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How to build a stable business in a turbulent environment. Yuriy Fylyuk on unique experience of Prompylad.Renovation

Yuriy Fylyuk knows how to build a stable business that changes the region. Photo: Prompylad.Renovation

Yuriy Fylyuk knows how to build a stable business that changes the region. Photo: Prompylad.Renovation

An innovative hub has been created in Frankivsk. The haub completely reboots the economy and social sphere of the city.

The whole country is following this project, Europe supports and is ready to learn from its experience. The Atlantic Council called it "the most impressive civil society project in Ukraine", the UN Partnership For Sustainability Award recognized it the best in the category Economic Development.

Prompylad.Renovation is not only the story of transforming a large industrial zone in the center of Frankivsk into an innovation center. This is also a story about how to teach business, government and the public to interact in order to renew the economy of the region. No wonder the project was presented in Davos, Stanford, Oxford, and the House of Lords of Great Britain.

It is also a story about "responsible" impact investing. Over 5 years, the project raised more than $10 million from 1,000 investors from Ukraine and 28 countries of the world: anyone can invest funds in it to create public goods and receive dividends from the project's activities.

How to turn a century-old plant into a driver of the region's economy without involving oligarchs, why Frankivsk and whether its experience can be scaled up—read in an interview with Yuriy Fylyuk, CEO at the project Prompylad.Renovation.

Industrial zone renovation: How much does it cost to transform a plant

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5 years ago there was a gigantic almost abandoned factory in the center of the city. Today, key events of the city and the region take place on the restored sites. How did this concept pop up?

Before creating the project Prompylad.Renovation, we went through an evolutionary path. My team and I worked in Kyiv, in the financial sector. And in 2009, during the increasing global economic crisis, we had to freeze the business and rethink everything.

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At that time I offered to go to Frankivsk because this is my native city. In order not to lose heart, we started opening restaurants. But then it became mentally cramped. We were faced with a choice: either go to more ambitious markets, or "rock" the city so that it becomes uncompromisingly interesting here.

I was engaged in projects aimed at the development of civil society, developing interactions in a triangle: business—local authorities—civil society. This is how Teple Misto appeared—an organization that offered new solutions for developing the city. For eight years, we have implemented about 500 projects in the areas of education, art, economics, urban planning, energy efficiency, mobility, and social entrepreneurship.

We were interested in looking for economically established models that serve the public interest. One such example was the public restaurant Urban Space 100: 100 people chipped in $1,000 each and launched an establishment with a total budget of $100,000. And for eight years the restaurant has been working according to the scheme: 80% of the net profit, by the decision of 100 founders, is redistributed to city social development projects.

Urban became an iconic place: the agenda was formed here, we saw that the city was changing in a noticeable way. More than 130 projects have already been financed from these funds, more than 1,000 events have been held and attended by approximately 700,000 guests.

We are inspired by this success. Using the example of Urban, we tested how economic interests and city development can be combined. Then the idea of revitalizing an old factory in the city center and turning it into an innovation hub popped up.

It was a challenge: one can not compare Urban with an area of 70 sq.m. and Promprilad with an area of almost 40,000 sq.m. To deliever such a large-scale project, it was necessary to look for other financial instruments. At that time we intuitively came to a mixed model called impact investment where the business serves both commercial and large public interests. But our current partners at Stanford explained it to us.

Your experience in development and renovation: what is left of the old plant?

By 2024, raising more than 700 million UAH, we plan to completely re-equip the four buildings of the plant, construct two new buildings, and create a park.

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We got 28,000 sq. m of premises from the plant, and now we are reconstructing them. We are rethinking the space itself: we combine elements of updating old structural elements and absolutely modern refined inserts. We will build another 10,000 sq.m. In total, the area of the facility after the work completion will be 38,000 sq.m.

Promprylad has a 100-year history, it was important for us to provide a certain outstretch from the past to the present. It was a classic "city-forming enterprise" exporting its products—gas industrial meters—to more than 60 countries of the world. At the best of times, 5,000 people worked there, there was a huge infrastructure, even with its own film studio. Even now, every third resident of Ivano-Frankivsk has family ties with the plant.

At that stage of industrialization, the plant was the center of the city's development: the best specialists, the best salaries. In fact, now we are restoring the former glory of the plant but in different realities with different meanings, connecting the region with the global world.

Because now we live in the post-industrial period. Therefore, we rely on other drivers of the economy.

