The Global Ranking of Startup Funding Ecosystems

by G.Sabarinathan, PhD¹

So, for all the excitement about being India’s Silicon Valley and so on, Bangalore seems to be ranked 33rd among startup cities in the world.  That is what I noticed from PitchBook’s (PB) survey of October 2023.²

The scoring methodology

PB’s list identifies the top fifty cities in terms of Venture Capital (VC) financing activity.  And its survey ranks cities on two different top level dimensions, namely development and growth.  Development itself is measured in terms of size and maturity.  Size comprises value and number of deals done, exits, investment funds and numbers of unicorns.  Maturity comprises a variety of measures of how well developed the funding system is, in terms of mega exits, ratio of number of late to early stage deals, late and growth stage pre-money valuations³ and deal value.  Their growth score measures the growth rate momentum of their size score over one, two, three and five year periods.

The lay of the league table

So which are the locations that rank higher than Bangalore?  Not surprisingly at the top is San Francisco, followed by New York and then Beijing and Shanghai.  If it appeals to your schadenfreude, you can draw some comfort from the fact that the corporate headquarters of the East India company ranked seventh.  Tiny Tel Aviv just made it to the top twenty.

Nine of the top twenty places are in the USA, while five are from China and the only European city to feature – now that the Brits have Brexited infamously – is Berlin.  And apart from China’s cities and Tel Aviv the other Asian cities to feature are Tokyo at the 11th place and Singapore at the fifteenth.

The report further notes of the top fifty places 40% of the cities are in North America, 32% in Asia, and 24% in Europe.  As the report suggests, the global spreading out of the cities, across the various continents, indicates the truly global nature of VC as an asset class.

At the top of the Growth scores is Dubai.  That should not quite surprise anyone who has visited Dubai in the past five years or so.  The city state is pulling all stops to turn into an attractive entrepreneurial hotspot for the region.  And it has many policy and socio-cultural aspects working in its favour in this regard.  Bengaluru is the only Indian city that features among the top twenty in growth at the 17th place.⁴  Seven cities from the USA, five from Europe and five from Asia feature among the top twenty in terms of growth.

The Development vs Growth Tradeoff

As the diagram below from the report indicates, many cities with high Development scores appear to score lower on Growth.  High growth centres “could be growing their VC activity at a faster rate than more established, expensive, and saturated locations’ writes the PB author in the report.  Although their VC systems are less developed than that of the better developed centres, they could have the  potential for greater upside.  “Locations with high Growth Scores may not have lofty headline figures, however, the rate at which they grow dictates their ranking”, explains PB.

Cities evaluated in terms of Development and Growth. Figure sourced from PitchBook’s report Global VC Ecosystem Rankings.

The report classifies location with high Growth scores as “frontier” and “emerging” while those with high Development Scores are classified as “established” and “market leaders” ecosystems.  A few like New York, Shanghai, London, and Berlin seem have a balance between development and growth.

Reflecting on the ranking

The importance of cities as geographical units of innovative activity has been now documented for a while by scholars of innovation and economic geography.  Several academic articles and books have noted that urban agglomeration seems to lead to a clustering of innovation and startup activities.⁵

The PB analysis evaluates the effectiveness of cities as startup hubs using venture financing data primarily.  It uses both the inflow of capital into funding of enterprises as well as investment outcomes in terms of follow on funding, which is a proxy for the survival of enterprises, and exits which is a measure of investment success.  The unstated assumption here is that VC investors fund innovative startups that have high growth potential with all the attendant beneficial economic outcomes.  VCs also tend to commit capital to locations that have the necessary economic and institutional environment to ensure the successful development of startups.

More generally, from a policy perspective, the report reinforced the findings of the academic literature:  Initiatives for boosting startup activity have to target creating centres of geographical concentration of entrepreneurial activity rather than follow a carpet bombing kind of strategy of rolling out broad initiatives across a whole state or the nation.

