Study says the US is quickly losing its entrepreneurial edge

According to a new study conducted by the Center for American Entrepreneurship and NYU’s Shack Institute of Real Estate, the US may be losing its competitive advantage as the dominant nucleus of the startup and venture capital universe.  The analysis, led by senior Brookings Institution fellow Ian Hathaway and “Rise of the Creative Class” author Richard Florida, examines the flow […]

Photographer: Daro Sulakauri/Bloomberg

According to a new study conducted by the Center for American Entrepreneurship and NYU’s Shack Institute of Real Estate, the US may be losing its competitive advantage as the dominant nucleus of the startup and venture capital universe. 

The analysis, led by senior Brookings Institution fellow Ian Hathaway and “Rise of the Creative Class” author Richard Florida, examines the flow of venture capital over 100,000 deals from 2005 to 2017 and details how the historically US-centric practice of venture capital has become a global phenomenon.

While the US still appears to produce the largest amount of venture activity in the world, America’s share of the global pie is falling dramatically and doing so quickly.

In the mid-90s, the US accounted for more than 95% of global venture capital investment.  By 2012, this number had fallen to 70%. At the end of 2017, the US share of total venture investment had fallen to just 50%.   

Over the last decade, non-US countries have propelled growth in the global startup and venture economy, which has swelled from $50 billion to over $170 billion in size.  In particular, China, India and the UK now account for a third of global venture deal count and dollars – 2-3x the share held ten years ago.  And with VC dollars increasingly circulating into modernizing Asia-Pac and European cities, the researchers found that the erosion in the US share of venture capital is trending in the wrong direction.

Growth of global startup cities and the myth of the American “rise of the rest”

We’ve spent the summer discussing the notion of Silicon Valley reaching its parabolic peak – Observing the “rise of the rest” across smaller American tech hubs.  In reality, the data reveals a “rise in the rest of the world”, with startup ecosystems outside the US growing at a faster pace than most US hubs.

The Bay Area remains the world’s preeminent beneficiary of VC investment, and New York, Los Angeles, and Boston all find themselves in the top ten cities contributing to global venture growth.  However, only six of the top 20 cities are located in the US, while 14 are in Asia or Europe.  At the individual level, only two American cities crack the top 20 fastest growing startup hubs.  

Still, the authors found the bulk of VC activity remains highly concentrated in a small number of incumbent startup cities. More than 50% of all global venture capital deployed can be attributed to only six cities and half of the growth in VC activity over the last five years can be attributed to just four cities.  Despite the growing number of ecosystems playing a role in venture decisions, the dominant incumbent startup hubs hold a firm grip on the majority of capital deployed.

China and the surge of mega deals

Unsurprisingly, the largest contributor to the globalization of venture capital and the slimming share of the US is the rapid escalation of China’s startup ecosystem.

In the last three years, China has captured nearly a fourth of total VC investment.  Since 2010, Beijing contributed more to VC deployment growth than any other city, while three other Chinese cities (Shanghai, Hangzhou, Shenzhen) fell in the top 15. 

A major part of China’s ascension can be tied to the idiosyncratic rise of late-stage “mega deals”, which the study defines as $500 million or more in size.  Once an extremely rare occurrence, mega deals now make up a significant portion of all venture dollars deployed.  From 2005-2007, only two mega deals took place.  From 2010-2012, eight of such deals took place.  From 2015-2017, there were 80 global mega deals, representing a fifth of the total venture capital activity.  Chinese cities accounted for half of all mega deal investment over the same period.

The good, the bad, and the uncertain

It’s not all bad for the US, with the study highlighting continued ecosystem growth in established US hubs and leading roles for non-valley markets in NY, LA, and Boston.

And the globalization of the startup and venture economy is by no means a “bad thing”.  In fact, access to capital, the spread of entrepreneurial spirit, and stronger global economic development and prosperity is almost unquestionably a “good thing.”

However, the US’ share of venture-backed startups is falling, and the US losing its competitive advantage in the startup and venture capital market could have major implications for its future as a global economic leader.  Five of the six largest US companies were previously venture-backed startups and now provide a combined value of around $4 trillion. 

The intense competition for talent marks another major challenge for the US who has historically been a huge beneficiary of foreign-born entrepreneurs.  With the rise of local ecosystems across the globe, entrepreneurs no longer have to flock to the US to build their companies or have access to venture capital.  The problem attracting entrepreneurs is compounded by notoriously unfriendly US visa policies – not to mention recent harsh rhetoric and tension over immigration that make the US a less attractive destination for skilled immigrants.  