We deliberately left elements of the living architectural code. Sometimes people jokingly ask: when do you plan to repair the ceiling on the pilot floor—because there are the remnants of Soviet-era plaster on it. It would be foolish to completely drywall everything and make a no-name classic office space. On the contrary, we use, for example, old glass blocks from the factory: we disassemble and assemble back the walls in the interior. Now, by the way, this is a fashionable loft trend, and besides, it is environmentally friendly.

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How much will the entire renovation cost?

At the moment we have reconstructed 6,200 sq.m. Now the active phase of construction of the next stage is underway—this is another 11,700 sq. m. The total budget of the project (all 38,000 sq. m.) is more than $30 million. This amount includes both the purchase of the facility and the reconstruction of the premises that we will lease. There are also functions that we do on a turnkey basis—this is our own business: a hostel, a coworking, and sites—this is part of the business that we will manage ourselves.

Three years ago you launched a pilot floor. What are the principles of an ecosystem?

It is important for us that the project itself creates 12,000 sq. m of social infrastructure: this is a makerspace, incubators for developing small and mid-sized businesses, child development center, a large art center, a cinema center, laboratories, including scientific ones. Any person, young and old, will be able to find something for themselves, learn something and do something here on the spot.

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This is an infrastructure that was not previously presented in Frankivsk, as in most Ukrainian cities that are not the million-plus cities. Thus, we create opportunities so that people have more chances to realize themselves in their hometown, and there is no need to travel abroad. We also rent offices and coworking space for business, as well as event sites.

All these projects are elements of a unified system aimed at developing the city. Currently, the first building has been restored—several floors have been leased out—for business and social projects. It is very important for us to select operators who have the same values, tend to openness, interact and enhance each other. Because in synergy one can get something more.

We analyzed what key elements could create a broth where new ideas and projects, new businesses, and organizations can be born. We select tenants for these slots. There is a diversified approach: for some, there is the possibility of reduced rental rates—low-profit and non-profit functions such as art, education, and incubators for the developing small and mid-sized businesses.

Anchor players will pay less, someone will pay more. A fitness center or movie theaters will always pay less than a retailer. But they are a magnet. Our magnets are education, science, art, and development.

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Impact investing: What is it, the model pros and cons

The business model of Prompylad.Renovation implies mixed financing: impact investments, grants, international partners,and loans. In addition, it is the project Prompylad that seems to be the first in Ukraine to apply impact investing.

We are definitely the first to approach this systematically and on a large scale. The trend itself was born in the United States. But the Europeans are also latching on to it, and it sounds more and more active in Ukraine. We consciously foster the development of this type of business.

The main idea of impact investing is that the investors, on the one hand, get economic added value and at the same time create a benefit for the society. That is, the project has a large social component.

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Until now, there were conditionally two extreme points in the world of business. On the one hand, there is capitalism of the old form, measured by how much maximum economic added value we give out per unit of space per unit of time. Somewhere in brackets one could read "don't ask how we will achieve this." This approach has resulted in global challenges—ecology, post-truth, and social gaps.

The second opposite category—social projects, civil society, and philanthropists—when business gives a conditional "tithe" to charity and to some extent tries to solve problems. But this model is no longer able to cope with them, especially since their accumulation also continues.

Therefore, the search for a middle model began, when business operates on the basis of at least not creating new problems, and at the same time trying to solve some of the accumulated important social or environmental challenges.

Such responsible businesses are less profitable because part of the margin goes to solving global or local problems. On the other hand, they are more stable and better integrated into the social tissue. The project Prompylad has become an example in this regard.

From a legal viewpoint, it is as follows: we have a holding company that owns an asset (plant), gradually developing new areas and functions. 70% of the holding belongs to the investors whom we structure through a corporate investment fund. 30% belongs to the Prompylad internal charitable foundation that, in turn, is managed by a consortium of public partners—these are Teple Misto, as well as the Lviv Business School (UCU Business School), the Swedish company BeetRoot Academy, and Metalab—our urbanists. These organizations are looking for grant opportunities and business support to create direct social infrastructure.

When the entire facility is fully operational, 70% of the net profit will be returned to investors in the form of dividends, 30% goes to a charitable foundation and is distributed to support education, art, the development of a new economy, science, and urban planning.

Thus, the project simultaneously helps to develop both economic parameters and social infrastructure that is also important for the economy.

