What challenges do Ukrainian investors and startups face? Read in the interview
In early February, before the war started, the editors of PaySpace Magazine spoke with Nykyta Izmailov, founder and CEO of the N1 specialized fintech fund. However, a lot has changed since then. Thus, we asked Nykyta additional questions about managing the fund and projects in wartime, new investment checks, and how he thinks the situation in Ukrainian fintech will develop. More in the interview.
Note: N1 is a specialized fintech fund founded by Nykyta Izmailov. The fund’s portfolio includes sportbank mobile bank, innovative payment system Asquad, TRANSENIX, a startup with Tap to Phone technology, and other fintech projects.
Please, tell us what N1 does and how it differs from other investment funds. What is your focus?
First of all, N1 differs from other investment funds since we are a specialized fintech fund. We invest mainly in fintech projects or those somehow related to finance. When it comes to finances – we focus more on the technological aspects.
I am also a shareholder in other funds without clear specialization. Here the principle of interaction is straightforward: if a project or startup meets the criteria, you buy a share.
However, if you are a specialized fund, especially if you claim to manage assets, you should be an expert in your specific industry. Then there should be a team that consists of many great specialists with deep expertise. Of course, you can’t gather such a team in one day. N1 is a clearly focused fund.
At the moment, we are operating with our own money. We are not blurring our focus on “vacuuming the market” for liquidity or attracting some external investors to amass funds. It is our own skill that we hone to place funds and manage companies.
Large-scale entrepreneurs think about social goals at a certain stage. Do you have such thoughts? In which direction would you like to move?
N1, like other Ukrainian foundations, now has one social goal – to help our country with everything we can. Donations, time, connections. No person in our team would not volunteer.
And, of course, continue to invest in Ukrainian fintech, thereby developing the market and supporting the economy.
What was the focus of the foundation and your own as a leader in the first months of the war? What is it now?
In the first months of the war, the main task was not to take rush actions regarding the activities of the fund, but to ensure viability and adopt main life-sustaining decisions for each asset. And, of course, generate the necessary liquidity for 2-3 months.
It was also important for me to stay in touch with my team.
In particular, we have already started investing in new startups and expanding existing programs. Of course, these are not the investment volumes we saw before. The war has made its adjustments to the revenues, that is, to the resource that we can use for investment. However, the safety cushion we had formed before the war now allows us to continue investing not in mega-scale, but rather promising projects, for example, TRANSENIX (in July, the fund announced an investment of $500,000 in a startup).
How have your investment plans changed? What are your current goals for the rest of 2022?
Of course, the goal is to complete a couple of projects with a price tag of up to half a million dollars by the end of the year (perhaps up to a million if the project is large and worthwhile). However, now it should not be a very long-term project in terms of return on investment. We all understand that we are now living and will live in even more difficult times. Therefore, we need projects that, in addition to their technological component, also have a very fast business model. From this point of view, our criteria for project selection have become stronger and more complex.
What is the maximum amount you would be willing to invest in a new startup?
The largest, hypothetically, is $2.5 million. If we talk about the funds already spent, we have invested much more in sportbank – over $15 million. Our investment is half of the project’s budget. We are not afraid of large checks, but we do not give out money either.
How do you think, how attractive is Ukrainian fintech for foreign investors, taking into account the hype around Ukraine?
Unfortunately, war is never an attractive factor for any investor. Except for the vultures who buy up assets for next to nothing in the hope of capitalizing on the difference. Therefore, it is difficult for any Ukrainian project now. Big investors are somewhat shy, to some extent they are afraid of the political component in working with a Ukrainian startup. It’s no secret that most startups have a team percentage still located on the territory of Ukraine, which adds a certain risk factor. This stops investors from fully and thoroughly considering Ukrainian startups for investment.
This is bad for startups, but good for us, because we understand Ukrainian fintech and the risks, we live in these realities too. Therefore, for N1, there’s nothing new here; in a couple of months, we have learned how to digitize existing risks well.
Does it mean it is more advantageous for Ukrainian startups to look for funding in Ukraine?
This is one of the fastest and most likely ways to find the needed money. Abroad, you don’t have a cushion, a clear life plan, you’re unsettled, and you live in uncertain physical and legal conditions. At the same time, you need to compete with other European startups for investments, for a resource … They don’t have a war in the country, they are in comfort, in good spirits. None of their relatives was killed, and no one serves in the army. In general, they sympathize with our country, but at the same time, no one has cancelled the rules of the market and competition.
What is your position as an investor – will you seek to develop products domestically or help them enter the global market?
Definitely, every project has its own global goal – to enter the international market. But I understand that not all projects will reach it due to different specifics and factors. However, all projects must have the task of becoming a successful profitable product in Ukraine, regardless of the situation. Whether it’s war or not, we must strive to do the maximum.
What attracts you in the first place in the companies you invest in? Have you added any new criteria with the start of the war?
People are the main attraction. I try not to draw conclusions about the company until I talk to top management. Since we are dealing with companies at an early stage of development or those having reached the MVP level, it is quite difficult to talk about the results of their operations and the product, because they have just started.
Therefore, the founder of the company or its CEO is the defining value that indicates how the company can grow.
