We’re Calling It: Startups Have Ended the Industrial Era
Write-downs notwithstanding, startups are now the net job creators, making it crucial for governments to adapt to the disruption.

The world’s economic map is being redrawn. Industries dominant since the 19th century with support from government institutions and political alliances are now a drag on the global economy. Meanwhile, tech startups — disregarded by many of the bureaucracies and political offices that perpetuated the old industrial order — are creating growth.

In this new epoch, cities, countries, and entire regions have the opportunity to advance economically by creating the conditions that attract information and communications technology talent and the investors willing to fund them. Outcomes are no longer determined by factors such as access to natural resources, military power, and international treaties.

Instead, economies are increasingly influenced by advances in processing speeds, storage capacity, and connectivity, which have spurred the migration of the enterprise onto cloud-based platforms developed by startups.

Reflecting this trend, technology mergers and acquisitions announced in 2015 reached a record high of $313 billion, up 82% compared to the $171.6 billion announced in 2014, VentureBeat reported recently, citing a PriceWaterhouseCoopers report.

And according to the 2015 Global Startup Ecosystem Report by Compass, a significant portion of U.S. job and economic growth in the past 15 years has come from high-growth technology companies such as Apple, Amazon, Facebook, and Zynga. These companies barely existed two decades ago and yet the nine largest tech companies have created almost a trillion dollars in new wealth.

Net New Job Growth

Companies in the startup space are disrupting and outperforming traditional industries — think Airbnb versus the hotel industry. A 2010 study by the Kauffman Foundation illustrates the economic importance of startups best: In the 28-year period ended in 2005, startups created the only net new job growth in the U.S. while “industrial era” companies collectively shed jobs. And the number of billion-dollar-plus tech companies have only multiplied in the years since the Kauffman study, further underscoring the shift in the balance of power towards startups.

Most importantly, young workers are embracing the new tech startup paradigm.

Smarting from years of diminished long-term and permanent employment prospects, millennials — who will drive economic growth in the first half of this century — are being both pushed and pulled into joining or founding these mini-factories of industrial disruption.

As a result, 32% of self-employed millennials are running startups, versus just 9% of boomers, according to a recent report by Global Risk Insights.

To be sure, confidence about startup prospects might waver amid recent write-downs and “down rounds.” However, few industry pundits are calling the volatility a repeat of the dot.com collapse of 2000. Mark Suster, managing partner at Upfront Ventures, calls what’s currently happening with valuations “a reversion to the mean.”

“The valuations were high; they’ve come back to the historical norm, so we could call that failure or we could just say that companies were overvalued for the past two years,” Suster said in an interview with TechCrunch.

Given the degree to which most people spend their lives online, the current correction might just make the startup ecosystem healthier because it’s making valuations more realistic.

Although Silicon Valley still dominates, burgeoning pockets of innovation are rising up globally and making their mark on the economies they operate within. Governments can choose to support or restrain their growth, but as processing capabilities speed up, smart devices proliferate, and connectivity continues to expand into all of the things people interact with, the latter choice becomes increasingly difficult to sustain.

Below are a few examples of tech ecosystems cited in the Compass report, and their economic impact.

Singapore (#10)

Jumping 7 spots from the 2012 rankings, Singapore’s tech ecosystem has experienced a meteoric rise. With its eyes set on becoming the world’s first ‘Smart Nation,’ tech startups are an integral component of the city-state’s long-term economic plans. This tech ecosystem is an excellent example of how risk aversion can serve as a competitive advantage. Rather than take a reactionary stance, Singapore-based multinational corporations (MNCs) are investing in their own disruption by seeking out startups, incubators and accelerators to fund, in order to minimize the risk of being displaced by younger, leaner competitors in the future. Risk aversion also underlies the government’s $1 billion Technopreneurship Investment Fund, which offers up to $2 million in funding to individual tech startups, and also shoulders some of the upfront costs associated with launching a tech startup. As a result, MNCs and Singapore’s government are redistributing risk within the tech ecosystem and shifting the burden from startups, creating a scenario in which risk is reduced for stakeholders, while potential gains remain high. The program not only bolsters homegrown startups, it is also attracting foreign entrepreneurs.