We believe that the moment will come when only the impact-oriented business will remain in the market. Other business models will gradually recede. Stanford explained to us 4 years ago that American venture funds, in addition to the classical assessment of any investment project—capital return, risk, liquidity—also necessarily add impact. The explanations are simple: a business that does not care about the ecosystem it operates in and addresses only its own direct interests will simply lose competition to others.

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Who are your investors and when will they be able to receive their first dividends?

According to the business plan, the forecast figures are in the range from 9 to 12% per annum, depending on the investment stage. Those who have invested earlier will have a large interest base. In addition, every year we re-evaluate assets. Accordingly, the market value of each investor's share will also increase proportionally. And there is an opportunity at any time to freely sell your share in the secondary market.

Until the beginning of 2023, we will reinvest the operating profit in the next construction. When the facility is fully commissioned, the payment of dividends will begin.

As of February 2022, 1,140 investors have joined us. Statistically, this is 75.08% of men and 24.91% of women. About 30% of them work in the IT sector. The average age is 36 years. There are investors from all regions of Ukraine and 28 countries of the world. For many, this is an investment in the future of Ukraine. Education, incubation, business development opportunities, and the return of talents are critical aspects that will be catalysts for changes.

My total contribution to the project was about $700,000. I sold my assets in the business. It is important for professional investors to see that you believe in the project, but, as with any investment, you risk just like everyone else does.

What are the main results of 5-years activity of the project Prompylad.Renovation?

The first two years were theoretical work: a lot of research, seed funding, searching for partners. The active phase, when we obtained the facility, began three years ago. Thanks to Teple Misto, Urban Space 100 and other initiatives, a dynamic appeared promptly. And now the project has become the largest platform where the most important events in the city are held.

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It is important for us that in 2020 the Ukrainian Forbes ranked Frankivsk 1st in the attractiveness rating for doing business, mentioning Prompylad.Renovation and Urban Space 100 as one of the main catalysts. Last year, our city also topped the DOU rating as the most comfortable city for IT professionals.

In addition, at the end of 2021, the development of a strategy for Ivano-Frankivsk started. The process was initiated by representatives from different sectors: city authorities, Teple Misto, business association, scientists association, Ivano-Frankivsk Drama Theater and others. All preparatory work was carried out at Prompylad.Inovation. That is, Prompylad really became a platform for intersectoral interactions and creating an overall citywide strategy—this is an important result. Although there are still 5 years of work ahead before the project’s full launch, but the foundation has already been laid.

The greatest achievement is that over this period of time, society has changed its attitude towards the initiative as such. Previously, if someone came out publicly with the initiative, they were "spit on". In the post-Soviet period, society is traumatized in terms of trust and sees some hidden threats or political risks.

But the lack of initiative makes it impossible to move and develop for positive changes. Our first projects also faced total distrust and criticism. Step by step and in 4-5 years, we felt that the attitude has changed dramatically.

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Now, in addition to Prompylad.Renovation and Teple Misto, there are many trends and movements in the city, investment cases, and projects of a new civil society. This is a living organism that is the key to the security and development of the country.

I am convinced that if such a vibrant civil society had had time to form in the east of Ukraine, a part of Donbas would never have been taken away from us.

How to create a project that cannot be raided

You have a lot of partners from Europe. Why is the project Promprylad attractive for Europeans? The renovation of a Soviet plant should be of interest to post-Soviet cities brimming with the same abandoned factories.

The first foreign partner was SRI International, the Stanford Research Institute that is collaborating with us on this project. And this was also their first experience of cooperation in the post-Soviet space.

Imagine, this is an organization with billions of dollars in budgets that owns the patent for the invention of the Internet, for bank credit cards, robotic projects, their own space programs, cooperation with the Pentagon and the US government. And here a small public organization from Ukraine, from Ivano-Frankivsk, addresses them.

We had a competent dialogue with them for six months. When the first agreements were signed, I myself asked why they had supported us. They gave an answer: "Because you intuitively felt the global trend of impact investment. The world came to this using their heads—they were looking for theoretical models, and you have it out of necessity, and to some extent it has already begun to be implemented. In addition, it appeared precisely on a market with high turbulence and high risks. Moreover, the model began to look like an instrument for solving these turbulences."

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That is why Stanford agreed to cooperate with us. They did not feel sorry for the poor Ukrainians, but said that this was one of the most interesting experiments for them they wanted to take part in.

