IT in Ukraine is alive and kicking, and some investors hope the local tech business landscape to develop further even amidst a horizon darkened by war. One of such investors is Vitalii Gorovyi, Founder of Kyiv-based holding InSoft Partners.
The last couple of years have been busy ones for InSoft. The holding has acquired seven B2B tech providers since early 2022. The latest four –acquired this year– have offices or are headquartered in Ukraine.
It’s surprising seeing an investor putting money into a location which is regarded at the moment as highly risky, and even more so in a context of increasing macro pressures, both related and unrelated to the Russian invasion of Ukraine. With that in mind, we reached out to Mr. Gorovyi in order to get his perspective on the state and potential future of Ukrainian and Eastern European IT.
The following conversation covers Gorovyi’s thoughts and recent experiences with the Ukrainian IT space, his outlook for the region, his assessment of the effects of the war in the sector and his vision, as an investor, of what it takes to be an attractive and ultimately successful player in the tech B2B space.
NSAM: InSoft has invested in four Ukrainian tech companies this year alone. Why are you so interested in IT services providers in Ukraine in the midst of the war?
Vitalii Gorovyi: Since February 2022, InSoft has backed seven companies in total. We keep investing for several reasons.
InSoft.Partners is not a fund that pools and allocates investors’ money, but a strategic player. We are looking for deals that give us a strategic edge in the market, not just immediate returns.
The Ukrainian software development industry has shown remarkable resilience since the war began. Our clients were happy with the services we delivered, even during Russian assaults and power outages. The work practically did not stop. Most of our companies’ clients are from the US and Europe. Therefore, our income is not tied to the Ukrainian business sector.
We are building a business ecosystem where companies share and leverage each other’s expertise and support each other’s growth. Therefore, a well-chosen company only enhances the whole group. And this holds true regardless of the external circumstances.
NSAM; What’s the state of Ukrainian IT services years into the war with Russia? Has it been negatively impacted in some way by the war?
Vitalii Gorovyi: Some of the negative effects of the war on the Ukrainian software development market are the risk of losing developers’ lives; the possibility of employees being drafted into the army; and some challenges with traveling abroad for pitching, attending conferences or meeting clients.
NSAM: Could you be more specific on the travel challenges?
Vitalii Gorovyi: If you are a man liable for military service, you need to get a lot of permits to travel abroad. It takes a lot of time and effort. Sometimes you can wait a month or more for permission. sometimes you can’t get them.
NSAM: When a permit takes too long or isn’t granted, what do you do?
Vitalii Gorovyi: Almost every company has people who already have such permits or live abroad. They do the bulk of the work on foreign trips.
NSAM: Are investors traveling to Lviv and other areas in Ukraine which are not within or close to the war zone?
Vitalii Gorovyi: Foreign investors come to Ukraine. Indeed, some of them go to zones close to war. It really depends on each individual.
NSAM: How has demand for Ukrainian IT services changed since the war began? We know Ukraine is one of several of Western Europe’s preferred destinations for nearshore IT.
Vitalii Gorovyi: The market was more affected by the global recession, the end of cheap money and the potential disruption from AI. We think that the military actions had a much lower impact.
The global economy periodically goes through cycles. Money becomes more expensive, then cheaper. The software development industry has survived different cycles for decades. So we just adjust to the new conditions.
The market was more affected by the global recession, the end of cheap money and the potential disruption from AI. We think that the military actions had a much lower impact—Vitalii Gorovyi, Founder of InSoft Partners
The same goes for the adoption of AI in our lives. InSoft companies are actively learning new tools, integrating them into their business processes and offering new services to their clients.
NSAM: We heard a lot of IT talent (programmers, software developers and engineers) fled Ukraine into other countries in the Eastern bloc, as well as Western Europe and even the Americas, at least in the earlier months of the war. Is that true? If so, are talents still migrating from Ukraine into other territories?
Vitalii Gorovyi: It is true. I think it is understandable that some people are scared of war and move to other countries with their families.