Singapore is also one of the 12 countries participating in the Trans-Pacific Partnership, a free-trade zone similar to NAFTA. These 12 economies have a combined GDP of $28.5 trillion, which accounts for nearly 40% of global GDP. Free trade with countries that have other powerful tech ecosystems such as Silicon Valley, Sydney, and Toronto could help bolster an already strong economy through perks such as the reduction or elimination of tariffs. By having greater access to North American markets, Singapore will also gain an edge over its biggest competitor, China.

Berlin (#9)

No other tech ecosystem has experienced more growth in the past two years than Berlin. Earning a 10 out of 10, Berlin’s growth index is now double that of its closest contender, Bangalore (4.9), and almost 5 times greater than Silicon Valley. Its stand-out growth can be attributed to a rise in exits, VC funding, and the notable back-to-back $6 billion IPOs of Zalando and Rocket Internet, which kicked Berlin’s tech ecosystem into high gear. High-valued exits aren’t the only signals of growth. According to a McKinsey & Company report, Berlin could gain 100,000 jobs between 2010 and 2020 as a result of initiatives focused on strengthening the local startup scene. Furthermore, the German Patent and Trade Mark Office received almost 66,000 patent applications in 2014 alone, a good indication that the city is thriving as an innovation hub.

Having signed a recent partnership with Tel Aviv — another highly-rated tech ecosystem — Berlin shows no signs of slowing down. The city’s startups will gain access to mentorships, coworking spaces, networking events, and more in Tel Aviv, exposing them to greater learning opportunities and allowing them to expand their market reach outside of Germany. The value and economic impact of the partnership will reveal itself in the next few years, and should contribute to Berlin’s continued upward climb.

Tel Aviv (#5)

Berlin’s tech ecosystem partner ranks at number 5, making Tel Aviv the top tech ecosystem outside of the U.S. Tel Aviv’s lead talent is molded by higher education, and military conscription which instills discipline and a sense of camaraderie, while also providing future entrepreneurs with opportunities to connect and collaborate. Combined with the availability of VC funding, these factors contribute to Tel Aviv’s entrepreneurial success. With an estimated 3,100 to 4,200 active tech startups, the city’s density allows for greater collisions and benefits from the cluster effect. Connected and experienced, its startups attract more foreign capital than any other European tech ecosystem (38% more than the European average). And its economic impact extends far beyond Israel; Tel Aviv startups rank first in Global Market Reach, having twice the percentage of foreign customers as Silicon Valley.

Tel Aviv is poised for greater economic success as growth in big data, IoT, cybersecurity, and digital currency accelerates.

Montreal (#20)

New to the list, Montreal has made considerable headway in positioning itself as a tech ecosystem worthy of global attention. The 2015 Global Startup Ecosystem Report ranks Montreal startups third in Global Market Reach, with a 57% foreign customer base (35% above the North American average) and an average number of product languages of 2.4 (24% above the North American average). This tight-knit startup community has experienced steady increases in success. ICT companies like Amaya Inc. and Budge Studios, have five-year growth rates of close to 3,650% and 2,500% respectively. High growth rates tend to be accompanied by hiring sprees, and Montreal startups have the added benefit of access to the most inexpensive tech talent amongst the top 20 tech ecosystems. Montreal’s gains on this front are crucial for Canada, which has been economically hamstrung by weak oil prices over the past two years. The fact that Montreal’s Series A funding is 11% higher than any other tech ecosystem only helps.

Alhough it’s a relatively young innovation hub, Montreal’s talent is making the most of what the city has to offer. When large tech companies like Ubisoft set up satellite offices in Montreal, they provide a springboard for talent who can also use that experience to launch their own companies, increasing Montreal’s contribution to Canada’s GDP.

Lead or Lag

As power continues to shift in this tech-driven epoch, it is the success of startups, not established companies, that will support and grow economies. How governments and private industries invest in startups will determine future GDP, international competitiveness, and whether or not they lead or lag on the global economic stage. 

 

 

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