PRAGUE, April 4 (Reuters) - Eugene Nayshtetik and his five co-workers shuttered their company developing medical and biotech startups to join the defense forces days after Russia invaded Ukraine. Within two months, their commanders agreed it would be more useful if they swapped their military gear for computers.
With the government's blessing, Nayshtetik and his team of engineers moved to neighboring Poland where they raised initial funding from a Polish company, Air Res Aviation, to develop a new drone for the Ukrainian military.
Jerzy Nowak, president and co-owner of Air Res Aviation, said his company's initial investment in the drone project amounted to around $200,000.
The Defender drone, now ready for testing, is designed to withstand strong winds to enable surveillance in bad weather, can fly vertically and carry big payloads. It's an example of how some startups in Ukraine's dynamic tech sector are switching to pursue military projects.
"We had our own portfolio of medical and biotechnology civilian projects before the war," Nayshtetik told Reuters. "We never dreamt of killing people. We wanted to heal people but the situation changed."
Reuters spoke to more than a dozen entrepreneurs, as well as Ukrainian and Western officials who said the shift to military innovation in Ukraine's once-thriving technology sector has bolstered the country's out-manned and out-gunned armed forces.
Military experts and Ukrainian officials told Reuters that innovations developed by these startups are making a difference on the battlefield, ranging from software applications that can target enemy positions more quickly to civilian drones adapted for military use, and systems that integrate data to give commanders more detailed battlefield views.
"The Ukrainians are outmatched by every numerical scale: in terms of numbers of forces; in terms of numbers when it comes to equipment. And yet they're holding their own," said a senior NATO official, who spoke on condition of anonymity. "One of the reasons they're holding their own is that they have, in a very innovative way, integrated technology into warfighting."
Before Russia's invasion, Ukraine represented one of the fastest growing tech hubs in central and eastern Europe. The enterprise value of startups soared more than 9-fold between 2017 and 2022 to reach 23 billion euros, according to data from Dealroom.com.
Ukraine offered a host of advantages for emerging technology businesses, including a tradition of producing graduates strong in math and computer science. A low cost base also allowed entrepreneurs to do more with less.
The country boasted 285,000 software developers in 2021 with an additional 25,000 graduating from tech universities annually, according to software development outsourcing company Softjourn.
But with most emerging companies in Ukraine focused on the domestic market, many startups suffered a collapse in demand following the war - which has killed tens of thousands of people, reduced cities to rubble and wreaked havoc on infrastructure.
Pavlo Kartashov, director of the Ukrainian Startup Fund (USF), a government-backed organization that seeds technology startups, told Reuters his group resumed funding in October. It hopes to finance around five to 10 emerging companies a month with grants of up to $35,000.
Most will focus on military technology, he said.
The fund also aims to unveil in April a new platform to connect emerging companies more closely with the military to identify the needs on the battlefield and to speed the transformation of ideas into tools that can be used in the conflict.
"If you have something innovative and efficient it will definitely be used by the army," he told Reuters. "We need new technology to fight the enemy and can try different approaches in real time."
PLOUGHSHARES INTO SWORDS
Since the war, Western venture capital firms often have required strict term sheets that include having at least one founder and other key parts of the business located outside Ukraine. So the government has become the sole source within the country of early stage funding - the lifeblood of the technology sector - more than half a dozen founders and venture capitalists said.
Demand from the government has driven the shift to military technology, but most of the entrepreneurs who spoke to Reuters said that patriotic duty also played a role.
Take Kiev-based efarm.pro, a startup founded in 2016 whose GPS technology attached to tractors helps farmers more precisely monitor how fertilizer has penetrated the ground. Many of its customers are located in parts of Ukraine that became too dangerous to farm after the Russian invasion so the company adapted its product to detect mines.
The self-driving technology is only aimed at farmers for now but could also work for military vehicles, the company's founder Alexander Prykhodchenko told Reuters.
"Clients were calling us in the first days of the war saying they don't know how they can work in the field," Prykhodchenko said. "The war started on February 24 and on February 26 we started work on the new project."
Currently, only three of the tractors are in use as the autonomous technology remains in the testing and development phase, Prykhodchenko said.
Ukraine's Minister of Digital Transformation Mykhailo Fedorov said the intensity of the fighting has meant that some concepts can flow from the drawing board to the battlefield in months, if not days.
While acknowledging the critical role of weapons supplied by Western nations in helping to fight the Russians, he added that the ability to utilize the know-how of tech-savvy Ukrainians at home and abroad has proved invaluable.
"One of the few areas where Ukraine has managed to stay consistently ahead of Russia is in the use of innovative military technologies," he wrote in a February article for the Atlantic Council.
Russia says its own weapons industry is increasing production and introducing new technology fast to meet the demands of military operations in Ukraine.
Gregory Allen, a senior fellow at the Center for Strategic & International Studies in Washington DC, highlighted the so-called "Uber for Artillery" application developed by a network of Ukrainian programmers before the Russian invasion that networks together infantry, reconnaissance and artillery units to spot and land an artillery strike more quickly.
He also said that a pair of anonymous Ukrainian software developers had rapidly created a program in mid-2022 that used machine learning to analyze video feeds from drones to detect more effectively military vehicles camouflaged in forests. Reuters was not able to confirm independently the details of the software.
"I used to work in the Defense Department, and I have almost never seen high quality military machine learning systems go from an idea in someone's head to a real system being used in war in a matter of weeks," Allen told Reuters. "The value of the Ukrainian software systems is impressive but the speed is astonishing."
The Pentagon's chief weapons buyer Bill LaPlante has described Ukraine's use of technology in the war as a "wake up call."
"We are seeing true innovation on the battlefield: new combinations of technologies and concepts being developed and implemented, and the cycle from idea to prototype to a warfighter's hands collapsed to months, if not weeks," LaPlante told a U.S. Congressional committee last month.
ISRAELI MODEL
While Ukraine's government and tech founders are focused on war-time innovation to aid the military now, they say these emerging start ups can also underpin Ukraine's post-war economy -- pointing to Israel as an example of how military technology laid the foundation for a booming technology sector.
Government support and experience working on military projects transformed Israel into a global tech hub and propelled the nation into a leader in cybersecurity and autonomous driving vehicles -- a path Ukraine officials and tech leaders like Valery Krasovsky hope to emulate for a country with a pre-war population nearly five times that of Israel.
"There are much more ideas in military technology," said Krasovsky, the founder and chief executive of Swedish-Ukrainian Sigma Software Group.
For now, the scarcity of seed funding in Ukraine has forced some companies to flee to places like to neighboring Poland. Groups like the Polish-Ukrainian Start Up Bridge - a Polish-government backed venture - offer emerging Ukrainian tech companies small grants to fund basic business needs and a co-working space in Warsaw.
"Startups have had the past year to teach themselves how to survive and adapt to the new reality," Mykhailo Khaletskyi, an advisor for the Startup Bridge and Ukrainian government, told Reuters.