At a recent speaking event, Florida stated he believed the US’ fading competitive advantage was a greater threat to American economic power than previous collapses seen in the steel and auto industries.  A sentiment echoed by Techstars co-founder Brad Feld, who in the report’s forward states, “government leaders should read this report with alarm.”

It remains to be seen whether the train has left the station or if the US can hold on to its position as the world’s venture leader.  What is clear is that Silicon Valley is no longer the center of the universe and the geography of the startup and venture capital world is changing.

The Rise of the Global Startup City: The New Map of Entrepreneurship and Venture Capital tries to illustrate these tectonic shifts and identifies tiers of global startup cities based on size, growth and balance of VC deals and investments.

Investors are waking up to the emotional struggle of startup founders

Mahendra Ramsinghani Contributor Mahendra Ramsinghani is the founder of Secure Octane, a Silicon Valley-based cybersecurity seed fund. More posts by this contributor Lessons from cybersecurity exits Is Symantec getting ready to buy Splunk? As the Gartner Hype Curve goes, from the peak of inflated expectations to the trough of disillusionment, so goes the founder’s emotional […]

As the Gartner Hype Curve goes, from the peak of inflated expectations to the trough of disillusionment, so goes the founder’s emotional journey.

Most founders hit the trough sooner or later, the proverbial nadir of their startup life.

The company’s business model undergoes the dreaded pivot. Teams dissipate and the foundation starts to fall apart. Startups die. Investors cut their losses and move on to the rosier pastures of their portfolio.

And what is often left is a depressed broken founder, dealing with the consequences of ‘crushing it’. But too often, its the founders psyche that gets crushed. Not much can be done about it but that’s changing.

Gartner Hype Curve: No emotional support needed

Several venture capitalists have now stepped in to address this challenge. The Felicis Ventures pledge to set 1% of investments aside to support founders development is a start. Brad Feld has been writing about his journey for years. Former investor Jerry Colonna founded Reboot to find a way to help founders establish their own path of radical self inquiry.

When I reached Jerry to discuss founders emotional challenges, he invoked the compassionate kindness of a zen monk who has been dealing with wayward children for way too long. “A lot can be done but we need to start with changing the language around this subject,” he said.

From depression to dark angels

A prominent VC told me that “we are a blend of the dark and the light’ and we need to respect both parts. I was not quite sure what he meant till I dug around and found the works of Carl Gustav Jung. Jung describes these are forces inside us – the light being the benevolent and the dark forces of greed, arrogance, self-delusion and hubris.

Jung pointed out that “the word “happy” would lose its meaning if it were not balanced by sadness.” As we are forced to face our dark side, we begin to come to terms with our challenges. And it’s only then we can build our own compassion.

Those who have experienced the dark nights are able to emotionally empathize with founders, and help them become resilient. Just as a founder who has taken a company public can help a startup scale their business. Because Jung correctly said that “Knowing your own darkness is the best method for dealing with the darknesses of other people.”

 

This man of matter ……rose up too far in the world….(image and caption by Carl Jung. Source: “The Red Book”, circa 1930)

When we start to change the language around this subject, it can become safer and easier for founders to discuss their situation. Instead of saying “I am depressed” a different way could yet be “I’m facing dark times”. The goal is to not trivialize the magnitude of the problem, but to make it gentler in self expression and social acceptance. We are too sold on sunshine, but that’s only half of the equation.

With co-author (and friend) Brad Feld’s guidance, I am working on my third book tentatively titled “Depression: A Founders Companion” and am looking at ways of how (a) founders reflect and identify their dark nights (b) how founders endure these times and (c) how can society respond and serve them when they are at their emotional nadir.

Only if we understand these issues can we can serve each other well. If you know any founders who can share their anonymized insights with dark nights, please request them to fill this survey. It will take less than 10 minutes and can help us to collectively address these challenges.

So far, several founders have shared that the primary cause of concern is social stigma. VCs will abandon the investment, team members will see the CEO as a weak person or worse, they will try to behave differently. Even if someone musters up the courage to discuss their mental health, we as a society do not know how to handle this information. We run, hide or escape.

Often, we try to cheer up people with lame sentences or hijack the conversations by discussing our own stories. (Hint: Neither of these are effective). Not only do we need a new language, we need a new social framework. In this case, the overused VC cliche of “how can I help” is like a doctor asking the wounded patient, “so how can I treat you today”. I’ll let you guess how effective that approach can be.

Feel those feels – be vulnerable

Catherine Shu wrote in a post  that asking for help when you are depressed is one of the bravest things you can do. Asking for help makes you vulnerable, but it does not mean you are weak. It does not mean you are deficient.