Some CEOs and founders can bring the company to self-sufficiency but have difficulties with further growth. Some can grow it to a multi-million valuation, and others can even reach a billion worth. And this is what can be roughly determined in communication with a person: do you believe them or not?
Then comes the assessment of the idea itself, the profitability of the company, and its philosophy.
This criterion depends on professional qualities and ethics. It is simply the speed of decision-making in uncertain conditions. And this is what I am particularly paying attention to now.
How do you assess the life of the Ukrainian fintech community during the war?
Ukrainian FinTech has not yet formed as a separate community. It is a component of banking and legal segments, or a partnership of large companies. We don’t have people who are clearly working in fintech and creating non-banking products.
First of all, this is because there is the minimal capitalization in Ukrainian fintech. There are few investors, especially foreign ones, who single out individual campaigns.
Unfortunately, as the war started, I did not see deep integration either. At the moment, this is the localization of corporate groups around already working solutions. Certain solutions generate profit. And other fintech companies are trying to coexist with these products or feed off them. Against this background, there are not many emerging startups and products. Moreover, war can hardly be called fertile ground for innovations.
Ideally, fintech should be singled out in a separate class. After all, it is strong only when it forms a true community. And when players don’t think about pleasing a bank or a merchant, but about making the product enabling fintech itself to earn and serve the end consumer.
When do you think the Ukrainian FinTech community will be formed?
It directly depends on the National Bank, namely on how far it will let financial companies go. Now it seems that it’s not going to let them go far.
Therefore, we will again face a situation when a financial company, even without a banking license, must have the same properties as a bank. That means it will technically have to become a bank, and this, again, leads to banking competition. Thus, I do not think that FinTech-community will be formed in Ukraine soon. But in 2-3 years it is quite possible.
How do you assess the reaction of the Ukrainian banking sector to all events? Who adapted better? Who failed to adapt? What could have been done better? What can you say about sportbank in particular?
In many respects, during the last 6 months, bank operations were dictated by the NBU regulations. And, of course, a very large part was occupied by a speculative or grey market. There, Ukrainian citizens and entrepreneurs tried to settle their income or diversify their assets by converting the hryvnia into other currencies, withdrawing cryptocurrency, or in some other way. One way or another, all this was affected by the lower limits of the National Bank or the exchange rates dictated by the regulator.
sportbank was one of those banks. It has gained a large client base in the last 5-6 months. Its quality is questionable though – whether these users will continue to use and comprehend our product. Probably will, but not 100%.
Banks that relied on physical branches and could not onboard a customer online lost their competitiveness. Their customer base has not grown and they only earn from those customers who they had before February 24th. This narrowed their options.
Do you think that some players will leave the market because of the crisis?
Undoubtedly. I expect that 15-20 banks will go bankrupt or give up their licenses. We’ve already got the first cases. For example, Kharkiv Megabank and several other banks simply remained without assets. What will happen to them is unclear, but it is unlikely that they will fully function after the war. The Deposit Guarantee Fund will have a lot of work in the next 1,5-2 years. I think that the number of banks after the war will clearly be less than 50.
Talking about the level of expertise of the state bodies, how professionally and effectively do they act in these conditions?
There are two main parameters we should consider: the hryvnia exchange rate against other currencies and the inflation rate. Considering that more than 25% of our territory has been occupied and about half of the production facilities are not working, raising the actual exchange rate from 29 to 39 hryvnia per dollar is basically negligible. I expected that the rate would be 50-60 UAH per dollar by now. From this point of view, the work of the regulator and other bodies can be called excellent. If we talk about other regulators – the Ministry of Finance or the Ministry of Defense – we can say that everything is working efficiently. As far as I know, there are minor delays in payments to state employees, but these are literally days.
Most likely, all these bodies were preparing for the war at least unofficially. And they managed all the running scripts quite well.
Has the role of cryptocurrency increased in the current environment and what are the forecasts?
For the first three months, before the introduction of a withdrawal limit on foreign currencies and equivalent funds, cryptocurrency was a fairly popular method of transferring value. And the Ukrainians used this channel to the maximum. However, now the majority will go down the reverse path because it will be necessary to exchange crypto back into hryvnia and US dollars. After all, when there is no cash flow, you unfreeze it all.
How would you assess the prospects of the Ukrainian securities market?
The main perspective is that we don’t really have it at the moment. There is a group of people who want to invest. But, unfortunately, not into Ukrainian exchanges, but into exchanges located in the UK, Europe and the USA.
Appropriate documentation and technologies must be created so that the user can buy Apple shares without transferring money abroad, and this is all real.
I am familiar with several projects that were going to launch in April-May. And the co-founders are very sad the war has started. Having talked with them recently, I realized that definitely no one will launch new projects until the end of the war. Plus it takes some time to build up. Probably in 2024 (when the war is predicted to end) these players will start to return. It is difficult to guess in such a situation.
There are great prospects, but the question in the market is whether there is solvent demand. Do we have customers who don’t need to restore their home or their parents’ home, move somewhere, restore business? Do they have a surplus of funds they are willing to invest in securities? If there is a demand, the supply skyrockets. If not, it’s pointless even to start.