Startups and venture capital increasingly take on a winner-take-all pattern geographically. Venture capital investments are highly concentrated geographically. Just the top five cities account for nearly half of the global total, and the top 25 for more than three quarters of global venture capital investment. And, previous research one of us has done for the United States and globally, shows that even within cities, venture capital activity tends to be highly concentrated among just a few postal codes.
The geographic concentration of venture capital has also increased over the last decade. This is particularly the case at the very top, where the top 10 cities account for 61% of venture activity worldwide in the latest three-year period, but just 56% a decade ago. Given the large amount of underlying activity going on each year, even small percentage point changes represent meaningful shifts in concentration.
Forces Behind the Shifts
We can point to three major factors driving these trends, though there are others. The first is technological, as the confluence of high-speed internet, mobile devices, and cloud computing has made it possible to start and scale digitally-enabled businesses at a fraction of the cost. As these technologies have fallen in cost, they are within reach in more markets, meaning that it’s easier to create and grow these high-growth, high-tech businesses in more cities.
The second factor is economic. The world has just gone through the largest global reduction in poverty and concomitant expansion of the global middle class in history, and multi-national corporate giants are emanating from more countries, particularly in emerging markets. This has increased demand for many digital goods and services in more places, giving technologically-enabled entrepreneurs in more places a robust market to sell into.
The third factor is political. Many nations around the world are doing more than ever to compete on a global stage by improving their education systems and universities, investing more in research and development, and bending over backwards to welcome high-skilled foreigners and company founders. The United States, on the other hand, is sliding backwards on all of these fronts — and in our view, has become complacent with its long-held dominance as a monopoly for high-tech entrepreneurship.
What It Means for Leaders
These trends have important implications for entrepreneurs, investors, managers, and workers, as well as national and local policymakers across the world. For entrepreneurs, it’s fairly straightforward. The San Francisco Bay Area remains by far the leading location for venture activity and the most robust ecosystem for growing a high-tech startup by a long shot. However, many of the key resources found in The Valley are increasingly available in other places. Whether non-American founders can’t obtain a U.S. visa or choose to stay at home for other reasons, it will only get easier for them to do so while building their companies.
For investors and corporations, the big takeaway is this: You can no longer look only in your own backyard for startups, innovation, and the talent that power them. Venture capitalists, used to looking close to home, need to broaden their horizons and think, look, and act globally. Corporate managers, especially those in the United States, are used to strong local sources of innovation, but they too must increase their awareness of global innovation and startups as they look to as address competitive threats and capture new sources of innovation. Large established corporates may see opportunities in building globally disturbed teams. Techies and entrepreneurs around the world can count on greater opportunities in their home markets.
For global policymakers, the lesson is that globalization of high-tech entrepreneurship and venture capital mean greater competition across the board. For U.S. policymakers, they can no longer take its long-established lead in innovation and startups for granted. China is nipping at its heels and other nations are also gaining ground quickly. Sure, the US remains the dominant place by far, but it is time to stop doing counterproductive things like imposing immigration restrictions on highly-skilled individuals and founders with validated business ideas. Such actions chill the climate for global talent. For countries that are emerging on the global stage, it means continuing and even expanding on recent improvements in education, innovation, and immigration. For the world as a whole, having entrepreneurs and techies build companies where they are may eventually help to address the growing spatial inequality and winner-take-all dynamics that currently define the global geography high-tech startups.
Of course, innovation and entrepreneurship are local, not national, games. That means mayors and city leaders must take the lead. And it means nations should consider devolving responsibility for innovation and economic policy functions to the local level, especially as most countries will only have one or a few cities that can compete on a global stage. But it does not mean throwing government money at venture capital, which too many national and local governments tend to do. Instead it means investing in local universities and innovation, creating greater local density, and generating the kind of quality of local talent. And it also means working with the private sector not just to improve the preconditions required for innovation and startups, but to address the growing economic inequality and housing unaffordability that is causing a growing backlash against big tech in cities across the globe.