Energized by technologies such as mobile computing, which has made it cheaper and easier to launch companies, cities across the globe are desperate to become hotspots for nascent entrepreneurs.
The location of launch is fast becoming a key decision for the ballooning figure of business founders, many of whom are now launching straight out of formal education, as this series will explore.
Jeff Skinner, executive director at the Deloitte Institute of Innovation and Entrepreneurship at London Business School, says cities create markets for the resources that businesses need, like employees, facilities, professional services and finance — dramatically lowering the cost of launching a venture.
“They create liquid networks of people and ideas, and this cross-fertilisation enables the rapid creation and testing of new business ideas,” he says.
Potential hubs from Berlin to Stockholm are vying to be the next big entrepreneurial centre.
But this has raised the question of whether second tier cities can rise to global success, and whether they can hold onto their start-ups or lose them to larger metropolises such as London and New York.
“Businesses move out when it gets too expensive, when the advantages of being in a cluster begin to disappear, or when the resources they need, such as money and access to markets, are better elsewhere,” Jeff says.
San Francisco’s Silicon Valley is seen as the ultimate start-up cluster, a mixture of old and new businesses striving to innovate, often with disruptive technologies.
Thomas Charlberg, co-founder and chief of executive of San Francisco based Avalanche Biotechnologies, a Nasdaq listed biotech start-up, says that all the pieces of an entrepreneurial ecosystem are in the Bay Area — such as talent, lawyers, bankers and investors.
“The degree of innovation and entrepreneurship in Silicon Valley is dizzying,” Thomas says. He graduated from California’s Haas School of Business in 2011, a year after launching Avalanche. Classes rotated between campuses in Berkeley and Silicon Valley. “You learn so much in business school — negotiations, strategy, organizational behaviour — that as a CEO you continue to draw from,” Thomas says.
Yet two-thirds of tech start-ups that have gained a $1bn valuation in the past decade — so called “unicorns” — come from outside Silicon Valley, according to research by Atomico, the venture capital group led by Skype co-founder Niklas Zennström.
“This is the best time in history to be a technology entrepreneur in Europe, or indeed outside Silicon Valley,” Niklas says.
Silicon Valley has produced 63 unicorns, but is followed by Beijing (23), New York (11), London (7), Stockholm (5) and Berlin (5).
In the US, New York’s tech scene in particular has expanded rapidly, while cities such as Austin in Texas are developing promising start-up clusters. William Peregoy, a graduate of Hult International Business School and founder of DineMob, a Dallas based app that helps restaurants fill during off-peak hours, says the Texas start-up scene is growing fast.
“People may not think of Dallas when they think of startups — but big startups do come out of Dallas,” he says. These include Broadcast.com, the television site founded by Mark Cuban, which was acquired by Yahoo for $5.7 billion, and cloud computing group Softlayer, recently bought by IBM for $2 billion.
In Asia, Beijing, Shanghai, Tokyo and Bangalore have seen rapid growth in venture capital deals, while Singapore also has a growing start-up sector.
Shouvik Dhar, an Indian School of Business graduate and co-founder of Bangalore based Creatist, a patented, cloud-based tool to create and measure interactive content, says India has a vibrant entrepreneurial scene.
“India is a huge market that is on the cusp of opening up to innovation,” he says. He launched the venture in 2013 with minimal investment and says that even now operations are low cost.
Professor Rama Velamuri, chair of the Strategy and Entrepreneurship Department at China Europe International Business School in Beijing, says technology has made it cheaper to found companies, and most entrepreneurs in the industry “bootstrap” their initial capital requirements.
“Technology sectors rely much more on knowledge and the capacity for hard work than they do on capital or social networks,” he says.
To succeed, start-up clusters need an ecosystem which includes finance, talent, support structures such as co-working spaces, and services such as legal advice. Venture capital flows more freely into the European start-up scene, much of it from the US, but it remains below levels of funding available in Silicon Valley.
“Seed money is abundant here,” says Simon Stockley, senior teaching faculty in entrepreneurship at the UK’s Cambridge Judge Business School. “But the real issue is growth capital,” he says.
However, this has not stopped several recent eye catching funding rounds. These include by ventures Farfetch, the luxury online fashion group, which raised $86 million based on a valuation of £1 billion; and London fintech start-up WorldRemit, which raised $100 million at a valuation of $500 million.
“There is an abundance of world-class talent in the city, and the convenient time zone which enables communication with Asia and the Americas in same working day, is an attractive factor,” says Ismail Ahmed, CEO of WorldRemit and a graduate of London Business School (LBS).
The education sector has been keen to help hone cities’ entrepreneurial ecosystems.
“People tend to stay, start business and then feed back into the ecosystem,” says Cambridge Judge’s Simon. Cambridge University counts among its successes Autonomy, the software group, which was controversially acquired by Hewlett-Packard for $11 billion; and biotech company Solexa, which was sold to Illumina for $600 million.
“There is the buzz of the peer network, everyone wanting to be seen as successful by other entrepreneurs in the community,” says LBS’ Jeff. He believes that more businesses will stick around in London as financial markets begin to see the potential of larger investment rounds.
But if cities do not court their entrepreneurs, they risk losing them to more attractive start-up clusters.
Alexander Afanasyev, founder of Moscow based design start-up YDCollective, and an IE Business School graduate, says setting up a company in the Russian city was like “dating a prom queen”.
“You have to rely on no specific set of rules or regulations, but on a rather holistic approach to every business issue, and personal networking,” he says. In Russia, he says, “failure is not an option”.
Artem Andrianov, co-founder of Cyntegrity, a start-up in Frankfurt that offers risk-based monitoring services for clinical trials, and is backed by Commerzbank, says the Germany city’s start-up scene cannot yet be described as “healthy”.
“For many years German businesses have been developing slowly and, consequently, have been reluctant to take risks and innovate,” says Artem, a graduate of Cass Business School. “The absence of tolerance of business failure makes many people refuse to try their ideas.”
He says, however, that an MBA in London allowed him to observe many young people taking risks to succeed with their own start-ups. “After graduation, I was not scared to start a venture.”