The Global Startup Ecosystem Report 2020 (GSER 2020) JA
State of the Global Startup Economy
The global startup economy remains large, creating nearly $3 trillion in value, a figure on par with the GDP of a G7 economy. Seven out of the top 10 largest companies in the world are in technology — the highest concentration of any industry sector among the top global companies — and 2019 saw close to $300 billion in venture capital investments around the world.
Nonetheless, even at the end of 2019, not all was well. Inclusion remained a fundamental challenge for tech ecosystems, with only 14.1% of founders globally being female, as our Startup Genome research shows. Value creation by ecosystems remains concentrated, with about 74% of all value produced being concentrated in the top 10 performing cities globally. Tech giants like WeWork and the stable of unicorns funded by Softbank began to falter — ranging from major crises, as in the case of WeWork; to a capital crunch for others.
But despite these challenges, we did not expect the major threat of the COVID-19 crisis to global ecosystems. Since the crisis hit:
- Layoffs among startups are rampant, with just over a third of startups globally not laying off staff nor cutting hours, and with the typical startup with full-time layoffs letting go an average 33% of the staff; and
- Startups are facing a double whammy with a drop in consumer demand at the same time VC investments are dropping, leading to a crunch for capital. In fact, four out of every 10 startups have 3 months or fewer of capital runway, meaning they will die if they do not raise additional money and their revenue and expenses remain the same.
While we see early signs of a rebound in Asian ecosystems — nothing like a return to normal, but a slowdown of the drop — the startup economy is going through a major transition.
In 2020, the State of the Global Startup Economy can be seen through two main angles: the calm before the storm, up to Dec. 2019, and the consequences of the COVID-19-triggered crisis.
The Calm Before the Storm
In the lead up to the crisis, the dominating trend for ecosystems globally has been the growing democratization of tech across geographies.
Democratizing the Tech Economy
Despite the concentration of value in tech ecosystems, access to the tech economy is increasingly democratized.
In 2013, tech unicorns became a phenomenon, with the term popularized by Aileen Lee from CowboyVC. The name alludes to the rare and nearly mythical quality of these companies. But while still powerful they are not so rare anymore.
When we analyzed companies in the billion-dollar club — exits or private companies in technology with over $1 billion in valuation — in 2013-2019, we see that in 2013 only four ecosystems produced unicorns or billion-dollar exits. Today, a cumulative 80+ ecosystems have done so, astoundingly.
The $4 Billion Barrier
In 1964, Roger Bannister became famous as the first person to ever run a 4-minute mile — breaking a barrier that had stood for decades and many thought humanly impossible to reach. Once he showed it could be done, the same barrier was broken by John Landy, an Australian runner, only 46 days later. And as Bill Taylor relates in a Harvard Business Review article, just a year later three runners broke the barrier in the same race.
Once Bannister showed the possibility, that level of performance that had never been done for decades became achievable. Since then, over 1,000 runners have completed a 4-minute mile.
As more cities around the globe become viable startup ecosystems, we think a similar thing might be happening, as we wrote in the 2019 Global Startup Ecosystem Report.
As of 2020, we have identified and studied nearly 70 ecosystems creating over $4 billion dollars in Ecosystem Value — a measure capturing the value of startups funded and exited in an ecosystem over two and a half years (2017 to first half of 2019). This is 48% more ecosystems than we identified last year, and nearly double what we identified three years ago.
While historical data on this is tricky, it is hard to imagine more than a few startup ecosystems creating that level of Ecosystem Value in the 1990s. As Pitchbook data shows, Boston had about $900 million in VC investments in 1998, New York City had $800 million, and both Seattle and London had only about $200 million in investments in the same year.
In 2019 we predicted that 100 cities would cross the $4 billion threshold in Ecosystem Value by 2029. It looks like we might hit that milestone even earlier.
There Will Be No “Next Silicon Valley.” There Will Be 30
“Instead of one new center or two new centers (of entrepreneurship, besides Silicon Valley), there will be 30, and there will be clusters in different places that don’t quite get to the density of the Bay Area but get beyond critical mass.”
Sam Altman, Y Combinator and OpenAI
In the 2019 Global Startup Ecosystem Report we wrote about our belief that in the future, there will be no “Next Silicon Valley,” but instead at least 30 global centers of entrepreneurship that are either: regional (e.g., Sao Paulo in South America or Jakarta in Southeast Asia) or sub-sector leaders (e.g., Shenzhen, with its world-class performance in Advanced Manufacturing and Robotics).
In last year’s report, we published the ranking of the top 30 global ecosystems and also highlighted 12 Challenger ecosystems: those ecosystems that were not part of the Top 30 at the time but had the potential to become so in the future.
Of the 12, seven (or 58%) are now part of the Top 30 Global Ecosystems and Runners-up lists, and three (25%) are among the top five Emerging Global Ecosystems — a new ranking Startup Genome is debuting this year that includes 100 ecosystems in total — those outside the top 30 and runners-up global that are nonetheless seeing impressive performance and growth.
