Worried about your competition? A piece of advice: Keep your eyes on cities abroad. 

High-growth startups cluster in urban areas. And urban areas around the globe--from Berlin to Mumbai to Tel Aviv--are rapidly gaining on U.S. cities when it comes to attracting venture capital, according to a new study by the Center for American Entrepreneurship, a nonpartisan organization that advocates for startups. The United States' share of global VC investment decreased from 95 percent in the early '90s to just over 50 percent today. And the decline is becoming more rapid. The country's share of global investment fell by about the same percentage over the past five years as in the previous two decades.

U.S. venture investments continue to break records, with businesses racking up more dollars during the first six months of 2018 than they did in six of the past 10 full years, according to PitchBook. But hot as things are here, elsewhere they are hotter. The U.S. accounted for less than half of VC investment growth from 2010 to 2017, according to the study. On a ranking of the top 20 cities for growth in VC deals, just two (Des Moines and Bozeman, Montana) are in the United States.

Most of the rest are in Asia, with Bangkok leading the pack with more than 600 percent growth. (Of course, most cities on the list started with relatively small baselines, so their contributions to global investment growth are less impressive. But they have the momentum.) China is gaining the quickest, with close to 25 percent of global investment.

When discussing entrepreneurship, it makes sense to look at the competitiveness of cities rather than just countries, says Ian Hathaway, research director at the CAE and co-author, with Richard Florida, of the report. "Knowledge-based activities like high-tech and software-driven innovation tend to be clustered [in cities]," Hathaway says. "Things like manufacturing, agriculture, and resource extraction are much less concentrated."

The report also identified "startup hubs"--metro regions with high numbers of VC deals, high dollar amounts of VC investments, and high growth on both measures. Encouragingly, four of the six "superstar" hubs are in the U.S. (the Bay Area, New York City, Los Angeles, and Boston). Below that elite tier, however, are 62 established startup hubs that represent about 75 percent of global deals and 90 percent of investments. Just 40 percent of the hubs at that tier are in the United States. And among emerging startup hubs, fewer than half are in the U.S.

What's driving the trend

Hathaway attributes this growing competitive heat to three factors. First, the internet is still on its everything-changing roll, enabling entrepreneurs around the globe to build products and reach customers inexpensively. Second, other countries are investing more both in R&D and in their university systems. "So other countries are doing things better," Hathaway says. "But number three is we are making some blunders."

Specifically, immigration policies that roll up--rather than roll out--the welcome mat for foreign talent discourage growth-minded entrepreneurs from other countries. The U.S. used to be easily the best option for getting funded and attracting skilled workers. "Now we are not," says Hathaway. "If founders have reasonable access to those things at home, then they would probably rather stay at home."

Hathaway vents his frustration that, after seven years kicking around Congress, legislation to create startup visas for foreign entrepreneurs with capital from U.S. investors is still not law. Such visas, as well as other enticements for entrepreneurs, are proliferating in other countries.

But all the news isn't woeful, he says. While the country's global share of VC investments is down, both dollars and deals are way up in absolute numbers. And a wider variety of U.S. cities are participating in the venture economy, with metro areas like Denver, Philadelphia, and Washington, D.C., among the top 10 percent of global hubs. The U.S. also claims a substantial majority of cities with the most deals and highest dollar investments per capita, representing the vibrancy of smaller university towns. In other countries, by contrast, "typically only one or maybe a couple of cities are participating," Hathaway points out.

China and India are exceptions. But China's strong showing also gets a boost from "mega deals" of $500 million or more. There were 80 mega deals between 2015 and 2017--up from eight between 2010 and 2012--and around 30 of those were in Beijing and Shanghai. 

Meanwhile the Bay Area, with 13.5 percent of global VC deals, remains the great white whale of venture funding. That's something Hathaway expects won't change anytime soon. "What made Silicon Valley great were the cultural dynamics of the time," Hathaway says. "I'm not convinced China and other parts of Asia have that down."

For U.S. founders, meanwhile, the silver lining is easier global expansion. "There is so much activity happening globally that employees in other countries are getting critical experience working in startups," Hathaway says. "It is not like you are starting from square one anymore."

Published on: Oct 5, 2018