You're reading: Lost successes of Ukraine: startups register abroad to escape bad business climate

Ukraine is home to at least 2,000 startups worth more than $2 billion as of 2013. This is an illusion, however. Most Ukrainian startups are registering their companies abroad, paying taxes and improving economies elsewhere.

They don’t suffer from a lack of patriotism.
The bad business climate is the trigger.

Settle

Developed by Ukrainian developers, Settle, the service for pre-ordering food and
booking tables in the restaurants, runs in 20 restaurants in Kyiv and negotiates to launch in 15 restaurants in San
Francisco. Settle is registered both in Ukraine and in U.S.

The startup has already had $165,000
investment from Russian venture capital firm Life.SREDA and undisclosed amount from the Ukrainian
venture fund SMRK. It is currently in the process of negotiating a new $1.5
million investment with several U.S. funds.

“Traditionally, American investors do not
invest in companies that are not registered in Delaware or other offshore
places with adequate conditions for running business,” Stas Matviyenko, founder
at Settle, says.

Delaware, one of the states with the lowest
taxes for businesses, was where Matvienko registered the company with the help
of American lawyers for some $1,500. In Ukraine Matviyenko lists high taxes,
lack of minority investors’ rights protection and bureaucracy as the top facts
that scare away all investment interest from the startups.

“It’s not financially efficient to run
business transparently in Ukraine. For one qualified programmer with a salary
of $4,000, the tax you pay as employer is 40 percent. Same you give away for
each employee,” Matviyenko explains.

While negotiating with foreign investors, he
doesn’t hide the fact that the service was developed and is fully managed by
the Ukrainian team. But clients tend to trust more American company than a
foreign one, Matvienko says.

Petcube

Petcube, one of the most widely discussed Ukrainian startups lately, also has two
companies – one registered in Ukraine and another in Delaware, U.S. Petcube
itself is a robotic device with a laser pointer and a camera to play and watch
one’s pet remotely using smartphone connected to the device.

“’Designed in Ukraine. Assembled in China.’
That’s what is written on the wrapping of the device. We also don’t hide the
fact that Petcube has representatives in Kyiv, San Francisco and Shenzhen,
where the product is being produced,” says Yaroslav Azhnyuk, chief executive
officer at Petcube.

This week Petcube has received $1.1 million
investment from Ukrainian AVentures Capital
and American Almaz Capital venture funds and hopes to multiply sales with the help of the
investment.

The startup has already manufactured and sold
around 2,000 devices in terms of its
Kickstarter campaign, where it collected over $250,000 in 2013. Most of the customers
are from U.S., Canada, UK and Australia.

Petcube registered its company in U.S. more
out of the need to sell effectively on the global market. Opening company only
in Ukraine was not enough for Petcube to reach that goal.

“Promoting your product on the global market
having a company registered in Ukraine is possible in theory. But technically
many difficulties evolve. For instance, we sell devices through the Stripe
payment system, which does not operate on Ukrainian market,” Azhnyuk tells.
“There are much more such barriers, which we could overcome, but more rational
way out was to register company in U.S.”

According to Azhnyuk, Petcube might have to
register also in China, Western European countries and everywhere, where it’s
needed to sell product effectively.

Newzmate

“The fact that the startup is from Ukraine or
any other former Soviet country means additional risks for the investor,” says Aleksey Chapko, chief executive officer at Newzmate. It is the developer of service Traqli that sends emails with
personalized media content.

Newzmate’s clients include international
media,
Digital First Media (U.S.), EurActiv (Slovakia), and also the
Kyiv Post. The service is being developed by Ukrainian engineers, while business
operations are run by the other half of the team in U.S.

The startup has recently successfully received
$300,000 investment from Polish venture fund Xevin Investments and Dutch business
angel Bas Godska. The money is going to the U.S. though, since Newzmate is
registered as American company.

Newzmate initially wanted to work with international clients and correspond to their law standards, that’s why it registered in U.S.

Chapko says that registering the company in
Ukraine must not be underestimated by those startups that want to target
Ukrainian businesses and clients. “Due to a lot of bureaucracy, it is more
convenient to operate with partners and clients having legal entity in
Ukraine,” Chapko says.

Companies registered abroad have more
credibility from both investors and clients, but many investors have gotten
friendlier towards Ukrainian startups due to the crisis. “In communication with
our clients ‘Ukrainian question’ can be at least a good starting point for a
dialogue,” Chapko tells.

Kyiv Post staff writer Bozhena Sheremeta can be reached at [email protected]. The Kyiv Post’s IT
coverage is sponsored by
AVentures Capital, Ciklum, FISON and SoftServe.