Based on the available data, there were around 300,000 developers in Ukraine before the war; now there are around 225,000. Moreover, many Ukrainian companies open new offices abroad, where they can hire new employees and also employ those who have left. If we look at the history of other wars in other countries, we can see that people migrated not only during the war, but also after it ended.
On the other hand, COVID has taught businesses how to work with remote employees, so this process does not affect efficiency much.
NSAM: How has the war in Ukraine impacted the IT services landscape in other European countries such as Poland, Ireland or even Spain? Has demand for services and talent increased?
Vitalii Gorovyi: The war has increased the demand for developers in the countries where Ukrainian companies have set up their new offices. However, Ukrainian specialists who have moved there also compete with local talents.
When we analyze demand, we should note that this business does not depend much on the local market. For example, if a client from the US wants to outsource, he can compare a partner from Poland, Romania, India or Ukraine. So, the relocation of resources [developers] does not change the global demand.
Based on the available data, there were around 300,000 developers in Ukraine before the war; now there are around 225,000—Vitalii Gorovyi
NSAM: As an investor, which are the major risks you see in Eastern Europe’s IT services sector at the moment? We see the war as the most prevalent one, but we want to understand how the war translates into more specific risks.
Vitalii Gorovyi: War can affect the emotional decisions of whether to work with a company from a country that is at war or from nearby countries. Only the successful experience of collaboration during the conflict can reduce this fear.
There are many media outlets that portray the war in Ukraine as a potential trigger for a third world war now. Everyone sees the tense situation around Taiwan, the strained relations between Azerbaijan and Armenia. However, unfortunately, this is the black swan that businesses find hard to prepare for. At the same time, we see many efforts by governments to solve the difficult situation through diplomacy.
Looking at Israel, we see that a country can mobilize people from business for military action. Of course, this can have an impact on its stability and future plans.
If governments fail to negotiate well, we may see a drop in business activity. However, I repeat, for the software development industry we now see more risks from the end of cheap money (the startup world is facing a venture winter, and larger businesses are investing less credit money in their digitalization) and the emergence of AI.
NSAM: As an investor in the B2B IT services space, which qualities in a company catch your eye the most?
Vitalii Gorovyi: This market (software development) is very competitive, so we need to use the best global practices, find creative solutions and run a lot of experiments. We offer all this to companies through joining the ecosystem we have created.
How does it work? If you have one business, you have one window to the world. In our case, we have multiple windows to the world from all our portfolio businesses; seven right now. Our companies work in different markets, with different technologies and business models. We have regular meetings of various departments where they share their experiences. We save time by running different experiments in parallel in different companies. Then, we apply what works in all companies, and we stop using what doesn’t work anywhere. This approach produces results and trains people very fast. For example, in lead generation, we achieve about 2.5 times better results than the market average.
The problem is that after the 2008 crisis, businesses got used to living with cheap money. It will take some time for businesses to adapt to new conditions—Vitalii Gorovyi
Therefore, we are looking for partners who are ready to be more systematic, who can listen and understand, who have a strong passion to grow and improve, and who are adaptable in their methods.
NSAM: When it comes to IT companies, what sort of guidance or improvements do they tend to need the most in order to enhance growth?
Vitalii Gorovyi: The market is always evolving. The strategies that worked yesterday may not work tomorrow. An entrepreneur must be flexible, seek new solutions and be open to new experiments and partnerships.
When the market becomes saturated (as in the case of software development), it is much more important to find your niche and excel in it than to offer solutions that are similar to others and hope for demand.
NSAM: You mentioned that the macroeconomic environment (high interest rates in particular) have been more troublesome for B2B IT in general than the war. Do you see those pressures continuing in the next year, maybe even 2025? What’s your outlook?
Vitalii Gorovyi: High interest rates are not something fundamentally new to the global economy. In the 80s, the Fed rate was significantly higher than it is now; it reached 20%. The problem is that after the 2008 crisis, businesses got used to living with cheap money. It will take some time for businesses to adapt to new conditions.