Thirty per cent of the world’s top startup ecosystems are now in Southeast Asia, compared to 20 per cent in 2012, finds a Startup Genome study.
Of the 11 new ecosystems that made it to the top ecosystems list, six are from the region.
The findings are from Startup Genome’s Global Startup Ecosystem Report (#GSER2020).
As per this research, the 2020 rankings have seen the growth of many R&D powerhouses (those ecosystems growing largely building upon their strengths on research and patent production). Tokyo and Seoul are the prime examples of this, with both ecosystems scoring the maximum in the knowledge factor, a measure of R&D activity.
Tokyo (#15) and Seoul (#20) have also made it to the top 20 ecosystems list, displacing Bangalore (which fell primarily due to low levels of funding) and San Diego.
In addition to Tokyo and Seoul, new entrants among the top 30 include Shenzhen (the advanced manufacturing hub, at #22), Hangzhou (home to Alibaba, at #28), and São Paulo (#30, returning to the top ecosystems list after falling off in 2017).
Other key findings
● In 2020, the State of the Global Startup Economy can be seen through two main angles: the calm before the storm, up to December 2019, and then the consequences of the COVID-19-triggered crisis.
● Until December 2019, things generally looked positive for startups globally. Startup Genome analysed companies in the billion-dollar-club, with exits or private companies in technology with over US$1 billion in valuation. In 2013, only four ecosystems produced unicorns or billion-dollar exits. Today, a cumulative 85 ecosystems have produced companies unicorns or had billion-dollar exits, astoundingly.
● As the COVID-19 crisis hit across the world, startups have found themselves in a double bind, being hit hard from two main shockwaves: capital shock and demand.
● Four out of every 10 startups today are in the Red Zone: they have three months or fewer of capital runway. This means that they will collapse if they do not raise additional capital and their revenues and expenses remain unchanged, risking a mass extinction event for startups globally.
● The fundraising process has been dramatically disrupted. Even for startups that already had term sheets from investors before the crisis, signed or unsigned, three out of every four startups have had the fundraising process disrupted. A dramatic 18 per cent of those startups with term sheets have had a funding round cancelled by the investor, and 54 per cent have had their funding round delayed or the lead investor become unresponsive.
● Total VC funding has dropped dramatically across every single continent. Globally, it is down by 20 per cent in the three months of 2020. In some regions of the world it dropped even more sharply. China, the first country hit by the crisis, had funding drop by over 50 per cent relative to the rest of the world, as we have written for the World Economic Forum. While the country is experiencing a rebound in investments in March, it still faces lower activity than it had in December 2019.
● About 72 per cent of startups saw their revenue drop since the beginning of the crisis, with the average startup experiencing a decline of 32 per cent. Shockingly, almost 40 per cent of companies of the companies saw their revenue drop by 40 per cent or more, and only about 12 per cent are experiencing significant growth.
● Over 60 per cent of startups have laid off employees or reduced salaries. For startups reducing full-time equivalents (FTEs), an average of 33 per cent of jobs were cut, as the Startup Genome COVID-19 Impact Insights survey shows. This is also reflected in crowdsourced data about startup layoffs globally, with the number of employees laid off identified in these crowdsourced lists growing 5x between March and May 2020.
● 71 per cent of startups have reduced their expenses, with an average cost cutting of 22 per cent. The combination of drop in expenditures, salary cuts, and layoffs have downstream effects for the rest of society, not just today but also tomorrow’s potential for economic growth and innovation capacity.
● However, the news is not all gloomy: Every crisis creates opportunities, and this crisis is no different. For instance, over half of Fortune 500 companies started during a contraction. Over 50 unicorns were created in the Great Recession alone, as Startup Genome data shows. The list of companies funded during the Great Recession is impressive. It includes Facebook, LinkedIn, Palantir, and Dropbox — all of these based in the Bay Area. This shows the need for funding startups during down periods.
● Startups need help now and if policymakers don’t work to support them, the economic effects will be dire. Global venture capital funding has dropped roughly 20 per cent since the onset of the pandemic in December 2019, creating ripple effects throughout startup ecosystems.
● Governments stand to make money by injecting at least six months worth of cash into technology startups. Even with a negative 10 per cent return on equity, the cost per job saved is 41 per cent lower for startups than for small and medium businesses (SMBs), respectively costing US$14,766 or US$24,928 per job saved. It simply costs less to save a job in a startup than elsewhere.
● Startups not only are a good engine for jobs, but without startups, there’s less innovation at larger corporations and at SMBs.
● Governments around the world are taking actions to help businesses during COVID-19, but they aren’t doing enough to assist startups. Government relief programmes typically have strict eligibility rules and emphasise companies with revenue, profitability, and collateral. But this leaves a lot of startups out in the cold.
● 43 per cent of startups globally are not receiving assistance and/or do not expect to be helped by national or local government relief measures.
● The first major goal of governments should be to inject capital quickly to save at least 80 per cent of startups that are at risk of folding in 2020. The second goal should be to inject capital to increase the rate of new seed and Series A investments over the next two years, to ensure these types of investments do not drop as dramatically as they did during the 2008 recession.
● With startups struggling to generate demand they had before the COVID-19 crisis, policymakers can step into help with the development of government-led innovation procurement programs. Startups can help with addressing problems rising from the COVID-19 crisis especially startups in healthcare, social services, and online services.
This article was first published on e27, on Jun. 26, 2020.