Even in a hyperconnected world, physical location still matters to entrepreneurs, investors and talent. Factors affecting a start-up’s decision on where to establish their headquarters include quality of life, cost of living, proximity to academic institutions, government support, the economy and existing "ecosystems" that help new businesses.
Here we look at five innovation hotspots and discover what makes London, Paris, Singapore, Munich and Tel Aviv so attractive to entrepreneurs.
Using Quid, a software that allows you to draw connections across massive amounts of text data (disclosure: three of the authors work for Quid), we analysed every company that has received funding in the last 10 years across the five hotspots.
We then used Quid’s artificial intelligence (AI) and Natural Language Processing
(NLP) to “read” the business descriptions of the companies in order to segment each market by theme and derive further insights into the fastest growing segments, the largest exits and the top investors.
We also interviewed Tech Pioneers, members of the World Economic Forum’s global community of trailblazing companies, who are based in these hotspots. They gave us their take on what makes their city amenable to innovation, as well as the challenges and opportunities of running a business there.
Unsurprisingly, of the five cities considered here start-ups in London have received the most investment in the past 10 years – $118 billion, according to Quid analysis using S&P capital IQ and CrunchBase.
The top segments in terms of number of companies are finance and fintech, advertising and marketing, and social networking. These segments make sense given the strong banking and media environment in London.
Husayn Kassai of Onfido, a digital identity verification provider, says the strength of fintech in London is reinforced by its rich history and recent efforts:
“We have an 800-year-old history of finance here and an incredibly favourable regulatory landscape to support it. Over the last few years alone, initiatives like Innovate Finance’s Industry Sandbox and the [FCA or Financial Conduct Authority’s] Regulatory Sandbox have helped fintech start-ups connect with established financial institutions and regulators. It’s enabled the industry to pool its resources to develop solutions to shared problems, and for fintechs to test their products in a safe space. Thanks to that spirit of collaboration, London is widely accepted as the fintech capital of the world – and PwC predicts that we’ll retain the title for some time to come.”
Perhaps more unexpected is that although gaming only represents 2% of the roughly 4,000 companies in London that received funding in the past 10 years, it is the fastest growing segment in London with a 279% growth rate (Compound Annual Growth Rate of investment, 2014-2017). One recent example is Improbable Worlds Ltd which develops a platform for third parties to build vast virtual and simulated worlds and raised $502M in 2017 in an investment round led by SoftBank.
Amongst companies founded in London in the past 10 years, gaming also has the highest median exit - the point at which investors sell their stake - at $531 million. Playfish Limited, for example, develops and publishes video games for social networks and was bought by EA Games for $275 million in 2009.
However, according to the Financial Times, though London boasts the highest rate of high-growth companies in the UK, it also has the lowest rate of survival. Investment activity by count peaked in 2015, with a recent downward trend, perhaps reflecting Brexit.
Paul Ellis of Electron, a company developing blockchain systems for the energy sector, however, says Brexit is not proving to be a problem as the UK government is making sure it creates an environment conducive to start-ups: “The UK is generally recognized as having highly regarded regulators for markets such as energy and financial services. These regulators have been pioneering the use of regulatory sandboxes to trial new start-up technology in these industries. Arguably Brexit has created an imperative for the UK to ensure that it invests in and promotes start-up companies.”
London’s local government, which is highly aligned with the country’s central government, is also making efforts to remain an innovation hub. For instance, in late 2017, London’s Mayor Sadiq Khan announced a programme of investment days for London start-ups to provide coaching and connections for investors. Khan also launched a $9.2 million fund to give young people better access to tech jobs and appointed the city’s first-ever chief digital officers.
Kassai highlights the access to talent as well as the vibrancy of innovation in London as key success factors: “When we first founded Onfido five years ago, London was our natural home. London as a hub has historically benefitted from a rich stream of international tech talent, recruiting from a number of world-leading local universities within a relatively small radius. As machine-learning specialists, that resource is invaluable.
“Our network is what makes us strong. In a single day, we can meet with Level 39 (a fintech hub) for breakfast, catch up with the banks in Bank for lunch, and drop in on the FCA at Canary Wharf before a little lobbying at Westminster. And with so many international airports, we're never far from our teams in San Francisco, New York, Lisbon and New Delhi, or our clients across the world.”
