American cities still have the edge when it comes to high-tech startups and venture capital, but other parts of the world are rapidly catching up.

The central business district in Beijing, one of the world’s emerging tech hubs Ng Han Guan/AP

We hear a lot these days about the so-called “rise of the rest”—the ascent of second-tier American cities such as Pittsburgh, St. Louis, Detroit, and Nashville as challengers to the established tech capitals of the Bay Area, New York, Boston, and Seattle. But the reality is that the rise of the rest is happening mainly in cities outside of the United States.

That’s the key takeaway from the 2018 edition of the Global Startup Ecosystem Report from Startup Genome. The report charts the rise of vibrant startup ecosystems in Europe, Canada, and especially China. It also describes which cities and countries are leading the way in the fastest-growing sub-sectors of the tech industry, including artificial intelligence, blockchain, and robotics. The report includes data on more than 1 million companies in nearly 100 ecosystems, and examines capitalization, founders’ biographies, and a company’s connectedness with the greater ecosystem, among other factors.

The graph from the report below shows the concentration of venture capital in startups across the major regions of the world: the U.S., Europe, Asia-Pacific, Canada and the Americas (excluding the U.S.), and Africa.

Venture capital funding by region (Startup Genome)

The U.S. remains the world’s leading center for venture capital investment in startups. But look at the trend from 2012-13 to 2016-17.  The U.S. share of total venture capital investment has declined from roughly 70 percent in 2012 to slightly more than 40 percent in 2017. Meanwhile, the Asia-Pacific region has seen tremendous growth in VC funding, increasing its share from about 14 percent to nearly 40 percent. In fact, in 2017, the U.S. and the Asia-Pacific region were perfectly even on this metric, each accounting for 42 percent of the global share (the graph shows two-year intervals).

Much of the growth in venture capital investment in the Asia-Pacific region has taken place in China, which now has 35 percent of the globe’s “unicorns” (privately held startups worth a billion dollars or more), up from 14 percent in 2014. The U.S. share of such standout companies has decreased from roughly 60 percent to 40 percent over that period. It’s worth pointing out here that in my own research on global venture capital data from a few years back, I found that China has a sizable number of very large investments in excess of $500 million, which are hard to justify as traditional startup venture capital and skew its figures upward. (I excluded those investments from my data.)

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Still, there’s no denying China’s increasing tech dominance. A recent analysis from the Wall Street Journal corroborates the findings of the Global Startup Ecosystem Report: In 2017, Asian investors (led by China) accounted for 40 percent of global venture capital funding, compared to just 5 percent 10 years ago. The growth of VC investment in China is driving unprecedented worldwide growth in tech startups. Global startup activity created $2.3 trillion in value between 2015 and 2017, up more than 25 percent from the period of 2014 to 2016. And while most Chinese venture capital flows to Chinese startups, investors are increasingly looking to fund companies abroad, particularly elsewhere in Asia, the Journal notes.

All of this new money is not flowing to the same types of companies as it would have just a few years ago. We are entering a “third wave” of venture capital funding in tech companies, according to the Startup Ecosystem report. The first wave of tech startups were the original gateways to the internet, like AOL and Netscape; the second wave consisted of social media companies like Facebook and Twitter. The third wave, according to the report, will be defined by  sophisticated “deep tech” firms, specializing in fields such as artificial intelligence and blockchain, as well as companies that solve real-world problems like Uber and Airbnb. Increasingly, the city itself is becoming a platform for innovation and startup companies (something I’ll be writing more about in the future).

Growing, mature, and declining sub-sectors of the tech industry (Startup Genome)

The report digs into the geography of startup ecosystems across 13 major fields of technology, or sub-sectors, showing a wide range of growth. The most promising sectors are artificial intelligence and big data, blockchain, robotics and advanced manufacturing, and agricultural and food tech. Mature sectors like biotech, fintech (financial technology), edtech (educational technology), and clean tech have seen their growth remain steady. A set of declining sectors such as digital media, gaming, and ad tech (advertising technology) saw declines in venture capital funding growth.

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The following maps from the report show the changing geography of startup ecosystems and venture capital investment across the top sub-sectors in the tech industry.

Artificial intelligence hubs (Startup Genome)

Take a look at the map for artificial intelligence, above, which many experts believe will reshape industry after industry and the economy as a whole. The Bay Area (which remains the leader), Seattle, Boston, Chicago, Houston, and Miami are all key centers of AI. But so are Toronto-Waterloo, Montreal, Ottawa, and Edmonton; London, Frankfurt, Istanbul, Moscow, and Helsinki; and Beijing, Shenzhen, Kuala Lumpur, and Taipei.

Blockchain hubs (Startup Genome)

There are fewer blockchain ecosystems, and the majority are concentrated in Europe—and in some rather surprising places, including Malta and Gibraltar. Financial centers including Beijing, Singapore, Tel Aviv, and New York are also major blockchain hubs.

Advanced manufacturing and robotics hubs (Startup Genome)

Traditional North American tech centers make up the biggest cluster of advanced manufacturing and robotics hubs. Many of these cities host leading research universities that are pioneering these new technologies. In addition to two major German cities, the rest of the hubs in this category are in Asia, where a great deal of the world’s manufacturing takes place. The report singles out Shenzhen as the “Silicon Valley of Hardware,” where many advanced manufacturing technologies are being developed.

While San Francisco and New York remain the world’s dominant startup ecosystems, and U.S. tech hubs like Boston and Seattle have significant advantages in two or more key technology fields, a large number of cities outside America host burgeoning startup ecosystems, such as Toronto, Montreal and Vancouver in Canada; London, Berlin, and Israel in Europe and the Middle East; and Beijing, Shenzhen, Singapore and Taipei in Asia.

The U.S. remains the world’s leading high-tech nation, but that increasingly rests on a narrow group of cities. There is little evidence of any rise in tech centers across the rest of America. But the rest is clearly rising in many other parts of the world, partly as a result of the exclusionary and anti-innovation polices of the Trump administration, and partly because of the conscious efforts of cities outside the U.S. to become more competitive as tech ecosystems. The rise of the rest of the world is the biggest challenge to America’s industrial dominance in decades.

 

This feature is written by Richard Florida & originally appeared in CityLab.

 

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