Startup ecosystem report: China is rising while the US is waning

Startups are a gamble, but it’s possible to better understand why some thrive and many more die by looking at the ecosystems in which they operate. Such is the mission of eight-year-old Startup Genome, composed of a group of researchers and entrepreneurs who, every year, interview thousands of founders and investors around the world to get a better handle on what’s changing in the regions where they operate, and what remains stubbornly the same.

The larger objective is to figure out how to help more startups succeed, and the outfit — which this year surveyed 10,000 founders with the help of partners like Crunchbase and Dealroom — produced some data that should perhaps concern those in the U.S. To wit, China looks positioned to overtake U.S. dominance when it comes to numerous tech sectors. Consider: In 2014, just 14 percent of so-called unicorns were based in China. Between the start of last year through today, that percentage has shot up to 35 percent, while in the U.S., the number of homegrown unicorns has fallen from 61 percent to 41 percent of the overall global number.

You could argue that investors are simply assigning China-based startups overly lofty valuations, as happened here in the U.S., and we partly believe that to be true. But China is also clearly “in it to win it,” based on a look at patents, with four times as many AI-related applications and three times as many crypto- and blockchain-related patents registered in China last year. With so much of the tech industry now focused on deep tech, it’s worth noting. In fact, as much as we loathed the January Financial Times column penned by famed VC Michael Moritz, who suggested that U.S. companies follow China’s lead, his underlying call to arms was probably, gulp, prescient in its own way.

What else should startups know? According to Startup Genome’s findings, in addition to the rise of AI, blockchain and robotics manufacturing, there are clearly declining sub sectors, too, including, least surprisingly, adtech, which has seen a roughly 35 percent drop in funding over the last five years. No doubt that ties directly to the growing dominance of Facebook and Google, which accounted for 73 percent of all U.S. digital advertising last year, according to the equity research firm Pivotal.

That doesn’t mean adtech startups are cooked, notes the study’s authors. Rather, declining sub-sectors are often “mature” but can be revived by new technologies. In this case, while funding for adtech has dropped, virtual reality and augmented reality could well inject some new growth into the industry at some point. Maybe.

Either way, to us, the most interesting facets of this report — and it really is worth poring over — are the connections it’s able to make by talking with so many people around the world. It addresses, for example, how Stockholm, a relatively small startup ecosystem, is able to produce sizable startups at a meaningful rate, versus Chicago, whose ecosystem is ostensibly three times bigger. (The answer: Stockholm’s startup founders are apparently better connected to the world’s top seven ecosystems.)

Also quite interesting is the report’s findings about women founders, who build more relationships with regional founders and are more locally connected than their male counterparts — except with investors. That’s bad news for both women founders and investors, as local connectedness is associated with better startup performance.

To read the report in full, click over here. You have to fork over your email address, but with 240 pages filled with fascinating nuggets and other useful information, you’ll likely find it well worth it.

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