As in London, the French government is actively taking steps to attract entrepreneurs. President Emmanuel Macron is a big supporter of technology: he wants France to be a “start-up nation” and is keen to take advantage of Brexit to boost the country’s innovation hotspots. However, the country’s financial infrastructure can pose a challenge as there are fewer native, wealthy entrepreneurs to invest in angel rounds and more regulatory and tax burdens. It will be interesting to see the impact on the city’s start-up scene of Station F, a start-up super hub backed by French telecoms billionaire Xavier Niel.
Luca Verre of computer vision company Prophesee (formerly Chronocam) says the government has had a positive impact on access to talent, which was one of the key reasons Chronocam chose to have its headquarters in Paris: “There’s great access to talent locally as in the city you can find top schools in mathematics, engineering and business. In addition, new governmental regulations are now facilitating the integration of EU and extra-EU talents from abroad.
“When Chronocam was founded three years ago, the co-founders (most of whom were not from Paris) debated the location of the company. Eventually, we decided to stay in Paris because we wanted to capitalize on access to large companies, access to capital and access to talent. Today, Chronocam is a team of about 60 employees, with 19 nationalities and 80% of our employees coming from outside Paris. The company is mostly funded by foreign investors such as Intel and Bosch. We managed to bring a lot of diverse and international people to our office in Bastille [a neighbourhood in Paris].”
The top Parisian market segments in terms of the number of companies are medical, food and drink, and social networking. AI is the fastest growing segment with a 168% growth rate (CAGR of investment, 2014-2017) and is a relatively young space with a median founding year of 2014.
In the past 10 years, there has been a notable growth in the number of investments in the medical and AI sectors, while the data and cloud services sector has recently experienced a dip.
Though the amount of investment in Paris in the past 10 years is about half that of London at $60.6 billion, the median investment is about 60% greater in Paris ($2.1 million vs $1.3 million). Top investors in Paris include a mix of private equity, venture capital, early-stage investors and accelerators, all of which tend to invest broadly across market segments, rather than concentrating on a few niche areas.
The most active investor, according to the number of investments, is Bpifrance Investissement, a bank owned by the Caisse des Dépôts, a 200-year old investment arm of the French state. Bpifrance’s head of innovation, Paul-François Fournier, says the fund is helping start-ups “to get heft without crossing the Atlantic to tap deeper capital markets.”
Verre is also very optimistic about the investment side: “Venture capital investments have increased tremendously in the past few years and more and more American (Sequoia, Khosla) and Asian (Naver) investors are either opening offices or investing in tech start-ups in Paris.”
Singapore recently topped a list of best start-up cities ranked by Nestpick, which analyses popular start-up locations. A variety of factors attract entrepreneurs to Singapore, including a high quality of life (being a very safe place with good healthcare), a highly-educated talent pool, advanced infrastructure with local investors and physical proximity to both emerging and developed markets.
Nobu Okada of Astroscale, which develops technologies to monitor and safely remove space debris, says the Singaporean environment is very beneficial for start-ups, providing numerous pathways that entrepreneurs can use to help defray some of their expenditures: “The Singaporean government provides different subsidy supports to encourage entrepreneurs to start and expand their business in Singapore. For instance, the Productivity and Innovation Credit (PIC) allows businesses to enjoy tax deductions or cash incentives for investments in innovation and productivity improvements.
“In Singapore, an entrepreneur can open a bank account in a day and has access to specially discounted packages. These tangible financial supporting mechanisms enable entrepreneurs to allocate money to hiring and R&D. In addition, Singapore is a compact city and there are plenty of networking opportunities.”
Indeed, investments in terms of dollar amount received were at an all-time high in Singapore in 2017, with GrabTaxi receiving a hefty $2.5 billion financing round from investors Didi Chuxing and SoftBank to compete with Uber in South-East Asia.
Finance and fintech is a hot segment in Singapore. It represents 14% of the start-ups funded in the city in the past 10 years (median founding year 2013) and the largest number of investment rounds and total amount of investment received.
