Burned by U.S. bank meltdowns, Ukrainian tech startups turn to the EU

19 April, 07:25 PM
Silicon Valley Bank (Photo:REUTERS/Nathan Frandino)

Silicon Valley Bank (Photo:REUTERS/Nathan Frandino)

Author: Kollen Post

Last month’s banking collapses in the U.S. kicked the legs out from under tech companies worldwide. The end of Silvergate, Signature, and especially Silicon Valley Bank severed key financial arteries pumping capital to tech firms too young and risky for many more established banks. 

With limited local banking and capital sources, Ukraine’s dense startup community was hit particularly hard. Ukrainian startups are now looking to hedge their traditional bets on the U.S.’s tech-friendly banks, though ultimately, U.S. federal regulators stepped in and guaranteed deposits at SVB. A New York regulator did the same for Signature Bank, another tech-heavy bank. Clients were ultimately made whole, above and beyond required deposit insurance — but the country is still wracked with the financial jitters.

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Ukrainian startup founders and venture capitalists tell the New Voice of Ukraine that some are looking closer to home — namely, at the European Union.

”We have to start to locate in the EU and that’s the way to go into a new market,” says Denys Gurak, the CEO and founder of A.D.A.M., a biotech startup that aims to 3D print bones for surgical implants.

“If the bridge before was functioning like Ukraine directly to the U.S., now the step in between has emerged: Companies going to the EU first and validating the products.

Like many Ukrainian tech founders, Gurak leads A.D.A.M. from the U.S. while the engineering team remains in offices at home, in Kyiv and Odesa.

It’s tough to gauge how many Ukrainian firms got hit by the Silicon Valley Bank collapse. Most of the data available on firms with assets there came either from voluntary disclosure or Securities and Exchange Commission filings that only publicly traded companies report – a category of companies already established.

Denis Dovgopoliy, founder of startup information hub Unicorn Nest, wrote in a Facebook post that he’d counted 25 Ukrainian startups banking with SVB. He did not name them.

“I suspect that 90% companies in Ukraine that have US structure/business are banked at SVB,” writes Mariusz Adamski, a partner at FF VC who leads the Ukraine-focused Blue & Yellow Fund from Warsaw..

As a result of SVB’s fallout, some Ukrainian startups have now set their sights on Poland as their next hub for capital and investment.

“It’s not as easy to set up account operations as in the U.S., but that's a big point for Ukrainians wanting to become part of the EU.” explains Adamski.

“They might well also send more money to Polish banks.”

“This has already been happening,” says Gurak.

“Because of the war, a lot of startups started relocating to Eastern Europe — to Poland specifically. Just to de-risk the whole business for investors because that's basically the main thing that precludes startups from raising now.”

However, EU banking is traditionally more tightly regulated and less profitable. Paschal Donohoe, the leader of a group of EU finance ministers, cheered the trading block in the aftermath of U.S. instability, saying “What we have done in the past, we can see the value in it now.”

Aftershocks are still reverberating through the U.S. First Republic Bank, a major competitor to SVB, has stopped giving out dividends, according to recent filings. Despite a $30 billion bailout from Wall Street heavy hitters in mid-March, First Republic’s stock has flatlined at around $14.

But U.S. banks are not alone in wobbling.

“I think it’s a global meltdown.” says Kirill Bandar, a founder of energy firm UDP Renewables and a partner at Kyiv’s tech hub, Unit.City.

“Some startups will die. There is no free money; money is expensive.”

The EU’s banking system has thus far held strong. But as Silicon Valley Bank, Signature and Silvergate fell, the long-embattled Credit Suisse finally got acquired by UBS.

“I think the small banks in America will start to fall and it will most likely happen this year,” predicts Elijah Podavalkin, the founder of outsourcing firm Scalamandra.

"The largest remains. As for Europe, there is also a similar scenario. Therefore, I would not expect that it will be much better here.”

Still, the U.S. retains a unique role. Its equities markets make up nearly half of the global total, according to the national self-regulatory organization for securities markets. The U.S. also has looser restrictions on letting companies access local banking services than the EU — which is appealing to startups that lack traditional credit histories.

For tech startups, it is also easier to visit Silicon Valley and line up a barrage of meetings with potential bankers than to hop to the various financial hubs of Europe.

“I think for most startups, they will still look to a U.S. bank,” says Oleh Zaremba, co-founder of AxDraft, which makes software to process legal contracts and was acquired by Houston-based ONIT at the end of 2020. Instead of abandoning the U.S., Ukrainian startups will become “more careful about how much they have in one account.”

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Podavalkin likewise recommends that startups diversify.

“I'd suggest looking into different big banks. It's also a good idea to avoid putting all your eggs in one basket (or one currency!) by splitting your capital between a few different banking jurisdiction,” he advises.

“And don't forget to keep some cash on hand too.”

Gurak, at least, thinks Ukraine has some critical experience weathering market storms.

“It’s a bear market for attracting investment in the U.S., but in Ukraine it was always a bear market,” he says.

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