In fact, we built a very stable financial model from the very beginning. The project is protected due to the fact that we have a large social function, a lot of different partners, both international and domestic. Essentially, this is some kind of a community-driven project. There is simply no point in raiding it or attacking it from any angle.

On the other hand, the Promprylad project unites and creates a number of opportunities for developing the entire market: anyone can join it and receive their added value.

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As for the current context. Does the threat of Russian invasion affect you and the country in terms of investment attractiveness?

Of course, investors are responding to this. We got into such a zone of turbulence when we planned the facility purchase. We were just waiting for the first tranche—$1 million—from the first U.S. investor. Funds had already been accumulated. But the contract collapsed due to the fact that at that moment President Poroshenko declared martial law in Ukraine, although there was no such threat as it is now. The Americans simply saw on newsreels that martial law was being introduced here, so they gave it up. And at that time we had a month to enter the deal and not lose the three years of progress. It wasn't easy, but we made it.

This is not the first threat that is suddenly besetting the country. I am confident that we should accept the fact that turbulence will not disappear anywhere and this will be a long process. Moreover, this turbulence concerns not only Ukraine, but the whole world. Therefore, from the very beginning, we built a stable model for developing the project at Promprylad.

What is the secret of this model's stability?

Firstly, we are "fair" for all 100%—this is an absolutely transparent project, structured according to all international parameters. This eliminates many risks because any attacks on a business occur due to weaknesses. But for us, initially it was a value framework and a guarantee of international reputation.

Secondly, there is a large social component of the project—this is already a value for society. If someone, for example, attacks a project, they also attack the society interests directly related to this project. The cost of such an attack would be disproportionately high.

Thirdly, diversification. There is no one project owner who realizes their political or economic ambitions through it. And accordingly, there is no one who could be put under pressure. But we have more than a thousand investors and there is no one who has a controlling stake: the maximum share in the hands is up to 5%. Accordingly, a publicly owned project is hard to attack. The whole society will become active against the one who will do it.

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Fourthly, a large number of local and international partners means different levels of protection. At the entrance to Prompylad, we have a Canadian maple growing—a gift from the Canadian Embassy. Other "diplomatic" trees will appear further. The governments of Sweden and Canada agreed to join the project. There is also support from Britain, USA, Switzerland, and Germany.

And fifthly, no less important, our project does not compete directly with anyone. On the contrary, if someone wants to do something like this, we, if there is a free time resource, enter into a dialogue and help, exchanging experience. For us, the success of anyone in the region is our success. Because this project was created specifically for proactive people with open values.

The Page reported that Prompylad.Renovation would be presented at the Ukrainian stand at the international real estate exhibition MIPIM. What will be your key message?

Ukraine can be and is already a trendsetter of new models, in particular, in development.

Secondly, our model allows us to enter markets that are still underformed or have high risks and turbulence—to build sustainable, successful development projects there. The example of Frankivsk and Prompylad.Renovation proves it.

Thirdly, we always look ahead. One needs to be present at such platforms in order to exchange ideas and show that we are a proactive subjective player in this market.

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Do you have a vision of what will happen to the project Prompylad in 10-20 years?

Over the next two years, we have to complete the last stage of renovation—build the entire volume and bring the project to the planned financial indicators and impact. Investors will receive reports on both monetary and non-monetary results. And they will see how much economic added value they have received and how much their investment has created positive changes, taken into account in parallel, in the city, region, country.

After the stabilization, work on developing a living ecosystem will continue.

Now I am the CEO of this project and after the full launch I will transfer authority to the next manager at some point. Most likely, I will switch to other projects.

To scale platforms for changes throughout the country?

General vision: in the next 15 years, quietly launch another 25 such "prompylads" in Ukraine.

Then this effect will spread throughout the country. And not only in Ukraine.

Why Frankivsk, and not Kyiv, for example?

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Firstly, Ukraine is already too centralized. There are countries that deliberately decentralize, evenly develop their entire tissue—it is healthier. In Ukraine, Kyiv alone accumulates at least half of all the country's resources—financial and intellectual.

Secondly, natural conditions for changes have been created in Frankivsk. It so happened that public initiatives began to start here—when different teams generate different meanings and different models for developing the country.

We are a fundamentally open model: all our developments (business model and research) have no access restrictions—anyone can take and reproduce them.

The more similar projects there are in Ukraine, the faster we will achieve the overall result of the changes. If another city appears on the map of the country that will offer changes and solutions to the country, that's great.

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