“A mass extinction event”: Startup Genome report highlights COVID-19 threat, as Aussie cities slide in the rankings

Startup Genome has released its Global Startup Ecosystem Report 2020, and while Sydney has slid down the rankings yet again, it is still clinging on to a top-30 spot. Melbourne, on the other hand, remains a mere ‘contender’.

But, the global startup environment looks a little different, and there’s more to worry about than who’s beating who in the ecosystem race.

The report measures startup ecosystems based on seven success factors: performance, funding, market reach, talent, connectedness, knowledge and infrastructure. It’s intended to identify the ecosystems in which an early-stage startup will have the best chance of success.

An ongoing rivalry

Like last year, Sydney once again makes an appearance in the top 30 startup ecosystems in the world, while Melbourne remains a ‘challenger’ ecosystem — one that has the potential to be listed one day in the not-too-distant future.

Sydney, which slipped six places last year (from 17th in 2018 to 23rd in 2019) has taken another tumble. This year it fell four spots, coming in at number 27.

While Melbourne is yet to crack the top 30, the Startup Genome report does suggest it may be on its way up.

“While Sydney is still ahead of Melbourne, in some key metrics Melbourne is catching up. For example, Sydney was the first city in Australia to have a unicorn, but now Melbourne has two.”

A deep dive into the Melbourne ecosystem found the city to be particularly strong in the life sciences sector, which accounts for 18% of Victoria’s startups. The report also noted the city’s strengths in fintech — it is home to the likes of Airwallex, Moula and Afterpay, after all.

LaunchVic chief executive Dr Kate Cornick sits on the Startup Genome advisory board, representing the Asia Pacific region. According to Cornick, Melbourne’s an ecosystem that’s growing faster than anticipated.

“In 2018, Startup Genome predicted the Melbourne ecosystem would be worth over $4 billion in a few years, but [we] have achieved this in just two years,” she said in a statement.

“These results show how fast our sector is developing and that it is a key contributor to the Victorian economy.”

Elsewhere, Tokyo has made the top 30 for the first time, storming in in 15th place and overtaking more established startup cities such as Berlin, Singapore and Hong Kong.

Seoul has also made a first-time appearance, coming in at number 20, as well as Shenzhen (22), Hangzhou (28) and Sao Paulo (30).

The top nine ecosystems remain unchanged since last year. In fact, the top seven have been the same for two years running, and the top five have held their leading places since 2017.

Silicon Valley takes the top spot, while New York City and London tie for second, followed by Beijing and Boston. Tel Aviv and Los Angeles tie for the sixth spot, followed by Shanghai and Seattle.

Startup Genome highlights an unusual year

But, of course, all of this is against a global backdrop the likes of which we’ve never seen before. While all things startup were looking up until December 2019, come January COVID-19 was starting to have an effect in some markets. Six months later it’s only got worse.

The report found startups are seeing a drop in consumer demand, coinciding with a drop in available venture capital funding. About 40% of startups now have three months or less of capital runway in the bank.

“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 report says.

In the months following the onset of COVID-19, just 28% of startups globally saw their funding plans continue as normal.

Of those with term sheets pre-crisis, 18% said their deals had been cancelled. A further 8% said their lead investor is now “unresponsive”. Almost half (46%) said their funding process has been slowed down.

Globally, VC dollars up for grabs are down by 20%. In China, the first country to be hit with the pandemic, available VC funding dropped at one point to half its normal levels.

At the same time, some 72% of startups surveyed said they had seen a dip in revenue. The average revenue decline reported was 32%.

These simultaneous shocks are already having a significant impact on the amount of jobs supported in startup hubs all over the world. Two thirds of startups are laying off staff or cutting hours, and those letting go of full-time staff are typically losing 33% of their workforce.

Still, 28% expect their revenues to drop further, and 31% expect they will have to make cuts in the near future.

The data shows that while many of these jobs are in areas you might expect, such as direct sales and marketing, 31% of startups are cutting research and development jobs, and 32% are cutting product-related employees, such as software engineers.

“This is a major problem not only for the post-crisis prospects of startups, but also for their ecosystems. As tech talent is laid off, they might be absorbed by large corporates, leaving the startup ecosystem altogether,” the report says.

“And for tech hubs that are less mature … these scientists and engineers might end up leaving the city altogether for the more robust startup labor markets in places like Silicon Valley, London, and New York.”

A common challenge

Martina Larkin, head of regional strategies for Europe and Eurasia, and a member of the executive committee at the World Economic Forum, wrote in a forward for the report that the COVID-19 pandemic has revealed how “fragile and exposed” current global systems and structures are.

“We have an opportunity for a global reset — to build a better, greener, and more resilient and inclusive future. Innovation, new technologies, and scientific discoveries are critical components in this reset,” she says.

“If we want to take advantage of this opportunity, we need to make sure advanced technologies produced through innovation form not only the cornerstones of national economic competitiveness, but also embody the social shift toward digital and entrepreneurial lifestyles.”

While the report measures cities against each other, this year, startups in every hub are facing the same challenge, she says: surviving the COVID-19 lockdowns and economic crisis, and finding a way to emerge on the other side.

“It is critical that each hub and its startups, regardless of where they may fall in the ranking, remain connected, vibrant communities that can play a critical role in this reset.

“As startups are a main driver of job creation and innovation, their survival will be essential to both the social and economic COVID recovery.”

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