Compass’s Global Startup Ecosystem Ranking on the top cities for startups offers clues about where the hot zones for entrepreneurs are developing – and why
Compass’s long anticipated 2015 Global Startup Ecosystem Ranking report was published on Monday, offering unique insights on the state of various startup sectors from across the world. Following a break of three years since Compass’s last ranking in 2012, when the company was called Startup Genome, the report lays out how the top 20 cities have built up their startup communities and rapidly expanded to reach new levels of growth. Unsurprisingly, Silicon Valley remains on top of the pile, holding on to its number one spot. However, this year’s list highlights a number of newcomers to the party and some significant shake-ups that refuse to be ignored.
Coming in at number 2 was New York City, knocking out Tel Aviv from the much-coveted spot down to number 5. Filling in the rest of the top 5 were Los Angeles and Boston, helping to keep the U.S. as the leader in the startup club.
New kids on the block
The fact that locals like Boston and LA have managed to take some of the top spots should come as no surprise. That said, it is worth taking a moment to look at the cities posting the most serious growth and figuring out what they are doing right to earn these positions.
Reporting the highest numbers in this ranking when it comes to full exit values was Berlin, which placed at #9. Considering Berlin experienced 20X growth between 2012 and 2014, Berlin would appear to be the clear winner in this round. But the truth is a little more complicated than that.
The massive IPOs of Rocket Internet and Zalando heavily offset the real value of the startups in Berlin. Moreover, these two companies have been criticized as basically being copies of American labels, thereby lacking that twist to make them really interesting. Funding there is still harder to achieve than in places like Silicon Valley and Tel Aviv, lowering the prospects for young companies to grow.
However, Berlin has a number of important factors going for it as well. Because it has remained relatively cheap to live in compared to places like Munich and Frankfurt, where much of Germany’s business is conducted, Berlin has become home to many of the young, creative characters that are an essential part of the startup ecosystem. Also, governmental efforts such as work visas for professionals and organizations like the Berlin Partner for Business and Technology have brought in a lot of needed technical talent to fill necessary positions and helped nurture this budding scene.
New York City has also stepped up in a big way in encouraging companies to breed the next generation of entrepreneurs with programs like START-UP NY, which offers zero taxes for 10 years for companies willing to work on or near campuses. Currently based in Chelsea, Cornell University has teamed up with Israel’s Technion to help push educational fields necessary for the startup sector. Bloomberg Philanthropies has also pledged $100 million to help them build their new campus on Roosevelt Island, showing serious confidence in the future of the project.
For its part, Tel Aviv remains a leader on the global startup stage, showing double growth in this timeframe. In a special Geektime report, the first half of 2015 brought in $1.64 billion in funding. This is 65% more than during the same period in 2014.
New criteria brings big changes
The ranking was based on five core measurements; funding, performance, market reach, talent, and startup experience. The publishers of the report have stated that this version is far more expansive than the previous one in 2012 in that included a much larger set of data. It is important to note as well that this round took into account factors such as the ecosystem value (the total valuation of startups from their funding events or exits), improved estimation of output (a better count of the number of startups in the local ecosystem), and perhaps most importantly, the exclusion of the ‘number of startups per capita,’ or the density of startups in the area.
One major drawback from the findings of this report was the glaring absence of a number of Asian powerhouses such as South Korea, Taiwan, China, and Taiwan. Compass explains that they were unable to properly research these countries due to a significant language barrier. While understandable from a capacity angle, it does place the overall findings of the report in question. Geektime strongly believes that if these countries had been included, they most likely would have kept smaller players like Amsterdam and Montreal off of the list.
The downgrading of Tel Aviv, which has led much of the global startup scene outside of Silicon Valley, can probably be attributed to three main factors. Once the startups per capita measurement was removed from the survey, the miniscule yet startup-rich Tel Aviv lost one of its strongest assets. Secondly, as can be seen in many of the reports published in Geektime, once many of the startups based in Tel Aviv succeed in raising a large Series A or B, they will quickly move to set up offices in the U.S. As noted in the report, “In the top 20 ecosystems, the number of offices that are 2nd offices from startups outside the ecosystem or headquarters of startups that were founded elsewhere and moved to the ecosystem, rose by 8.4X from 2012 to 2014.” More often than not, these offices are registered in New York City, thus boosting their competitors’ numbers in the financial capital of the world.
It seems that as long as companies outside of the United States feel the need to set up shop in the U.S., American cities will continue to climb in Compass’s and others’ startup city rankings.
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