Military startups: myths and reality of cooperation with the state

Chief Investment Officer at Innovations Development Platform
Військові стартапи: міфи й реальність співпраці з державою

There are great many myths of Ukrainian defense industry. Perhaps, one of the most deep-rooted ones is of the closure of this industry. Myths of the defense industry exist all over the world, since the weapon category refers us to something secret. However, defense industry – is also other technologies that have no direct relationship to deadly weapon.

To be sure, this market is partially closed. However, it is gradually transforming itself and becoming open. First and foremost, this occurs due to the global trends and economic phenomena. Nowadays only open industries are on the rise and tend to survive. Openness involves interaction with other related contractors and partners not on the domestic markets only, but on the external ones as well. It matters a good deal. Systems cannot survive without the openness, since they will lose their strategic flexibility and adaptivity to the external environment inconsistency. As of today, Ukrainian defense industry, namely Ukroboronprom State Concern, is moving towards corporatization, reorganization from the closed system to the open one within reasonable limits. Market is being developed and we are gradually becoming more open.

A great many inventors believe that it is impossible to reach out to Ukroboronprom if you have no relatives or friends working there. The question is – what you can offer? As a former employee of Spetstechnoexport (subsidiary of Ukroboronprom), I can say without any doubt that there is a battle for particular innovative product. And this poses some problems. Another issue is about cohort of scientists, who once were linked with the old school and old management of Ukrainian defense industry.

Not only engineering component is of importance to us. We shall consider marketing and financial evaluation, business model estimation, economic analysis of one or another decision. This is basically what you need to reach out to Ukroboronprom. After all, Concern is serving in various capacities. Full-scale production may be launched within the premises of Concern. Ukroboronprom engages experts, who conduct technical expertise and give their recommendations. In such case, Ukroboronprom is no different from any private or state defense concern.

Well and truly innovative solutions make their way in the world. Whether this is easy or not – challenging issue. But one cannot enlist up support if the information is furnished improperly. You shall admit that if developer is unable to explain the substance of his proposal, no one will believe him. To all effects and purposes, if your product settles some problem in innovative way, if the technical parameters of your solution are innovative, – I see no communication problem.

Yet another popular myth – defense industry conservatism and ill-preparedness for advance developments implementation. The question at issue is where exactly these developments are directed. We shall first separate Ukroboronprom from the Ministry of Defense as the possible customer and purchaser of innovative developments. In other words, when it comes to the development as a product, Concern is mainly manufacturing and selling rather than purchasing. This is export-oriented company interested in the sale of new developments.

When it comes to implementation of new production solutions, I believe that basic limitations are not generated by the very readiness of Ukroboronprom. The problem resides in legislative frameworks that regulate the work done by the Concern. That is to say that to some extent this conservatism is regulated by obsolete regulatory framework, namely by the failure to establish joint ventures with foreign and private partners. This is atavism number one. However, Concern is trying to get over it and to open the door to joint enterprises establishment.

Concern is currently open enough in terms of its policy, intentions, and actions. Bulk information may be found about transformations that take place there. But still – what to compare with? With American DARPA? American agency is the leader of innovative solutions in the defense industry. If we compare Concern with other institutions or private organizations of Ukraine, we will see that it is the most successful and dynamically developing enterprise.

Those, who bear a relation to the defense field, believe that it is “overregulated” in a certain manner. Not every business may operate under such conditions. In sober fact, overregulation of the field – is basically the question for judicial reform. Regulatory traps relate not so much to Ukroboronprom, as to the Cabinet of Ministers, the Verkhovna Rada and our president. That is, Сoncern would be glad to liberalize the legislative requirements and to change own activity base, provided such changes are reasonable, like this is done in various countries, in the USA, the UK, Israel, etc. Commonplace inability to establish joint ventures looks like a barbarism.

It is not infrequent that innovations are treated as the possibility to “share out” funds. A short time ago this verbal statement was made by one of the directors of Concern. As if, for historical reasons any innovations in defense industry is only the call for budget funds stealing. Thefts used to occur wherever the budget funds were. For what purpose funds were disbursed? For innovative solutions in defense industry, in particular.

Hardly anybody understands has an idea of what innovation stands for, how to determine it, exactly what kind of innovativeness criteria will you choose. For this purpose we shall develop and adopt determination procedure for innovativeness or non-innovativeness of the product. At this stage, the set of legislative provisions prevent from innovativeness determination. The very innovation is determined in a broad sense, Ukraine has no generally accepted expert evaluation of innovative projects. On the other hand, we have some logic and reasoning in product innovativeness evaluation. Innovations Development Platform, for instance, has its own evaluation algorithm and may show at no charge how innovative your product is. Sure thing, if you are the urban crazy and decided to create a spacecraft… But even in this case we will advise you what technical expert will help you.

This present time, Сoncern’s enterprises and defense industry enterprises pay 75% of their profits to the state in the form of dividends. In other words, Сoncern’s enterprises form profitable structure. Remaining share of profit is steered into support and irreducible development of the industry.

Problems that Concern is currently facing with in respect of innovations involve not only “share out” of funds. Law-enforcement authorities have specific perception of money invested in innovations. This is because Security Service of Ukraine is checking most of the developments in defense industry. This causes lots of troubles. Nowadays Concern’s enterprises help to commercialize new products and solutions. In other words, these newly-developed products are not quite from private sector. And if that is so, then this is done in cooperation with the public sector.

Those budget funds that may be steered into innovations are chicken feed. There is nothing to be “shared out”. Market leaders realize that best efforts shall be made to develop new product, namely to come into international markets by selling of new products. Otherwise, market share will be decreased and diffused. Market leaders see dynamics and are interested in decision-making. People are afraid to put up their own money. But this refers to judicial reform and failure to protect investors’ rights. Therefore, one shall not blame defense industry for this state of affairs.



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