Startups Struggle as Russian Invasion Escalates

The attack of Ukraine on Russia is now the largest war on a European country since World War II and has resulted in what many experts are calling a “second cold war”. The Russian invasion has now entered its 4th week with more than 3.2 million Ukrainians having fled the country, according to the United Nations Refugee Agency.

While Ukraine’s allies are reluctant to send troops to the country in order to avoid direct military conflict, billions of dollars worth of military equipment have made their way to the country to help defend against the invasion. However, the sanctions imposed on Russia and Belarus for sparking the conflict have been swift and severe, with even countries like Switzerland taking action despite their history of neutrality.

As international sanctions start taking effect on the Russian economy, its national currency has started crashing while companies reconsider doing business in the country. The effects of the war have also been noticeable in Ukraine as people fled the country and CEOs struggled to keep their businesses afloat amid the chaos. 

Ukraine has grown in popularity as a thriving startup ecosystem, leading many startups to open offices in Kyiv and aspiring entrepreneurs to start their startups there. According to the Ukrainian government, over 1000 startups and product companies operated in the capital, with many others opting to establish themselves in Kharkiv, Odesa, Dnipro, Lviv, and Vinnytsia.

The situation for Russian startups is also proving to be problematic, as international sanctions have made it extremely difficult for Russian businesses to operate abroad. Despite sanctions on oligarchs and Russian companies not directed specifically to Russian citizens, startups, and small businesses with no relation to the Kremlin, collateral damage is taking place.

Unfortunately, the outgoing conflict has forced startups operating in the region to reconsider their position. Not only are startups being forced to reconsider how they operate but also to take direct actions to ensure the safety of their workers. This represents an unprecedented challenge for CEOs and their teams, with its effects that have already rippled through the world.

While startups in the two countries scramble to support their employees and maintain their operations running, the entirety of the startup ecosystem is keeping a close eye on how the situation develops. With the effects of the sanctions being sure to have an impact on the global economy, startups around the globe are developing contingency plans and bracing for what is about to come.

Investors Are Keeping a Close Eye on the Situation

Investors and clients are well aware of the outgoing situation and the possible ramifications, which is adding further pressure on local startups. While founders are finding that most of them are being supportive given the circumstances, business continuity plans are being requested en masse as they reconsider their positions.

Potential investors are also postponing their decisions until the conflict is deescalated, which is not only affecting startups in the region but all around the world. According to Crunchbase News, only 154 startups revealed investments during the last 5 days of February, totaling $912 million per weekday. When compared with the 1.9 billion per weekday at the start of February, this represents a drop of over 50%. The effects of the war can also be seen on round counts, which dropped from 80 to 39 per weekday.

Data shows that these numbers have continued to drop over the past few days in a significant manner, which is believed to be as low as 70% for EU countries. As the available data is the result of looking at funding announcements, it is possible that the reduction in funding is not as bad as it seems but the result of companies choosing to announce them at a later date.

However, cryptocurrency-related startups seem to be finding it easier to navigate the outgoing situation. George Melka, chief executive officer at crypto broker SFOX, told Reuters about this trend:

“Crypto native companies are still raising at very high valuations and many funding rounds are still oversubscribed. In fact, crypto startup valuations are probably the highest I’ve seen.”

Investors seem to believe that the cryptocurrency industry will withstand the economic turmoil caused by the Ukraine-Russia conflict. Firms like Bain Capital Ventures have announced that they are launching funds destined exclusively for crypto-related investments.

Despite the cryptocurrency market’s recent bear market, crypto assets have shown better performance than traditional stocks since the conflict started. Biden’s executive order on digital assets has also sparked optimism among investors.

Ukrainian Startups Struggle to Protect Their Employees and Operations

Ukraine is home to unicorns like GitLab, Grammarly, Genesis, and Firefly Aerospace. Despite being ranked 34th according to StartupBlink, the country has gained popularity among founders. With 127 startups having primary or secondary offices in the country according to Fortune, founders are struggling to keep their operations running and keeping their workers safe. A Grammarly spokesperson told the outlet:

“We have implemented our contingency plans to help our team members and their families remain safe. We’ve also implemented our plans to help ensure Grammarly’s services will not be disrupted. This includes, for example, securing backup communication methods and temporary transfer of business-critical responsibilities to team members outside of Ukraine to ensure our Ukraine-based team members can focus on the immediate safety of themselves and their families.”

When it comes to the tech industry, Ukraine is estimated to be home to over 200,000 English-speaking tech specialists. Startups with employees in the country have been offering support, mostly in the form of financial assistance to help them flee the country. As leaving the country has become more difficult over the past few days, especially for those living in cities signed by the Russian army, logistical support is also being provided.

