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This exclusive Cogs of War interview is with Perry Boyle, the CEO and co-founder of MITS Capital LLC, which is working to bring capital to the Ukrainian defense industry.

From a distance, it’s hard to know which new systems being fielded today in Ukraine are truly successful and which are not. How does your team cut through the noise and accurately assess whether a company’s tech has a significant battlefield impact?

We invest in technologies deployed on the battlefield today, which will have international demand once the Ukrainian government issues export licenses (more on that soon): jam-resistant long-range communications; ground drones for battlefield evacuation; non-Chinese drone motors; autonomous targeting; undersea drones; 3D spatial awareness for intelligence, surveillance, and reconnaissance drones; GPS-denied navigation systems; ultra-low-cost long-range strike drones; and advanced acoustic targeting for counter-battery fire. We invest in our own direct relationships with commands and members of Ukraine’s general staff so that we can get unfiltered feedback.

Our staff is almost entirely Ukrainian and has worked for and with the Ukrainian military and state for over a decade. MITS personnel have been active in personally supporting combat units with supplies since Russia started its initial invasion of Ukraine in 2014. They have skin in the game, with relatives on the frontline. I personally get real-time feedback from a battlefield user of one of our portfolio companies’ products via Signal. How many CEOs of venture capital firms in the United States can say that?

Given our mission of getting Russia out of Ukraine and integrating Ukraine into NATO’s defense supply chains, we have to make sure that what we are investing in meets the needs of the warfighter.

Ukraine’s defense sector has streamlined defense procurement processes to allow for rapid fielding. What is one aspect of the Ukrainian system that the Defense Department should seek to emulate?

In a NATO country, there is a massive bureaucracy that stands between the defense contractor and the warfighter. In Ukraine, there is no distance between the factory and the frontline. This means there is constant collaboration between the user and producer in a way that doesn’t exist in the United States. The Defense Department should push at least some control over weapons design and procurement into its combat commands.

Ukraine’s coordination platform for its defense tech industry, Brave1, is ingenious and has multiple benefits. It rewards combat commands for achieving desired military outcomes, requires verifiable data that can be leveraged tactically and strategically, and creates a regularly updated demand signal for what warfighters need to generate these outcomes. This means the defense industry knows what to produce in almost real time. Nothing like this exists in any NATO member’s military.

Decentralization in Ukraine’s fighting forces has both positive and negative attributes. The most important positive is that the perception of some independence within a combat command is highly motivating to the warfighter. The will to fight is critical when repelling an invasion.

Decentralization has also empowered some combat commands to directly acquire warfighting and support supplies. Several brigades have their own fundraising non-profits that pay for these materials (e.g., Azov.One). This has the benefit of directly connecting citizens with the frontline, giving them a feeling of skin in the game, and ensuring that soldiers know they have the support of their communities. It also reduces the bureaucratic red tape of getting what works to the battlefield and getting feedback to the manufacturer on a real-time basis.

However, decentralization has its issues. There is less oversight of how the money flows, which can lead to the misappropriation of resources. It can also hamper attempts to reduce cost-per-effect via scaled production and standardization.

But let’s not forget the positives: In just three-and-a-half years, Ukraine has developed one of the largest defense industrial bases in Europe. It even has a ballistic missile program — Sapsan — and a defense data integration program that is competitive with Palantir’s Maven, at a much lower cost.

We have moved beyond the garage startup phase in Ukraine. We know what the avenues are for product development. The real imperative now is scaling production to capitalize on Ukraine’s low-cost producer status. A great example of this is the Bohdana howitzer, which is comparable to the United Kingdom’s M777 — but better and cheaper.

Ukraine’s challenge is to mitigate the downsides of decentralization while maintaining its positive aspects. An American analog would be U.S. Special Operations Command, which operates much like Azov or the Third Army Corps in Ukraine. Ukraine has a lot of work to do to improve its procurement processes, but it is building a system that is nimble and effective at creating battlefield asymmetry within the constraints it finds itself in. It might not be a model for how the U.S. process should work, but nor would America’s process work well for Ukraine — not at all! Ukraine would have lost by now.

As for corruption in Ukraine: I have never personally experienced it, although I am sure it occurs. But every country struggles with corruption in defense, especially during wartime. People who read War on the Rocks might be familiar with Harry Truman’s work to battle corruption in the defense industry as a member of Congress in 1941. And there is still plenty of corruption in the U.S. defense industry today on a scale far beyond what takes place in Ukraine today. However, the difference between corruption in the United States and in Ukraine is that corruption is often technically legal in the United States.

