The Latest Buzzy Tech Investment: Ukrainian Drones
Ukraine has pioneered the use of drones in battle. Now Western investors are trying to get a piece of the action.
Foreign investment in Ukrainian drone makers and other defense technology has risen this year, founders and investors say, driven by the prospect of the battle-tested technology winning a slice of rising military spending.
In Ukraine, the added financial firepower is helping professionalize outfits that began in garages and military units—giving them a chance to compete abroad with Western players. The Ukrainian startups also offer the U.S. possible solutions for its shortcomings in drone technology.
“Are they scrappy? Yes. Are they all working in bombed-out buildings with pliers found on the side of the road? No,” said Justin Zeefe, a founding partner at Los Angeles- and Kyiv-based Green Flag Ventures. “They know what they are doing.”
Green Flag was set up in 2023 to invest in Ukrainian companies, and the venture-capital firm says that in recent months there has been growing interest in its inaugural $20 million fund.
Western investors see Ukrainian drone makers as less risky after many companies generated a couple of years of revenue, secured customers outside their home country and added governance controls, Zeefe said. Kyiv has also recently said it would allow defense companies to export for the first time.
Ukraine has been at the forefront of drone warfare since Russia’s 2022 invasion, with the war serving as a testing ground for new technology. Most of the unmanned aerial vehicles in action are made by local startups, whose products are often considered more effective than those of their U.S. and European counterparts. Their UAVs also cost a fraction of the price of those made in the West.
Kyiv-based Swarmer in September raised $15 million in a funding round—including U.S. investors—that the startup said was the single-largest investment in a Ukrainian defense-tech business since the start of the war.
The company, which started out of a garage in 2023, makes artificial-intelligence software that has been used by Ukraine to coordinate drone swarm attacks on Russian positions. It plans to use the fresh funds to open offices in Warsaw and Austin, Texas, as well as to develop new software.
While investments are small compared with the riches flowing into American defense-tech companies and other hot sectors such as AI, the number of deals is increasing rapidly and Ukraine-focused funds are raising more money.
Ondas Capital, an American fund, said recently that it expected to invest at least $150 million in combat-proven technology, mostly in Ukraine. Four European venture-capital firms said at a September defense-technology conference in Ukraine that they plan to invest a combined $100 million.
The conference attracted 5,000 investors and executives, its organizers said, up from 1,000 the year before.
Much of the money arriving in Ukraine so far is European. That is partly because the startups are too small for mammoth American funds.
Investing in Ukrainian drones also comes with risks. The country has a history of corruption, the UAV market is crowded, and simply visiting to scout deals is arduous and potentially dangerous.
“There is a business opportunity here, and that is why people are jumping in,” said Eveline Buchatskiy, managing partner of D3, referring to the potential for these companies to capitalize on increased European military spending. The fund, which counts former Google Chief Executive Eric Schmidt among its backers, was established at the start of the war to invest in Ukrainian defense technology.
Attracting venture capital in the first two years of the war was “almost impossible,” according to Yevhen Zhebko, co-founder of Teletactica, which makes drone communication systems. “Everyone tried to understand, will we survive?” he said.
In July, Teletactica raised $1.5 million from investors including Green Flag. The funding has helped the company scale up production for the front lines. It is also expanding in Latvia and Estonia, where officials have requested small batches of the firm’s technology, Zhebko said.
Foreign money is already shaking up the sector. U.S. investment firm MITS Capital recently consolidated four Ukrainian defense businesses into one larger company, called MITS Industries. The new entity is to be based in Denmark to address investor concerns about Ukrainian governance and capitalize on Scandinavian demand for equipment.
Western companies are also investing. Germany’s Quantum Systems in July agreed to acquire a 10% stake in Frontline, a Kyiv-based drone maker, and said it would help scale up manufacturing in Ukraine. Terms of the agreement weren’t disclosed.
The investment comes just two years after Frontline began in an unheated, abandoned building. Now it has more than 100 employees and is rapidly boosting production. One key selling point: At $3,000 a piece, its flagship drone costs less than a sixth of the price of what the company sees as its nearest Western competitor.
In “Europe and the U.S. there are [comparable] companies but they offer the same capability for a much higher cost,” said Mykyta Rozhkov, Frontline’s chief marketing officer.
Lower production costs are encouraging Western governments to look to Ukraine too.
The Pentagon has already awarded a small number of contracts to Ukrainian startups for technology including long-range drones and counterdrone systems. Now, the U.S. and Ukraine are negotiating a deal under which Ukrainian companies would share their drone technology in exchange for royalties or other forms of compensation.
The U.K. and Denmark have signed their own deals with Kyiv, aimed at getting Ukrainian drone makers to manufacture in their countries.
To be sure, the sector is crowded. Ukraine already has more than 300 drone makers, according to the Ukrainian Council of Gunsmiths, a trade organization. Hundreds more are springing up across Europe and the U.S.
Industry executives predict a shakeout when the war ends.
Employees of Plural, a venture-capital firm whose investments include German defense startup Helsing, recently attended a defense conference where Ukrainian startups pitched investors.
“The vast majority won’t make it,” said Khaled Helioui, a partner at the London-based firm. But, he added, as long as some of the startups make it, “you have winners.”
Write to Alistair MacDonald at Alistair.Macdonald@wsj.com and Heather Somerville at heather.somerville@wsj.com
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