While there is little startups can do for their employees beyond offering financial assistance and facilitating remote working, startups around the world have taken a stance against the invasion. These actions range from preparing for the worst-case scenarios, as in the case of Cloudflare’s decision to remove cryptographic material from servers in the country, to actively educating their Russian user base on the true nature of the invasion.

Startups all around the world have also taken action to aid Ukrainian refugees in countries like Poland through grassroots efforts. Founders like Swobbe co-founder & CEO Thomas Duscha have used platforms that have taken to social media to help organize these efforts. In a Linkedin post, Duscha said that Swobbe would ensure connectivity by providing mobile energy and Vodafone Gigacubes, all while also stating: 

“I was born and raised 20 km from the Ukrainian border, know the Ukrainian culture and share their values, my Grandfather was from Lviv. It is impossible to stay passive.”

Just like Swobbe, multiple startups have offered support in the form of donations and logical assistance to NGOs like Tech To The Rescue (TTTR),  which launched the #tTechForUkraine campaign to help other NGOs design solutions to maximize their impact. This assistance can go from improving cybersecurity and embedded payment methods to decentralizing resource management to ensure stability. 

According to Jacek Siadkowski, founder and director of TTTR., the tech community’s response has been overwhelming with “tens of thousands of people” making the pledge to help in the efforts.

For now, the status of the startup space in Ukraine is entirely focused on rescue plans and caring for their employees, which makes it difficult (and non-urgent) to estimate the economic cost.

Russian Startups and Entrepreneurs Are Not Unscathed

Russia, which is home to unicorns like Miro, Avito, and Wildberries, has over 10 startups that were set to expand the list in the near future prior to the start of the war according to Forbes. The country used to be considered one of the top 20 countries for startups when accounting for the quality, quantity, and business environments but this is no longer the case.

Unfortunately, founders in the country are finding it difficult to navigate the sanctions imposed on the country as a result of Vladimir Putin’s decision to invade Ukraine. From major financial institutions in the country being banned from SWIFT to major card operators choosing to isolate the country from their networks, the situation is dire for startups relying on foreign currency, partners, and customers.

An example of the impact of these sanctions is Buyk, a fresh food delivery startup with a considerable user base in New York and Chicago. In early March, the startup was forced to lay off 98% of its staff as it looked for means of funding its operations to avoid bankruptcy. CEO James Walker told the New York Post:

“Our founders Slava Bocharov and Rodion Shishkov have been providing bridge financing to Buyk until we close our next investment round. However, the sanctions against Russian banks have now made this bridge financing setup untenable, despite neither of our founders being sanctioned.” 

Founded back in 2021, Buyk raised $46 million in seed funding as investors believed in the startup’s potential to make real-time retail a reality in the cities it operated. Other startups in the industry like Fridge No More also saw themselves in the need to let go of more of their staff.

Russian entrepreneurs that have nothing to do with the situation in Ukraine will certainly find it more difficult to operate in the United States and other western countries, which is expected to affect startups reliant on Russian investment. Julian Zegelman, a General Partner at Step Ahead Capital, told CNBC:

“There can be a stigma toward founders from Russia coming over to the U.S. and Russian-speaking entrepreneurs. We hope it’s not a witch hunt.”

Despite Russian investors representing about $9 billion in funding across 232 deals back in 2021, many startups are opting not to accept funding from them until the situation normalizes. This precaution makes sense when considering that new sanctions are likely to be imposed as the invasion progresses. In fact, being a Russian citizen has proven to be an additional barrier ever since the annexation of Crimea.

While Putin seems to have gathered the support of many Russians over the past few days, he is still facing strong opposition. Among protesters, Gen Zers and Millennials seem to make up the biggest part of the group. Now, many of them are choosing to leave the country as fears of further internet and traveling restrictions loom over them.

These fears have been especially prevalent for Russians working remotely for companies in the west, with the New York Times estimating that ”tens of thousands” of young professionals are choosing to leave. For many of them, leaving their native country is a matter of ideals while for others, it is also about being able to keep their means of living.

However, despite leaving the country as a result of their opposition to the invasion of Ukraine, many of these professionals are finding it impossible to find jobs in their fields. According to Ivan, a Russian game developer interviewed by The Times, answers like “Sorry guys. We hope to work together in the future but right now, we cannot” are not unusual. 

For now, concerns around compliance with international regulations will shape the future for startups with Russian links of any kind. Unfortunately, the impact of the sanctions is expected to last long after the invasion of Ukraine finalizes, independently of the outcome.