Why attracting startups is more important than ever

In these times of falling FDI levels, investment promotion agencies (IPAs) and economic development organizations (EDOs) need to widen their investment attraction focus beyond established players. Venture capital funding has remained relatively resilient globally and startups continue to raise money.

If you cannot get Google to set up in your location, maybe you can attract the ‘next Google’ to open its first international office there. Or you might even be able to attract the founders to start the ‘next Google’ in your location. If these firms are able to scale up and grow, the benefits for the location will grow along with them as well.

The ranks of the world’s largest companies are increasingly held by firms that were founded just a few years ago. For example, in July 2020, 17-year old Tesla became the world’s largest car maker by market capitalization overtaking 83-year old Toyota, 104-year old BMW and 112-year old GM.

Attracting a startup before it grows big can have a huge impact on the local economy. For instance, Berlin-based fashion e-commerce company Zalando grew to become the 10th biggest employer in the city over the last 12 years. The fintech company N26 was founded in 2013 in Berlin. The founders chose to start their company in Berlin although both of them are originally from Vienna. N26’s decision to open an office in Vienna in 2019, creating 300 jobs, was great news for Austria’s capital city. But Berlin was able to gain much more from N26 with the majority of its 1,500 staff based in the Berlin headquarters. These examples show how a location can benefit in the long-term if it can attract the right startups as early as possible.

The distribution of successful startups across cities is highly uneven. According to data from CB Insights’ Global Tech Hubs report, Silicon Valley is still the world’s dominant startup hub with more tech deals since 2012 than all non-US startup hubs in the world combined. Silicon Valley-based startups closed over 12,000 financing deals  from 2012 to 2018, followed by New York with slightly over 5,000 deals. Beijing and Shanghai have been rising quickly in recent years. Leading European hubs such as Berlin and Paris are all significantly smaller at around 1,000 deals.

What are these cities doing better than others? Studies on this topic, such as Peter Cohan’s book “Startup Cities”, emphasize the importance of the local ecosystem. For a city or region to become a startup hotspot, there needs to be a mix of universities generating a talent pipeline, sources of finance such as venture capital funds, and established companies that can serve as potential customers and cooperation partners for startups.

Many locations have been seeking to put themselves on the global startup map and to attract startups and entrepreneurs to their location. The Startup Chile accelerator program famously helped to raise Chile’s profile as a location for startups and brings a yearly batch of startups to the country. Estonia engaged on a country-wide branding campaign to make itself known as a place for digital business, and through its e-residency program, it aims to be an incorporation destination of choice for location independent businesses. In the UAE, the Dubai Future Accelerators program provides opportunities for startups and scale-ups to develop and test new technologies with government partners. Business Finland is helping to attract startups with their Startup Kit designed to facilitate startups to setup or move to Finland.

What can IPAs do to attract startups?

  • Work with the local ecosystem to make it easier for foreign startups to integrate. This includes establishing close contacts with universities, other talent sources such as coding boot camps, existing stakeholders and multipliers in the ecosystem such as accelerators and associations, and larger enterprises interested in cooperating with startups.
  • Organize fundraising events for startups to facilitate access to funding and make it easier to scale up.
  • The local availability of talent is key for attracting high-tech startups. This makes it important to position the location not just as an attractive place for investors but also as an attractive place to live for an educated workforce. The Global Talent Competitiveness Index provides a good benchmark for locations vis-à-vis their competitors. Many IPAs – especially at the city level – now have a double mandate to attract not just investment but also talent.
  • Provide opportunities for startups to test and develop their technologies in a real life setting. The RetailTech Lab in the Science City Lyngby in Denmark allows entrepreneurs and startups to test innovations for the retail industry. Australia ran an initiative last year for agri-tech firms from around the world to test and demonstrate their solutions live on Australian farms.
  • Targeting is as important as in other areas of investment promotion. IPAs should focus on startups that match the local ecosystem and which reflect their overall investment attraction priorities.
  • An easy way to identify attractive startups is by tracking funding anncouncements. These often explicitly state the intended use of the new funds such as expansion to certain markets or opening new offices overseas.

Since many IPAs are still measured in terms of the number of jobs they help attract, it can be challenging to convince stakeholders of the value of attracting companies that may only create a handful of jobs at first. Also, startups have a high failure rate, which increases the risks of attracting them since some of them may not survive. The key performance indicators used to assess IPAs need to be adapted to reflect the lower job numbers and potential risk associated with attracting startups. It also helps if IPAs receive an official mandate to attract startups in addition to large companies, which will support cooperation with other organizations and initiatives in the location that work with startups.

How can you start right now in the current environment? IPAs and EDOs should include startup attraction in their overall investment promotion strategy, if they have not done so yet. Further, focus on building your network with local universities, talent centers, venture capital funds, and corporate partners wanting to cooperate with startups. Startups are a target group that are at home online, so use the time when international travel is down to conduct digital marketing and online events aimed at startups. Lastly, startups typically move faster in their business decisions than larger corporates, so be prepared to provide support quickly at the pace required by this important target group.

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