Brad Feld writes that  “I encourage you to let yourself feel the emotions you are feeling.”

It’s a line his wife Amy uses with him all the time: “Brad, feel your emotions. Don’t suppress them. Just feel them. Process them. And then reflect on what you are feeling. Any, more importantly, explore why you felt them. It’s probably uncomfortable. But it’s part of being human. And, while tragic, we can learn from it to help ourselves, and help others.”

And Sam Altman, the former head of Y Combinator  has weighed in on the subject, writing:

“… a lot of founders end up pretty depressed at one point or another, and they generally don’t talk to anyone about it.  Often companies don’t survive these dark times.

Failing sucks—there is no way to sugarcoat that.  But startups are not life-and-death matters—it’s just work.

Most of the founders I know have had seriously dark times, and usually felt like there was no one they could turn to.  For whatever it’s worth, you’re not alone, and you shouldn’t be ashamed.

You’ll be surprised how much better you feel just by talking to people about the struggles you’re facing instead of saying “we’re crushing it”.  You’ll also be surprised how much you find other founders are willing to listen.”

These struggles are not unique, but they are individual. That said, the best way to overcome them is as a community and these early steps from investors should go a long way toward building that community.

Foundry Group quietly announces a big fat $750 million fund

Foundry Group, the Boulder, Co.-based venture firm cofounded 11 years ago by startup whisperer Brad Feld, has raised a $750 million seventh fund to target early-stage and growth-stage companies, as well as to invest in other venture funds. It sounds like — and is — a lot of money, though the firm notes that it encompasses all of its […]

Foundry Group, the Boulder, Co.-based venture firm cofounded 11 years ago by startup whisperer Brad Feld, has raised a $750 million seventh fund to target early-stage and growth-stage companies, as well as to invest in other venture funds.

It sounds like — and is — a lot of money, though the firm notes that it encompasses all of its various investment strategies, whereas its last fund, a $500 million vehicle that it closed in 2016, was used to invest in other venture funds and growth-stage companies alone; Foundry was separately managing its early-stage bets in a different fund.

It’s a little confusing, but if you really want to know the details, Feld breaks them out in a post:

For historical reference, our early-stage funds (FG 2007, FG 2010, FG 2013, and FG 2016) are all $225 million in size. Our first early growth fund raised in 2013, Foundry Group Select, is also $225m in size. In 2016, when we raised Foundry Group Next, we approximately doubled the size of that fund to $500 million since 30% of it was going to be invested in partner funds and 70% in early growth. So, at the beginning of 2016, we effectively raised $725 million (FG 2016 and Foundry Group Next). Foundry Group Next 2018 is simply the combination of those two funds rounded up slightly.

Foundry was founded by Feld, Ryan McIntyre, Jason Mendelson, and Seth Levine — “four equal partners,” as Feld describes them.

With this newest fund, he says, Foundry now has “seven equal partners,” meaning each receives the same amount of carry — or profits from the firm’s successful investments — no matter that three of the partners are newer to the table.

Foundry’s newer partners include Lindel Eakman, who joined in 2015 to help Foundry identify venture funds in which to invest. (Very meta, we know.) Eakman had previously spent 13 years with the University of Texas Investment Management Company (or UTIMCO), which was Foundry Group’s largest investor.

The firm last year also added Chris Moody, who’d been the CEO of Twitter data reseller Gnip before Twitter acquired the company in 2014 and made Moody a GM and VP of its data and enterprise business. (Foundry was an investor in Gnip.)

The firm’s newest partner is Jamey Sperans, who was as an early member and managing director of Morgan Stanley Alternative Investment Partners, where he served on the global investment and executive committees. Sperans, who joined earlier this year, has also founded five companies over the years.

In case you are wondering, yes, that is seven men. (Just remarking.)

Foundry has had at least 44 exits over the years, according to Crunchbase. Among its most recent wins: the email service provider Sendgrid, which staged a successful IPO last November, and the 2015 IPO of Fitbit, the wearable device company, whose shares are trading at roughly $5.50 apiece right now but were as high as $47 in the months after the offering.

Among its newest investments is Chowbotics, a four-year-old, Redwood City, Ca.-based company that makes a salad-making robot and raised $11 million in Series A-1 funding last month; and Sensu, a year-old, Portland, Ore.-based full-stack monitoring platform that raised $10 million in Series A funding back in April.

It has also re-upped in plenty of its portfolio companies in recent months, including Urban Airship, an eight-year-old, Portland, Or.-based company behind a digital customer engagement platform. In June, it raised $25 million in Series F funding led by Foundry Group, which had also led the company’s Series B round in 2010.