Incubator in the War. How Military Startups Work in Ukraine
Dmytro ShestakovManaging Partner of the Innovations Development Platform
"Now, the key challenge is unavailability of competitive innovation products on the global level. Certain products appear from time to time, but not systematically. Moreover, many such new products are very difficult to sell for various reasons. As a matter of fact, there are no R&D (Research and Development) efforts. Currently, the number of successfully commercialised serial products is close to zero."
Republished from LIGA.net
From a laser mock battle system to a human body scanner – the range of products deployed by military startups
In spring 2016, the agency for research and development of new technologies in the defence industry – the Innovations Development Platform – appeared in Ukraine. The business incubator is located in UNIT.City innovation park. The Platform is primarily designated to consolidate developers and raise funds for promising products, and then sell such products in global markets. For the year of its operation, the Platform has procured financing for four projects. The Platform is currently handling about 20 other projects with their scope ranging from a laser mock battle system to a human body scanner.
In the interview taken by LIGA.net, the Managing Partner of the Innovation Development Platform, Mr. Dmytro SHESTAKOV, shed light on the financed military startups, the profit sources of the Platform and its significance for business.
Who launched the Innovation Development Platform?
This agency for incubation and implementation of innovation technology projects in the defence industry was set up on the initiative of SpetsTechnoExport Company controlled by Ukroboronprom Ukrainian Defence Industry State-Run Concern.
What is the project ideology?
Now, the key challenge is unavailability of competitive innovation products on the global level. Certain products appear from time to time, but not systematically. Moreover, many such new products are very difficult to sell for various reasons. As a matter of fact, there are no R&D (Research and Development) efforts. Currently, the number of successfully commercialised serial products is close to zero.
Therefore, the core idea lies in intensified development of innovative products in the Ukrainian defence industry, at least, to bring such products to existence.
How Ukrainian companies presently develop and sell their military innovations?
The lack of a systemic vision is the primary problem here. A developer does not communicate with specialising exporters. How specialising exporters could help them? They can ensure the marketing expert assessment, validate a problem faced by a developer, and validate the final product in terms of specifications and global demand. However, no such relations are in place. Instead, ad hoc dialogue exists, in certain cases only. As a result, most developments are difficult to commercialise.
The second problem concerns state-run companies. They have virtually no R&D financing. State-run companies pay out 75% of their profits to the state, as dividends, and use the remaining 25% for other purposes. Consequently, the Government makes no reinvestments in strategic areas and directions. At the same time, R&D investments in the defence industry are, currently, the key driver of industry survival.
The third problem is connected with the lack of trust and cooperation among developers. Many developers take efforts to tackle the same challenge, repeating the work of each other and decreasing efficiency considerably, whereas the global practice is based on openness and cooperation principles. Our Platform originally underlies the open model.
Is it right that, nowadays, the Ukrainian defence industry has no innovation market and your Platform intends to lay the foundation for it?
Yes, we have such mission. UA.RPA, a private agency for innovative defence projects incubation, also takes efforts to develop this direction. However, they have a different, closed model. They’ve tended to assess products in terms of the domestic demand, and tailored products for defence orders. We are sure that low probability of commercialisation is attributable to such model. Ignoring of consumers beyond your country is not a correct approach. Globally, the market looks towards technology transfer, and you may not omit this aspect.
Ukroboronprom has recently presented their GUARDA Project which is also aimed at innovation development, including innovations in the defence industry. Don’t you repeat each other’s efforts?
GUARDA is going to specialise in breakthrough technologies. The issue of commercialisation is not the case here. It’s all about development of breakthrough innovation technologies, rather than business. Their time horizon is 10 and more years, whereas we handle the projects with the high probability of developments commercialisation right now, and with further exportation of the products.
Furthermore, we’ve adopted different models of operation. According to their approach, GUARDA should be financed from the State Budget only, while our model provides for cooperation with private investors, among others, like in Israel. We believe that R&D dependence on the often deficient State Budget would result in financing complications. GUARDA may exist as a project, but, in our opinion, taking into account the current economic environment in Ukraine, we have to focus on commercialisation of developments and science, for the sake of our economic safety. And we assert that it is quite attainable in case of systemic operation.
Who provides financing for the Platform?
Initially, SpetsTechnoExport Company identified the problem and Platform formation idea, then, the search for financing started adopting the typical western model of venture project implementation. Mr. Dmytro RUZHYTSKYI, who worked in Ukroboronprom Concern earlier, responded. He became the angel investor and the CEO of the Platform. The initial investment was about USD 12,000. Now, we are in the phase of engagement of successive financing for the Platform. It is not a matter of millions of US dollars. The Platform budget for the forthcoming two years is only several hundreds of thousands.
In addition, we separately work with the pool of investors to engage financing for certain projects.
Have SpetsTechnoExport Company been engaged in financing?
No. We have considered their possible involvement as a co-incorporator, but they may not set up private companies or hold interest in them.
In which defence industry directions does Ukraine still have competitive potential in the global market?
We have a powerful radioelectronics school. Ukraine accounted for 80% of the USSR developments in this field. The pool of practical knowledge still exists, and it is not outdated. We keep top positions in the radioelectronics competition battlefield. Here, we have one interesting project – Griffon – offering an integrated UAV (unmanned aerial vehicle) fighting solution.