The Rise of Asia-Pacific
A major beneficiary of this democratization of tech is the Asia-Pacific region, which has gone from having 20% of top ecosystems in 2012 to 30% of them today.
When it comes to the rise of Asia-Pacific, there are five key findings to highlight:
- Seoul and Tokyo have broken into the top 30 global startup ecosystems, in no small part due to their strength as R&D powerhourses. We cover more about the story of Seoul and their massive investments of $1.6 billion in the next three years in a special feature on this report.
- Melbourne joins the select group of top global ecosystems as a runner-up, getting closer in performance with Sydney over the years. While Sydney is still ahead of Melbourne, in some key metrics Melbourne is catching up. For example, Sydney was the first city in Australia to have a unicorn, but now Melbourne has two: Airwallex and Judo Capital (a challenger bank).
- Continental China has gone from having two of the top 30 global startup ecosystems in 2017 to having four of the top 30 in three years: Beijing, Shanghai, Shenzhen (the robotics and advanced manufacturing powerhouse), and Hangzhou (home to Alibaba).
- Delhi joins Bangalore in the list of top ecosystems, bringing the number of Indian cities represented up to two
- Singapore and Hong Kong continue to perform well, but now have more regional competitors than they had before
The Post-COVID-19 Crisis and the Impact on Global Ecosystems
Risk of a Mass Extinction Event for Startups
As the COVID-19 crisis hit across the world, startups have found themselves in a double bind, being hit hard from two main shockwaves: capital shock and demand.
Shockwave #1: Capital
On the capital side of the equation, there is a crunch for capital across the world. This capital crunch manifests itself in three key statistics:
First, four out of every 10 startups today are in the red zone: they have three months or fewer of capital runway. This means that they will collapse if they do not raise additional capital and their revenues and expenses remain unchanged, risking a mass extinction event for startups globally.
If we focus on startups on Series A+ only, we see that 35% of startups have 6 months or fewer of capital — a troublesome figure given how long it takes to raise a Series B or later round, especially in the current environment.
Second, the fundraising process has been dramatically disrupted. Even for startups that already had term sheets from investors before the crisis, signed or unsigned, three out of every four startups have had the fundraising process disrupted. A dramatic 18% of those startups with term sheets have had a funding round canceled by the investor, and 54% have had their funding round delayed or the lead investor become unresponsive.
Third, total VC funding has dropped dramatically across every single continent. Globally, it is down by 20% in the three months of 2020. In some regions of the world it dropped even more sharply. China, the first country hit by the crisis, had funding drop by over 50% relative to the rest of the world, as we have written for the World Economic Forum. While the country is experiencing a rebound in investments in March, it still faces lower activity than it had in December 2019.
Shockwave #2: Demand
The other side of the equation on the shocks affecting startups is we have seen demand drop like a rock for most companies.
About 72% of startups saw their revenue drop since the beginning of the crisis, with the average startup experiencing a decline of 32%. Shockingly, almost 40% of companies of the companies saw their revenue drop by 40% or more, and only about 12% are experiencing significant growth.
The Downstream Effects of the Coronavirus Crisis
The downstream results of these two shocks are dramatic:
Over 60% of startups have laid off employees or reduced salaries. For startups reducing FTEs, an average of 33% of jobs were cut, as the Startup Genome COVID-19 Impact Insights survey shows.
This is also reflected in crowdsourced data about startup layoffs globally, with the number of employees laid off identified in these crowdsourced lists growing 5x between March and May 2020.
Some of the types of job cuts are exactly what you would expect given drop in demand and even operational availability of selling: jobs in Direct Sales (36% of companies with job cuts) and in Marketing (29%). But a significant number of jobs cut are particularly troublesome because they hurt a company’s long-term innovation capacity. Roughly 31% have cut jobs in R&D, and 32% have cut jobs in Product (e.g., software engineers). This is a major problem not only for the post-crisis prospects of startups, but also for their ecosystems. As tech talent is laid off, they might be absorbed by large corporates, leaving the startup ecosystem altogether. And for tech hubs that are less mature, such as the ones we cover in our Emerging Ecosystems Ranking, these scientists and engineers might end up leaving the city altogether for the more robust startup labor markets in places like Silicon Valley, London, and New York.
Cost-Cutting and Expectations
Relatedly, 71% of startups have reduced their expenses, for an average cost cutting off 22%.
When we look at what founders expect for their companies in the next two months, 31% expect they will have to do salary cuts, and 13% of startups expect they will have to terminate more employees. In terms of revenue, only 10% of startups expect their revenue will grow a lot. 40% expect it will stay about the same or grow a little, and a dramatic 28% think their revenue will still drop a lot further.
The combination of drop in expenditures, salary cuts, and layoffs have downstream effects for the rest of society, not just today but also tomorrow’s potential for economic growth and innovation capacity.
