Ukraine Will Have Its Own Silicon Valley One Day

Venture business in Ukraine is still in its infancy. Why is this happening and is there an exit point from the vicious circle?

Only the lazy don't discuss the need for innovations in Ukraine. Large Ukrainian companies and corporations make ambitious statements: DTEK created a separate department for the development of innovations, MKhP launched its accelerator, Alfabank and OKKO launched an affiliate program with the RE:ACTOR platform. But we don't see the results, and the venture business remains in its infancy as many years ago. There is neither pre-seed and seed money, corporate venture or newly raised funds, nor a layer of experienced active angel investors nor legislation. Why is this happening and is there an exit point from the vicious circle?

Silicon Valley’s secret

To begin with, I suggest revising the widespread myth that an innovative economy is a range of uncontrollable creative ideas born in garages. It is rather romantic, but not true. That is a kind of passive position when a state relaxes and waits for talented young people to create a dime a dozen unicorns, the same as a business doesn't bother about R&D and unpredictable startup projects. Even though innovations are still terra incognita, the Western school has been moving for several decades in the paradigm of innovation as a completely predictable and manageable process of organizations' activity. The turning point was the formation of American DARPA, affiliated to the Pentagon, in the 1960s.

Silicon Valley resulted from the implementation of one of the first large-scale projects of the DARPA agency—according to the Triple Helix model based in Stanford University. It was the first prototype of a cluster model of economic development, which subsequently spread to the entire civilized world (so far, apart from Ukraine and a number of other countries of the Third World). The DARPA model suggested the following. An agency defines the main problems and challenges that need a solution and provides them to businesses and universities for development, which means placing orders. In turn, the business moves these tasks further, if needed.

So, the state agency was the first prototype of an open innovation model and began to set the pace for the creation of new technologies. So, ultimately, appeared GPS, microchips, the Internet and much more that people at the current time cannot imagine their life without. Over time, influenced by and following the DARPA model, the largest American corporations began to operate delivering their problems and challenges to the market, thereby providing food for thought of young engineers and entrepreneurs. That's how Silicon Valley was born. I would like to note that the Valley had been established long before the Internet was invented, which later revealed the B2C innovation market driven by the easy creation of business models.

In other words, the corporate sector has become the basis for the development of the innovative economy of the United States and, subsequently, of several other countries (Israel, Singapore, Canada, and India). There is also a logical explanation for this. It is obvious that demand from businesses for the development of new products and technologies means providing startup projects with the necessary capital at initial implementation stages. That is the approach which, one can say, doesn't exist in Ukraine and is covered mainly by 3F investors (friends, family and other fools), which is not enough for system development. But that is not all.

Ukraine and the Vicious Circle

There is a vicious circle: no money—no projects, no projects—no venture investors. This is a problem for Ukraine. This chain is broken by the injection of requests from businesses in the form of addressed problems and challenges (ideas) and, in fact, by an order to purchase these products. This is of crucial importance for venture investors in the initial stages of projects.

It means that business acts not only as a generator of ideas but also as a launch customer. This solves the main risk of most innovation projects, namely the customer value hypothesis, which is the risk that the product can turn useless for the user. The value hypothesis consists of two components: the problem or challenge that needs to be solved, and the hypothesis that a particular solution will be of value in comparison with other alternative solutions.

In addition, within the open innovation model, business creates an environment for testing new products and technologies, while entering projects to international markets without their validation at the local market is almost impossible.

And who else but business?

In addition to business, there is another driver for the development of innovation in the economy - successful startup entrepreneurs who have raised capital in such not a simple environment and know the market. But, unfortunately, except that this is a slow evolutionary path, our guys leave with their teams to the Valley, Dublin, Estonia and other countries. So, it is hardly worth counting on it.

Corporate innovations in action

I believe that putting the economy on the track of managed innovation is possible only by launching a model of corporate innovation trumpeted by many Ukrainian companies. But progress over the past four years of hype is not actually impressive, if not absent. Why is this happening?

It is worth highlighting two categories of business: those who take steps and those who do nothing. The reason for the latter case is that the business does not understand what innovations are and why they are needed. On the other hand, the myth that innovations cannot be controlled leads to forecasted refusal from them in favour of more predictable investment projects and usual operating activities.

In the case of companies that take steps and sometimes, at first glance, in a very systematic way, the results leave much to be desired. The main reasons for that are the lack of “suitable” projects, the current model for making investment decisions, motivation of management and lack of experience in managing innovation projects.

What is holding the process back?

The lack of "suitable" projects can be viewed in different ways. The first case represents a point of view of the passive or active position of the company regarding the open innovation strategy. A passive strategy involves a one-time campaign to find projects. An active strategy involves constant communication with the sources of projects, search and selection. Limitations of the passive strategy are quite obvious: if you are lucky—interesting projects are in the funnel, if not—you choose from what is available.

In the case of the active strategy, the business comes to a standstill while focusing on project selection filters, which are closely related to the current practice of making investment decisions in the company. First of all, within the traditional logic of analysis and evaluation of investment projects, it is impossible to assess the risks and attractiveness of an innovation project, as a result, the interesting ideas fail on traditional filters.

Secondly, the implementation of corporate innovations is based on "statistics" investments, i.e. portfolio logic is based on the theory of probability and portfolio conversion, which means that the company softens the project selection filters and invests in more projects. But such logic cannot be fitted into business as any kind of substructure, it does not work like that. That is why successful companies create corporate venture capital funds through which the corporate innovation model can be implemented.

Another significant element limiting the successful implementation of corporate innovation is the motivation of management. First of all, everyone is afraid of mistakes. Companies try to avoid them in their ordinary activities, but this is the basis the innovations cannot exist without. Secondly, innovation is an uncertainty people do not want to accept responsibility for. Thus, at an average level, it is a matter of choosing the projects that are to be broadcasted further, those projects win that most closely match the current practice of the company.
On the other hand, top-level management is reluctant to implement innovation projects, that, compared to the main activity, provide significantly fewer potential bonuses in the short term. The situation becomes more intense because of the lack of innovation project management experience. 99% of companies simply don't have it. As a result, those few startups that come to the implementation phase, tend to self-destruction. This happens because the classic predictive models of project management and in many cases even adoptive ones, such as Scrum and Kanban, are not suitable for certain innovation projects.
In addition, the successful management of innovation projects is based on the logic of hypotheses testing, which is a separate set of specific tools and methodologies for managing products and risks. Looking at the root of the problem the key mistake is people, to be more precise, incompetent people. This is the biggest problem of Ukrainian business at all levels. An incompetent person is excessively confident to implement a difficult task and certainly fails.
Another paradox is that incompetent self-confident people are intuitively afraid of competent people, engaging, as a rule, those of their own kind. Up to a certain moment, of course, until take some knocks. It is obvious that incompetent people can never do innovations. The good news is that there are competent people in Ukraine. But the truth is that there are not so many of them and one has to struggle for them on a global level because such giants as Airbus, Boeing, Samsung, and Google know their prices.

Value and appreciate the people, your business will be defeated without them.

Dmytro Shestakov, 2020
Originally published in Liga.Business