” he said. That’s why both countries have become “very focused” on the development of their IT, he added.
Belarus, for example, proves it by having built High Technologies Park, a special economic zone with a special tax and legal regime for tech workers. Those who work in the park are exempted from most taxes, including value-added tax and income tax. Moreover, employees of the resident companies enjoy a 30 percent reduction in personal income tax compared with other sectors.
The main goal of the tech hub is to stimulate the development of IT businesses. Today 400 companies with their 30,000 employees work within the economic zone. This is 60 percent of all of the country’s techies.
Ukraine doesn’t have such special economic zones, but it does have comfortable taxing conditions like a flat 5 percent tax rate for entrepreneurs, including tech freelancers; this explains the reason why 130,000 Ukrainian entrepreneurs are registered as programmers.
Besides, Ukrainian tech industry players organize international conferences like iForum (12,000 attendees) and Lviv IT Arena (3,500 attendees), publish IT industry reports, and form communities like private innovation park Unit City.
Antoniuk thinks that both countries have “historically a very good base” for the development of the IT business and both can use it to improve their economies.
Powerful neighbor
For Ukraine and Belarus, the tech sector isn’t only about money — it helps countries integrate into the global economy, according to Igor Byeda, a regional head at software firm GlobalLogic.
Countries like Poland, Slovakia, and Croatia, on the other hand, are EU members and are already integrated into the European and global IT markets, Byeda says. His firm generates up to 50 percent of its revenue in the region.
Take Poland, he said. Global integration along with stability ensured by the EU membership makes it more attractive to investors than Ukraine. This also makes the country have more programmers than any other Eastern European country.
But Ukraine has an advantage: its IT doesn’t depend as much on the foreigners as Polish IT does. In Poland, global product companies like Microsoft, Google, Ericsson and many others have engineering centers all over Poland.
Meanwhile, the majority of leading IT businesses in Ukraine are either chiefly Ukrainian service companies or global firms with offices here like GlobalLogic or EPAM. They generate the major part of export income from IT.
This makes Ukraine’s tech sector grow fast. Local IT market grows 20–25 percent per year, while in Poland the sector annually grows by 6 percent.
‘Stop lying to ourselves’
Despite the fact that Ukraine’s tech industry doesn’t stand out in Eastern European region, local tech entrepreneurs tend to over-promote the country, naming it “the next Silicon Valley.”
But according to John Kim, an American tech millionaire from California, who last year founded an information technology company in Ukraine, such comparison is deeply wrong.
According to him, one in every 11,000 people in Silicon Valley is a self-made billionaire who contributes to the ecosystem by investing, teaching, and giving jobs. Silicon Valley has $128,000 per capita in annual gross domestic product. Meanwhile, Ukraine’s is $9,700.
“When the same will happen in Ukraine, then it becomes the next Silicon Valley,” Kim told the Kyiv Post. “Before then, it’s just marketing bulls**t and everyone with half a brain knows it.”
“It’s time,” Kim went on, “that we in Ukraine stop lying to ourselves so that we can begin the real work of transforming from a service economy of cheap IT labor to that of an innovation economy, where we are at least considered peers of Silicon Valley talent level — and not ‘cheap IT!'”
According to the entrepreneur, that is done only through teaching businesses English and soft skills from real Silicon Valley people living in Ukraine. “There is no other way,” he said.
Michael Balyasny migrated from Ukraine to the U.S. and founded startup Attendify in Silicon Valley. He echoes Kim’s words.
“People make this comparison because they’re lazy and it’s easy to make a sweeping statement without investing much thought,” he told the Kyiv Post. In his view, however, Ukrainians aren’t the only ones who make such exaggerated statements.
“Whether it’s projects like Skolkovo or even huge successes like Israel’s technology hubs, everyone reflexively (starts) saying, ‘We’re building Russia’s Silicon Valley’ or ‘Israel’s Silicon Valley,’” he said. “That kind of approach is doomed to fail because it’s an oversimplification.”
Balyasny believes Ukraine can’t recreate Silicon Valley and shouldn’t try to. Instead, it should aim to be the better version of itself, he said.
“The keys to success are not in building flashy real estate projects or the president showing up and cutting a ribbon, it’s about boring things like education, fostering entrepreneurship at a young age and making it truly easy for companies to do business in Ukraine,” he said. “When we’re making progress on those vectors there will be plenty of time to cut ribbons and make bold proclamations.
“That’s the foundation, and I completely recognize how boring and long-term that sounds, but I don’t believe there are silver bullets.”
The Kyiv Post’s technology coverage is sponsored by Ciklum. The content is independent of the donor.
