America Is Losing Its Edge for Startups

Lately, there’s been talk of a shift in innovation and high-tech startups from expensive, increasingly unaffordable hubs like Silicon Valley to more affordable, up-and-coming locales such as Pittsburgh, Detroit, Cincinnati, and Nashville. I’m all for it: Having spent nearly two decades in Pittsburgh at Carnegie Mellon University, I have long been a fan of the incredible innovation capacity and entrepreneurial potential of that great city.But according to new data I analyzed with my colleague and collaborator Ian Hathaway (a leading expert in entrepreneurship and venture capital), the more troubling reality for the United States is that an even bigger “rise of the rest” is occurring in cities in Asia, Europe, and elsewhere in the world. Our report released on Friday compiles the most detailed data yet on global startup cities, tracking venture-capital investment in nations and cities around the world. Using data from PitchBook, a leading source of information on venture-capital investment, it tracks that investment in more than 100,000 startup companies in 300-plus global cities over the period 2005 to 2017.

Up until very recently, the U.S. was far and away the dominant player in high technology backed by venture capital. Game-changing companies like Intel, Apple, Microsoft, Google, Genentech, Amazon, Facebook, Twitter, Netflix, Uber, Airbnb, and WeWork are just a few well-known examples of venture-backed companies that have introduced new technologies and spurred the rise of whole new industries.But America’s long-standing lead in VC-backed high tech is now in jeopardy, according to our analysis. About two-and-a-half decades ago, the U.S. was home to more than 95 percent of global startup and venture-capital activity. Today, that share has been cut to a little more than one-half. And the pace of that decline is accelerating, with more than half of the fall occurring in just the past five years.While it is true that venture-capital investment in the U.S. continues to rise, having reached more than $90 billion in 2017, such investment is growing even faster in other parts of the world, expanding by nearly 375 percent—more than twice the 160-percent increase here. China saw the largest jump, its share expanding from 4 percent of global venture investment in 2005 to a nearly a quarter of it by 2017. But it’s more than China. Nations including India, Singapore, Japan, the United Kingdom, Germany, France, Sweden, Israel, and Canada have all seen substantial increases in venture-capital investment in their startup companies.When it comes to high-tech innovation and startups, the real action happens in tight clusters of activity within cities and urban centers. And here, the relative decline of the U.S. and the rise of the global rest is, if anything, even more palpable. The San Francisco Bay Area remains the world’s leading startup city, with roughly 20 percent of global VC investment. But a growing number of global cities are gaining ground, and quickly.

Beijing and London have joined the Bay Area, New York, and Los Angeles in the club of what Hathaway and I term Superstar startup cities. In our second tier, Elite hubs, Shanghai, Singapore, Bangalore, Delhi, Mumbai, Berlin, Paris, and Stockholm join Austin, Seattle, San Diego, and Chicago. And in the third tier, Advanced global startup cities, Toronto, Sydney, Dublin, Barcelona, Amsterdam, and Hong Kong join Raleigh-Durham, Miami, Denver, and D.C.

Of America’s rise-of-the-rest cities, only two or three—Pittsburgh, Baltimore, and Minneapolis—make the list of the world’s 60 or so established startup cities. The majority of them, such as Nashville, Detroit, Indianapolis, Columbus, and Cincinnati, are part of a separate group of 40 or so emerging tech hubs, alongside smaller U.S. college towns like Ann Arbor, Madison, and Bozeman, and rapidly growing Asian hubs like Bangkok, Ho Chi Minh City, Calcutta, and Manila.Ultimately, the global geography of startup cities remains incredibly clustered, concentrated, and spiky. Just the top six—San Francisco and nearby Silicon Valley, New York, Boston, Beijing, and Shanghai—attract more than half of all venture-capital investment, despite being home to only 1 percent of the global population. And just four of those cities—San Francisco, New York, Beijing, and Shanghai—accounted for half of the global increase in VC investment in the past half-decade.The pattern is clear: The rise of the rest is occurring, and it is mainly occurring in cities outside the United States. Across the world, innovators and entrepreneurs are increasingly realizing that they no longer have to come to Silicon Valley or elsewhere in the U.S. to launch their startup, and they are more often starting their new companies at home.As Hathaway and I outlined in the Wall Street Journal this past weekend, part of the reason is that other nations and global cities have gotten wise to America’s long-term advantage and increased their investments in universities and R&D; made their cities denser and more attractive; and worked hard to retain their talent at home and opened their borders to global talent. The eroding advantage of the U.S. is partly self-inflicted, because it has clamped down on immigration and become far less open to foreign entrepreneurs and innovators.The U.S. still accounts for roughly half of all venture-capital investment in high-tech startups. But if the trend continues as it has, it is more likely than ever that the next game-changing innovation will be launched not in Silicon Valley, Boston, Seattle, or New York, but in Shanghai, Bangalore, London, Berlin, or Tel Aviv.