Ukrainian Tech Industry January 2024: Where’s it at and where’s it going?

January 2024 came and went for The Ukrainian Tech Industry. Nevertheless, it is still a rough time to be a tech entrepreneur in Ukraine because the Ukrainian government is deliberately not making things any easier. 

But we’re getting ahead of ourselves. 

This article breaks down what is happening in The Ukrainian Tech Industry during January 2024 and what it might mean for the industry in the long term.

Ukrainian Tech Industry Major Challenges as of January 2024 Explained

The Ukrainian Tech Industry’s services export had an 8,5% decrease ($6,7 billion) during 2023. That’s all you need to know.

• Part of the reason why is because there’s a war going on. Naturally, the economy would take a hit. 
• However, there’s another reason why The Ukrainian Tech Industry is actively losing momentum – and their name is the Ukrainian government (long thunderous applause ensues). 

It’s not a big revelation that the Ukrainian government has been oddly passive-aggressive and lately downright hostile to one of the few economy segments that showcased stable growth and scaling over the thick and thin 2010s and early 2020s. 

• One of the reasons why it is so is because the Ukrainian Tech Industry did it all without the government’s involvement. There were no Fat Government Contracts until 2019-2020.
• But that state of things kept a part of the government up at night because that’s not right in their twisted minds – you can’t succeed without them. Because that’s not how it works. Except it does, but who cares? 
• Ministry of Digital Transformation emerged; the Diia super app was launched, ye olde kolkhoz Diia City ensued, and all the GovTech and DefenseTech contracts came afterward. Cue corruption, backdoor dealings, empty promises, and good old-fashioned business bullying. 

As we’ve mentioned in our December 2023 retrospective article, there are several challenges that the Ukrainian Tech Industry faces with no apparent solution for one reason or another.

• Mobilization and its decidedly anti-business politics;
• Lack of government support for fledgling businesses;
• Government’s official and unofficial pressure on businesses.

There’s also a war going on, but we don’t have to explain that.

Let’s break it down by company type.

Ukrainian Tech Industry Outsourcing Sector

Getting and maintaining new clients is a challenge for outsourcing companies. Most foreign potential clients see what’s happening here and assume it’s not worth the hassle. Can’t argue against that. 

• Instead, those potential clients are moving towards African, Asian, and Latin American markets that don’t have wars and have much lower prices.

This development doesn’t mean much for big outsourcing companies like SoftServe or Eleks, but it’s a death knell for a small-time up to 50-100 employees companies that don’t have diverse business models to offset emerging business challenges. 

Since outsourcing is a significant part of The Ukrainian Tech Segment – this kind of business slowdown takes a toll on the entire industry. 

• In the long term, this development has already brought layoffs, salary cuts, company restructuring, and dissolution.

But all this doesn’t mean Ukrainian outsourcing is dying. 

Far from it – Ukrainian outsourcing companies that relocated to Poland and other European countries feel all right and even manage to compete with local companies in terms of price-quality ratio. 

• It’s just being in Ukraine is inexplicably bad for your business (damn).

Ukrainian Tech Industry Product Sector

The Ukrainian Tech Industry’s product companies can succeed if they focus on markets other than Ukrainian. That’s the reality of the situation.

• Any time you see some good news about some Ukrainian Product Company getting hefty investment or expanding into some new market – all this happens outside of Ukraine through a foreign office.

But even not being in Ukraine is not a guarantee for success because the global economic recession is not going anywhere. 

• This situation means consumers don’t have that much spare cash to buy endless SaaS subscriptions and wonder gadgets. 

Similarly, businesses can’t afford many tools and will focus on essential solutions. 

• Because of that, Ukrainian product companies now focus on niches that can be described as “cheap alternatives.”. Sacrificing innovation for optimization is a way to go if you’re strapped for cash but need to go.
• The thing is, working in the “cheaper alternative” paradigm means following a certain kind of blueprint that leaves limited space for actual innovations. 
• From the business standpoint, this setup means fewer opportunities to market competitive advantages. Instead, companies reiterate the same talking points with different line breaks. 
• As a result, the competition among various tech products is growing fiercer each quarter. 

That’s bad news if the company is only starting to establish itself.

But there’s more.

In addition, numerous investors showcase unrealistic expectations towards the product’s rollout on the market and its short-term and mid-term success. 

• The good old assumption that “just because we give you money, you have to succeed” lives on regardless of the general market situation or state of things in a particular niche. 
• Expectation management is challenging because these businesses also need to carry on amidst war with a government throwing as many wrenches as possible.

The Ukrainian Tech’s internal market was already barely there as we were coming into 2023, and it didn’t fare any better during Q1 2024 either.

• The Ukrainian businesses that potentially could’ve brought money into Ukrainian Tech are more concerned with the following:
  • fending off rampant mobilization;
  • avoiding corrupt government officials;
  • dealing with the overall volatile market situation.

These factors prevent the Ukrainian internal market from becoming a significant source of income for the Ukrainian Tech Industry.  

The Ukrainian product companies are forced to relocate their business operation outside of Ukraine. The reason: the Ukrainian government sees no reason to figure out a compromise that would enable Ukrainian Tech companies to function correctly inside Ukraine. 

• Why bother – who needs the economy needs days? We get our money from our partners out of the kindness of their hearts.  

Ukrainian Tech Industry Startup Sector

DefenseTech

The big narrative of 2023 is that DefenseTech became a big part of The Ukrainian Tech Industry. And that’s true. 

DefenseTech is a very prominent Ukrainian Tech Segment. Because we have a war going on, it would’ve been strange if the government and businesses would not invest in cutting-edge defense technologies. 

• That said, it is childish to assume that DefenseTech is an actual business domain that racks in money. 
• Technically, it is, but there is a catch – the government is involved. And because of that, it is safe to assume that we can’t trust any figures coming out regarding DefenseTech contracts. The historic flair of corruption is too persistent to take them at face value.  

Artificial Intelligence and Machine Learning

The other popular startup domain was all things Artificial Intelligence and Machine Learning – generative AI and analytical AI. 

In both cases, we can see a clear trend:

• Investors overestimate the startup’s potential and chances of developing into a full-fledged business.
• Companies tack on AI tags to attract more significant investments and carry things out as long as possible.

There’s also an issue with developing sufficient business models.

Analytical AI products have a distinct, tangible contribution to the business operation. Their input can substantially affect data-heavy business operations.

• This configuration requires long-term subscriptions that stabilize the cash flow necessary for operational expenses, research development, and subsequent scaling. 
• Having corporate clients also makes optimizing products based on actual use cases easier.

Meanwhile, generative AI requires significant operational spending to train and optimize models, while consumer demand could be more consistent. 

• There’s also a competition issue. Many companies take on various generative AI APIs and wrap around their products scaled down to their specific use cases. 
• Only so many companies develop their own solutions through and through because that requires even more money for something that may or may not ever justify the investments..  

However, because of the market oversaturation, these startups need to attract as many users as possible as fast as possible. Otherwise, they wouldn’t get enough momentum to keep going and attract more investments. 

• But because there’s so much competition, you need to keep your prices low, which further burdens the business model’s viability. 
• As a result, just like crypto – most Generative AI startups gain momentum not via actual usefulness but by using louder marketing.
• But there’s a catch. Bold marketing claims also affect investors’ perceptions, which fuels unrealistic expectations. Getting out of that vicious circle is not something Generative AI startups can do gracefully.

What’s next?

A mobilization law update is coming. This legislation initiative will make all Ukrainian tech entrepreneurs even happier than they already are. 

Our upcoming article will discuss mobilization, its decidedly anti-business approach, and its ongoing detrimental effects.