This obviously does not mean that supportive initiatives be confined to those centres where there is pe-existing critical mass, in locations like Bengaluru, the National Capital Region, Mumbai or Pune.  It implies that apart from improving the attractiveness of these cities, policy should attempt to replicate similar in cities or locations that have at least a few of the endowment conditions to help startups succeed and raise adequate and appropriate funding.

For example, in the state of Tamil Nadu, the city of Coimbatore possibly has such conditions: A sizable network of high quality educations, an existing industrial culture, albeit from the older economy – the city is sometimes referred to as the Manchester of India with its concentration of textile and engineering units – a culture of entrepreneurship, quality social infrastructure, well positioned in terms of logistical connectivity and so on.⁶

The curious case of Bengaluru’s rank

A discussion on the report would be incomplete without circling back to the case of Bengaluru’s rank, that we started this story with.  On a partly lighter note, it appears as disappointing as the position of Bengaluru’s own cricket team, Royal Challengers, known more popularly by their abbreviation, RCB, in the IPL league table, in spite of having star batters like Virat Kohli.

Given the numerous criteria that the evaluation uses it would be difficult to understand the low ranking, without a closer look at the data.  Given further that the ranking has been done on the basis of VC financing activity, where India has fared well in the past decade or so, it is all the more puzzling.  India emerged as the second largest market for VC financing in Asia, after China and was home to the second largest number of unicorns, again after China.

The Indian market was considered a largely Series A market in the early 2000s.  This changed after 2010 as I document in a working paper I co-authored with two of my students, Aditya Muralidhar and Ahana Shetty in 2016.  At the peak of investment activity in 2021 Indian startups raised close to $ 66 bn across around 1490 deals, and investors exited from 269 companies realizing $ 36 bn in cash, according to data from Venture Intelligence. 

One possible reason for the rank Bengaluru has is the recency of the growth of VC in India.  But then the study draws on data from 2017 to 2023.  This is the period when the Indian industry grew dramatically on all three dimensions:  New funding to startups, follow on funding and exits.  Startup valuations, one of the other criteria that PB’s methodology lists, also registered a steady improvement during this period.  The other possible explanation is that the numbers that we note for India are scattered across India and Bengaluru as a city accounts for around 40% or so of the various parameter values.  A cursory examination of the data for the Top 20 locations suggests that in spite of the disaggregation, the data for Bengaluru alone could well be higher than that for some of the cities that feature in the Top 20.

Whatever the reason, the issue deserves a closer study.  Rankings of this kind may not be the sole or ultimate arbiter of a city’s success as a startup destination.   But they may count for something.  To the extent they do, Bengaluru deserves a better ranking as does its cricket team RCB, for the sake of its loyal fans, if for no other reason.

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²The PB report titled Global VC Ecosystem Rankings is dated October 2023. The report was the subject of PB’s most recent weekly newsletter.
³Pre-money valuation is a term the VC industry uses. It is defined as Post Money Valuation – Cash, where post money valuation is the valuation offered by an investor in a given round of funding. Post money is calculated by dividing the amount of funding divided by the percentage equity required by the investor in return for funding. Thus a Rs 1 crore funding for a 10% equity would value the startup’s equity at Rs 10 crore
⁴Gurugram appears in the 17th place in the table that has top 20 growth cities. But the table that has the development and growth data for the top 50 cities had Bengaluru in the 17th place in terms of growth.
⁵See for example, the following recent set of related articles. Rise of the Startup City: The Changing Geography of the Venture Capital Financed Innovation Richard Florida & Charlotta Mellander, Paul Gompers, Anna Kovner and Josh Lerner, Buy Local? The Geography of Venture Capital, Journal of Urban Economics 67 (2010), 90–102; How the Geography of Startups is Changing by Richard Florida and Ian Hathaway, Harvard Business Review, November 27, 2018 https://hbr.org/2018/11/how-the-geography-of-startups-and-innovation-is-changing. The related literature is quite vast and its origins go further back in time.
⁶This author does not have any pecuniary or other personal interests in the city of Coimbatore, which is being mentioned as an illustration because of his familiarity with the city as a centre of commerce.