How defense-tech companies make money and why it's more of a charity: Skiftech's experience

The number of ammunition and weapons with which the military trains is limited. That is why laser and VR simulators came into play a long time ago. They allow fighters to learn how weapons work and hone the skills needed on the front.

After 2022, the demand for these systems will increase 4-6 times, however, for manufacturing companies, work in this direction remains rather volunteer work. The state does not have time to finance purchases, so businesses focus on foreign markets.

Liga.Tech talked about it with Anastasia Melnikova, director of product development at Skiftech. Read more about entering the US market, the financing situation in Ukraine, and defense-tech prospects.

Commercial research for defense development

The history of Skiftech began in 2013. At that time, the founders Yuriy Lavrenov and Mykhailo Obod already had a business producing civilian laser tag equipment under the Netronic brand. To expand their business, they decided to create Skiftech, which will develop simulators for the military. In 2014, the co-founders concluded the first contracts with the state to create simulators.

By 2022, the company has developed more than 20 products, now offices are located in several cities of Ukraine, as well as Poland, the Czech Republic and the USA. In addition to Skiftech, the group includes the trademarks Netronic (development of laser tag equipment), Vion VR (VR attraction for business) and Air Bunker (inflatable shelters for the organization of game arenas).

The company employs more than 230 people, 1/5 of the entire number of specialists work in the field of research and development. Technologies that are found or developed are tried to be applied to all directions: research for commerce is used for military development, and vice versa.

Self Financing

The specificity of working with the public sector is that the company receives income only after shipment. In addition, there is seasonality in state financing, when budgets are formed. Therefore, expenses between these periods are financed with the money of the owners.

They help the military department to work all year long to predict the future needs of the army, for which funds will be allocated later.

The team analyzes which educational centers have not yet installed the system, which new ones have been put into service. This is how he forms hypotheses about needs and manufactures equipment in advance. Thanks to this, they try to ship the system already a week after the order.

Several projects were sponsored by third-party structures. For example, the US Department of Energy supported the supply of simulators for the military, which guards Ukrainian nuclear power plants.

"We cover 15 percent of the needs of the Armed Forces"

The number of orders changed 4-6 times with the beginning of a full-scale invasion. However, the direction will pay off when the company enters the foreign market. "In our country, it's still more of a charity because of the high cost of development," says Anastasia Melnikova.

Although the Ukrainian military-industrial complex is gradually increasing production, the state does not have time to finance military purchases. The same is happening with training simulators for fighters, confirms Skiftech.

"We cover a maximum of 15% of the needs of the military," Melnikova shares. And he adds that the number of those mobilized is much greater than the number of orders to training centers.

During its operation, the company supplied systems to more than 170 divisions. Before the full-scale invasion, they were supplied through tenders announced by the state or specific brigades. After 2022, divisions were able to order simulators directly.

The company does not see a fundamental difference between the channels, the main task is to deliver the system as quickly as possible. In the case of direct purchases, it depends on whether the specific unit has allocated funds and how well it has established relations with the bodies that make decisions on financing. For government procurement, the speed is affected by the preparation of documentation.

Standardization is required for export

To promote Skiftech equipment, it uses its demonstrations, although "word of mouth" in divisions works just as well. In addition, the Brave1 cluster and the DOU community help with networking. Both organizations establish communication between developers, business and the state.

Brave1 organizes hackathons, in which not only developers, but also military and scientists can join. At such meetings, companies can receive feedback from fighters about certain technologies.

In addition, the cluster helps speed up the equipment standardization process by involving manufacturers in the formation of standards. Their absence makes the development much longer, and the equipment may not be compatible with other systems in the end.

One of Skiftech's divisions studies international standards for exercise equipment and works with the body in the US that creates them. This year, the company received a NATO identification code, with which it will be able to export equipment abroad in the future.

"Unfortunately, prospects in defense-tech are excellent"

One of the strategic goals of Skiftech is to enter the foreign market. The company's developments have already been noticed in the United States and demonstrations of their equipment have been held for the American military. Skiftech also cooperates with a company that trains police officers.

Scaling is focused on allied countries. The main focus is on the USA, because it creates standards and steadily invests in technology.

"Ukraine is a place for the soul, and money can be earned on foreign markets to help the state win," says Anastasia.

According to the CPO, Ukrainian manufacturers will be able to teach other global companies. The usual standards of warfare do not work in Ukraine, so the desire to win contributes to the faster development of technology.

As Melnikova adds: "Unfortunately, the direction's prospects are excellent. Why unfortunately? Because they were gained by combat experience."

The situation is also unique in that development occurs in the absence of earnings. According to Melnikova, defense-tech companies will be able to earn stably if there is more investment and the absence of corruption. However, changes for this can last from three to five years.