If you were to come up with an archetype of a defense tech startup, you typically picture a software company in beautiful Silicon Valley — a far cry from the bloody realities of the frontlines of Ukraine. What are some additional things you have to take into account when investing in Ukrainian wartime startups, such as contested supply chains or staffing issues?

It is extremely hard to succeed as a Ukrainian defense provider. If you can make it in Ukraine, you can probably be successful globally. The barriers to entry are low, but the barriers to long-term success are daunting.

The biggest advantage you have as a Ukrainian startup is that you can have direct and constant product feedback loops from multiple combat units. Nothing like that exists anywhere else in the world. And your production costs tend to be 40 percent or less than what they would be in the European Union or the United States. You are both the low-cost producer and the innovator at the same time — that’s really rare.

The Ukrainian government makes sure you earn your revenue every day. There are few long-term contracts — they purchase in batches. Your margins are limited, your payment terms are terrible, and access to working capital financing is almost non-existent. While you might have multiple customers within Ukraine, ultimately, there is only one payer — the government. Solving the financing conundrum is critical if Ukraine wants to scale its domestic defense industry.

Ukrainian defense companies have been isolated by U.S. and E.U. banks, and very few of their venture capital firms will travel to Ukraine. Ukraine’s legal regimes for startup investing have not yet caught up to the standards that are common in NATO nations, although Ukraine’s virtual tech business city, Diia.City United, is making progress. Ukraine doesn’t have a U.S. or E.U.-style venture capital market, as there has been no initial public offering market in Ukraine since the full-scale invasion and few domestic acquirers of defense companies.

But back to this issue of export permits: Ukraine is leaving serious money on the table by failing to provide export permits. This comes down to internal Ukrainian political pressures to put all material at the disposal of the Ukrainian military. This is bad national policy. Ukraine has excess production capacity that it could fill with international sales to generate much-needed revenue that is critical to staying in the fight and keeping the country going.

The result of this bad policy is not more munitions getting to the front-line — the Ukrainian government can’t make the orders — it’s successful Ukrainian defense business leaders leaving the country to make their products. This is the dumbest thing I have seen Ukraine do.

Ukrainian President Volodymyr Zelensky and U.S. President Donald Trump are on the cusp of a major drone deal, with Ukraine looking to lift an unofficial ban on the export of drones and electronic warfare weapons for the first time since February 2022. The United States and other NATO countries are certainly eager to start buying drones and additional electronic warfare weapons from Ukraine, but if it is eventually inked, what challenges do you foresee in the deal’s implementation?

If this deal is inked, it will be a huge breakthrough for the Ukrainian defense industry. I think the biggest challenge to implementation will be scaling production to meet demand. In particular, it is unclear how Ukrainian companies can access sufficient working capital to purchase inventory and finance accounts receivable. A huge benefit to this would be if buyers made multi-year purchase commitments. That would make these companies easier to finance.

This comes down to excess capacity, which Ukraine has a lot of in ways that most observers might not understand. The defense industry has many different sub-industries. Ukraine has excess production capacity primarily in drones and drone components. It also creates software — where there are no capacity constraints for adding customers.

Ukraine does not have excess capacity in ordnance and ammunition. What would be better than countries constantly sending expensive ammo to Ukraine would be for them to invest in ammo production within Ukraine. We are raising money to increase domestic production of ordnance, ammunition, and explosives. Ukraine can produce things like howitzer shells at less than 40 percent of the cost of any NATO member.

Ukraine’s wartime economy and production capacity have grown significantly in the past few years. What are some weapons besides drones that you think Ukraine will be exporting to the West after the conclusion of the war?

Warfighting is not about drones: It is about creating asymmetries and optimizing cost-per-effect via warfighting systems. Drones are important, but they are part of a larger system that includes things like sensors — ranging from thermal cameras to acoustic sensors to passive radars — all of which Ukraine is a global leader in.

Ukraine also has some of the best jam-resistant communications providers in the world. These are already getting international attention.

Ukraine has leading startups in sensors and data integration, and we expect NATO members to jump on these companies. Even in basic materiel ranging from armored vehicles to ordnance to munitions to explosives, Ukraine is building some of the best companies in the world with products that are a fraction of the price of U.S. or E.U. equivalents.

One of the things we need to acknowledge is the speed at which Ukraine is replacing Chinese components with domestic components, in some cases, much faster than NATO defense industries. For example, take drone motors. Most of them come from China and are cheap. U.S. versions cost three to four times as much, and almost all of them have Chinese magnets. However, there is a Ukrainian producer (one of our portfolio companies) that makes motors at only a slight premium to China and will have non-Chinese magnets by the end of the year. They will have a massive demand.

Image: Iryna Supruniuk via Wikimedia Commons.