Speaking about products more specifically, we expect the best opportunities from radars, acoustic systems, UAV (unmanned aerial vehicle) platforms, and integrated software products.
In terms of tactical unmanned aerial vehicles, Ukraine has actually revived this direction since 2014. We may mention here Spaitech, iTech, Ukrspetssystems and other developers.
For instance, Spaitech (Odesa) has developed Sparrow and Anser UAV systems. We signed with them the contract of joint venture for UAV manufacturing in India. Now, the company makes preparations to take part in the bidding scheduled for 2018. It is expected to be the major global bidding for supply of 200 UAV systems. The probability of winning this bidding is very high, since the company’s UAVs compete with American and Israeli ones in terms of tactic and technical specifications, with the offered price reduced by 7-8. The Ukrainian party supplies the technology, and the Indian party provides finance.
Developers from Kharkiv have substantial experience in development of electromagnetic and microwave weapons. A magnetic gun has been developed by them under the contract with Indian DRDO (the second top global agency providing finance for defence industry developments). The contract has been implemented successfully.
We have the leading global positions in the sector of armoured vehicles. Aerospace programs are also among our strong points. For example, plasma-jet engines manufactured in Kharkiv are better than the US ones in terms of many components. Yet, the aerospace development should be supported by governmental programs. It’s not a scalable business. It is usually tailored to the needs of the macrosystem, like a state. Despite the extinction of aerospace programs, the school still exists, and it is quite powerful.
Everything related to software solutions – and Ukraine has a giant potential here – is of strategic significance. I mean technical solutions in programming and software integration into hardware.
All in all, outsourcing still prevails in the Ukrainian IT sector. Do we have the same situation in the defence industry?
No. It’s all about the delivery, where a product is developed and sold. In terms of technical solutions, we have a very strong base to start from finished products rather than practise outsourcing.
How do you find developers suitable for investments? What are your selection criteria?
Sometimes they approach us, and sometimes we contact them. Initially, we sent cooperation offers to research institutes, university labs, and private companies. Sure, we faced a certain lack of trust. It should be born in mind that the defence industry is transcendental. Closed mentality prevails here, while partner cooperation is something new for this industry.
Suppose, I have a development potentially promising for the market. Can you tell me the reason why I should work with you?
I’ll explain using the example of Limpid Armor Ukrainian company that we cooperate with. They developed a helmet-mounted circular review system based on HoloLens augmented reality glasses from Microsoft linked with cameras installed on the armoured vehicle.
The company approached us requesting to find financing for their project. By the way, searching for financing is the most common issue in the initial stage of cooperation. To find a solution to this issue, we have to clearly know as to what should be financed.
Then, we make the economic, marketing and technical expert assessment, and the analysis of the project user (as a matter of fact, it’s like a crash test of the project). The assessment and analysis help find out whether the product in question is demanded in the market, and identify competitors and potential orderers of the product, etc. At the same time weaknesses of the project are highlighted. We show developers the direction to be followed to finally attain a successful and commercially attractive project.
If we can see a potential demand, we prepare materials to engage investors.
Do you charge fees for the expert assessment accomplished in the initial phase?
Who is in your pool of investors?
The number of investors is a floating figure. Currently, such investors are predominantly individuals having professional knowledge of the defence sector. We work with Indian companies in respect of project cofinancing. We also hold negotiations with US funds operating in the defence technology market. Their number is about 140.
We plan foundation of the investment fund combining the existing pool of investors and providing finance for projects successfully validated by the Platform. We expect its launching within 9 months.
Which financial model is used for cooperation with developers? And what is your source of profits?
We employ, as a rule, syndicated financing, when a part of the required funds is available, and a part thereof is missing. Any investor earns either from product success (linked to future sales), or from holding of intellectual property rights.
Would you name your successful projects, and their current phases?
Today, we may talk about implementation of four projects: UAV (unmanned aerial vehicle) systems (Sparrow and Anser UAVs which are already supplied to the Ukrainian Army and to Africa), Phantom UAV (with preliminary contracts providing for exportation of nearly 50 vehicles), and Taipan Weapon Station (with contracts handled by SpetsTechnoExport Company).
Please, list the current top 5 promising Ukrainian military projects.
Firstly, a mobile mine detector. Humanitarian deminers are potential users here. It’s about the technology of horizontal area scanning. This problem has no global solution despite the several decades of researches. An operating prototype workable in the laboratory environment already exists. If we manage implementing of this project, the result will be a pure innovation.
Secondly, a sonar station (operating in the active and pseudo-passive operation modes) for monitoring of water areas. Our development is used to detect military divers. An operable prototype already exists.
Thirdly, a portable tropospheric station ensuring safe communication. It is a product of strategic importance, and not only for Ukraine.
Fourthly, a photo-based antisniper system. It helps detect a sniper on the basis of glaring of optical components.
And fifthly, the Limpid Armor helmet that has been already mentioned.
What is the cost of market launching for these projects?
The average budget for project implementation is about USD 200,000. Now, we try to work with projects having the implementation period of up to two years.