The top investors in Singapore are largely local (Joyful Frog, Spring Seeds or Crystal Horse Investments, for example) or have strong ties to Silicon Valley (500 Startups or Golden Gate Ventures, for example).
While Singapore benefits from a robust local VC community, Munich is an economic hub that offers entrepreneurs great infrastructure including access to top universities. Many established, R&D-heavy corporations also have their headquarters in Munich, such as BMW and Siemens, and these help to incubate start-ups with investments and programmes.
In addition, international companies are launching hubs in Munich, including IBM’s Watson Internet of Things (IoT) centre and Microsoft’s IoT and AI Insider Labs. Indeed, 2017 World Economic Forum Tech Pioneer KONUX is a quintessential Munich-based, Industrial Internet of Things(IIoT) startup which provides smart sensors and AI-based predictive analytics to the rail industry. However, living costs are high in Munich, requiring start-ups to pay higher salaries to engineering talent.
Access to talent, the innovation environment, government support as well as the general quality of life in Munich stand out as big advantages to Andreas Kunze of KONUX: “We have an ongoing demand for first-class engineers, computer scientists and product [managers], just to name a few. Our proximity to local universities is very helpful in order to attract the best talent to our team. Both the Technical University and the Ludwig-Maximilian-University are rated among the world’s top universities regularly. UnternehmerTUM, the Center for Innovation and Business Creation at the Technical University of Munich, is one of our oldest investors. The federal state of Bavaria also provides excellent support, both in the early stages of start-ups as well as for growth financing.
“The local start-up environment is pleasantly small and uncomplicated, people know each other, which makes networking easy. Last, but not least, Munich’s proximity to the beautiful countryside and the Alps adds to the already high quality of life. A recent PwC start-up study got to the point: German start-ups are doing well; Munich start-ups are doing even better.”
Although there are not as many start-ups in Munich as there are in Berlin, the city has the largest median investment of our chosen hotspots at $4.6 million. Befitting the local environment, the top market segments in Munich are retail and online platforms, finance and fintech, and energy and sustainability.
While energy and sustainability is the fastest growing segment in Munich with a growth rate of 130% (CAGR of investment, 2014-2017), medical has the highest median investment at $17.4 million.
5. Tel Aviv
Tel Aviv, the centre of Israel’s “Silicon Wadi”, has one of the best environments for start-ups in the world according to Nestpick, offering easy access to investors, VCs, mentors and talent. The Israeli government also plays a supportive role, with Eli Cohen, Minister of Economy and Industry, stating that he wants Israel to become the 15th largest economy in the world by 2025.
The success of the city’s start-up scene is illustrated by a string of recent acquisitions by international companies, such as Facebook, eBay, and Apple. That said, Israel has a small population of approximately 8 million and a relatively small domestic market, meaning that start-ups in Tel Aviv need to be able to scale internationally to be successful.
The top market segments in terms of the number of companies that have received funding in the past 10 years are social networking, retail and online marketplaces, medical, and industrial solutions.
Investment in Tel Aviv start-ups has been on a steady upwards trend in terms of the number of investments, with significant growth in the industrial solutions, medical, and cybersecurity sectors.
Cybersecurity is a relatively young market segment (median founding year 2013) with one of the highest median investment amounts ($6.4 million). The success of security and computer-vision start-ups in Tel Aviv is helped by the Israeli defence industry, the country’s ties to the US market and its world-class technical universities.
Guy Caspi of Deep Instinct notes both the challenges and advantages of being an Israeli cybersecurity company: “There is in-depth technology experience from the Israeli Defense Forces, perceived as an extremely technologically-advanced army. Despite the high salaries, Israeli start-ups will continue to leverage the immense pool of local talent to build comprehensive solutions addressing global markets and retain them by providing ongoing innovation. Cybersecurity with its global nature is tailor-made for Israeli companies with high talent but a small national market.”
Have you read?
Each hotspot has a local flavour with a traditional industry focus, access to capital and markets and government support. Physical location still matters to entrepreneurs as it affects quality of life, the day-to-day innovation environment and how many wealthy entrepreneurs are nearby for mentorship and investment.