When startups suffer, the whole economy suffers.
Tech Economy Will Be Crucial for the Recovery
The unstoppable march of the economy becoming increasingly reliant on digital and technology products got accelerated by the crisis triggered by COVID-19. This means that, even more than in the previous crisis, the tech economy will be fundamental for recovery.
First, as about a decade of research has shown, most of the net job creation in the economy comes from new young companies, especially those that scale.
Second, when we compare dollar for dollar, startup jobs are cheaper to save than traditional small business jobs by government programs — about 41% cheaper, as we cover in a recent funding policy paper. Some governments even believe these investments can generate positive returns on taxpayer money, as does Israel now.
Third, in addition to creating most of the net new jobs, tech companies have impressive job multipliers. The best estimates we have suggest that for every high-technology job, five other jobs are created in the economy. This is not only because these jobs pay high wages, but also because they create new products, innovations, and are such big exporters for the economy. Notice that the tech jobs are cheaper to save through government action even without taking into consideration the employment multipliers and the higher average wages (and contribution to tax base) of tech jobs.
Third, in addition to creating most of the net new jobs, tech companies have impressive job multipliers. The best estimates we have suggest that for every high-technology job, five other jobs are created in the economy. This is not only because these jobs pay high wages, but also because they create new products, innovations, and are such big exporters for the economy. Notice that the tech jobs are cheaper to save through government action even without taking into consideration the employment multipliers and the higher average wages (and contribution to tax base) of tech jobs.
Fourth, in the wake of the Great Recession, startups contributed strongly to the economic recovery. By 2011, employment in the “Computer Systems Design and Related Services” industry was growing by 2.6% per year, while in job creation the overall economy was negative, at -1.2%. In fact, between 2007-2011, job growth in Computer Systems (a subset of the larger “Professional Services” sector) was larger than job growth in all major sectors of the economy, including Healthcare.
*Computer Systems Design and Related Services classification (NAICS 5415) refers to “establishments primarily engaged in planning and designing computer systems that integrate computer hardware, software, and communication technologies”. Number for U.S. labor market
New Normal for Economic Development
As the Financial Times’ fDi wrote based on Startup Genome’s policy advisory, governments need to act to support startups and bail them out in the same way they are doing for traditional industries and small businesses. We need a new normal for economic development, where we are supporting the technology economy just as much as we were supporting traditional small businesses and traditional industries like airlines.
This is especially true for ecosystems that are not at the very top and do not have the decades of experience, talent, and capital to draw upon during times of crisis. One of the reasons acting now is particularly critical is that startup ecosystems have increasing returns to scale due especially to network effects. As the number of startups in the ecosystem grows, the whole economic community related to the ecosystem — talent, universities, startup support organizations — produces more value. An ecosystem that is 3x larger creates about 5x more economic value. This also means that if you lose about 20% of startups, you can expect to lose about 27% in value. If you lose 40% of them, which is the figure for startups in the red zone globally, and you're risking shaving off over 50% of economic value produced by your ecosystem.
Economic Impact of Startup Ecosystem Accelerates with Ecosystem Size
Ecosystem Value by Number of Tech Startups in Ecosystem
Source: Startup Genome | www.startupgenome.com
Ecosystem Policy Is the New Industrial Policy
The reality is that, once we are through with this crisis, top startup ecosystems will remain high performing. Places like Silicon Valley, New York, London, and Beijing will continue to produce tremendous innovations and create astounding value. They have depth of talent, experience, and capital in the ecosystem; which might retract but will remain there post-crisis. That is not the case in emerging ecosystems, where failures now will leave deep scars. Talent that gets laid-off might make a permanent switch to working for big corporates or move to another city altogether. The same is true for founders who might have to close their businesses.
Ecosystems need to invest now to not lose the progress made in the past 10 years.
The Next Great Generation of Companies and Ecosystems
Every crisis creates opportunities, and this crisis is no different. For instance, over half of Fortune 500 companies started during a contraction, as our colleague Dane Stangler has written, and over 50 unicorns were created in the Great Recession alone, as Startup Genome data shows The list of companies funded during the Great Recession is impressive. It includes Facebook, LinkedIn, Palantir, and Dropbox — all of these based in the Bay Area.
In the same way opportunities are unlocked for companies, they are also unlocked for ecosystems. The current crisis has accelerated the digitization of the offline economy, making tech companies even more important. The actions of ecosystems today will help determine how they will be positioned in the global stage tomorrow. At the same time, this is a unique opportunity for all of us to rebuild our economic communities with a lower negative impact on the environment and a stronger focus on inclusion and fair access to the amazing value that tech ecosystems create.
Just like the rise of both London and New York City came at the heels of the 2007-2009 Great Recession — in their attempt to diversify from reliance on their traditional strengths in finances — the post-COVID-19 recovery will see new ecosystems rising.