Startup Ecosystems and Cities

ISHII Yoshiaki
Consulting Fellow, RIETI

1. Are unicorns born in cities?

Startups (Note 1) are important economic entities for the creation of employment and innovation. Unicorns (unlisted companies with a market capitalization of USD 1 billion or more) are often used as examples of the success of startups. The government's Integrated Innovation Strategy, which was released in June 2018, includes the target of creating 20 unicorn companies within the space of five years (Note 2). By increasing the number of growth company role models, the government hopes to gain the upper hand in the global fight for innovation dominance.

However, it is not possible to intentionally create individual unicorns through a policy program. It is said that the chances of finding a homerun venture are around 1 in 10, even if venture capitalists (VCs) repeatedly look for and consider promising businesses (Note 3). Policy-wise, all one can do in this kind of field is to create an environment that is conducive to unicorns and use the power of private enterprise to widely support potential unicorns (Note 4).

The environments that are conducive to unicorns that have drawn attention in recent years are cities. According to a survey by the World Bank, in the US, which produces the majority of the world's unicorns, over 80 percent of unicorns are found in urban areas (San Francisco, New York, Boston, etc.). Other countries such as China and the UK show similar results (Note 5). In Japan, home-grown unicorns such as Mercari, PeptiDream, Preferred Networks, and Sansan are all from Tokyo.

2. The rise of innovation districts

I would now like to focus on the rise of innovation districts (Note 6). These districts provide attractive environments for innovator communities within cities and result in further concentration of innovators within these districts. There has also been a recent trend for startups on the US West Coast to shift from Silicon Valley to the outskirts of San Francisco. Such growth companies as Airbnb, Uber, and Twitter all have headquarters located in San Francisco rather than Silicon Valley, and well-known VCs that operate from Sand Hill Road (central Silicon Valley) now have branches in San Francisco (Note 7). Kendall Square, which is located next to the Massachusetts Institute of Technology in Boston, is another example. The offices of over 4,000 startups, influential VCs, Google, Amazon, and Facebook, etc. are located within walking distance of Cambridge Innovation Center (CIC). New York has been improving its ability to attract startups and positioning itself as one of the world's best startup locations through such measures as increasing support for startups, holding multi-tiered networking events, and convincing Cornell Tech technical college to establish its campus there in order to diversify industry after the collapse of Lehman Brothers (Note 8). Measures such as these are also being taken in cities such as London, Paris, and Berlin.

In this day and age of lightning-fast platforms and overwhelming technology, the growth of startups is determined by the success of the personnel that underpin it. Companies overcome global competition by securing competitive personnel such as visionary management and leading researchers and engineers. Many of these individuals prefer attractive urban areas and gravitate towards communities of innovators, further strengthening the connection between unicorns and cities. The basic composition of the creative class has not changed since the importance of the creative class was observed by Professor Florida in 2002 (Note 9). Moreover, from the perspective of gaining a competitive advantage, the importance of a community where people can meet face to face has only increased with the development of telecommunications and the penetration of IoT and AI.

3. Globally noteworthy cities

In this environment, the startup strategy, "Beyond Limits. Unlock Our Potential" (Note 10), that was jointly released by the Cabinet Office, the Ministry of Economy, Trade and Industry, and the Ministry of Education, Culture, Sports, Science and Technology at the meeting of the Council for Science, Technology and Innovation held by the Prime Minister's Office in June 2019 includes a section on creating globally noteworthy urban startup ecosystems. This is a pilot program aimed at enhancing startup ecosystems by concentrating public and private sector support within two or three global centers and a few promotion centers that have been selected from among our domestic cities. Specifically, in terms of public support, through enhanced, international promotional efforts, selected cities are to invite foreign entrepreneurs and investors along with foreign, state-of-the-art acceleration and other programs to establish incubators in their cities, and the national government will provide support in the form of regulatory reform in order to increase public implementation of any innovations that result from within these incubators. In addition, private support in the form of mentorship, access to specialists and other sources of know-how will be available along with networking opportunities and facilities will be connected to public support structures. At present, a preliminary investigation is underway with an eye to accepting applications from cities in January 2020. It is anticipated that sites will be selected within FY2019.

4. What kind of cities will receive support?

The criteria that applicant cities must target are as follows. Only cities that meet the designated standards will be selected as candidates.

(1) Activities of startups and supporters
High new-business opening rate, entrepreneurship indicators, number of startups, amount of investment from VC firms, and other investors, IPOs and M&A, , presence of influencers, facilitators producers, large corporations and top niche corporations, and significant numbers of startup-related events, etc.

(2) Local government initiatives
Official engagement plan, support-related funding, independence and influence of responsible organizations, local government contact points, appointment of private sector specialists and representatives, openness to globalization, and cooperation structures between national, prefectural and local governments, etc.

(3) Data concerning personnel and education
Top universities (large numbers of research papers and patents, researchers, industry-university cooperation programs and engagement, entrepreneurial seminars, and university-led venture businesses, etc.), education for entrepreneurs of all levels, high foreigner and female labor-force participation rate, and large number of designers and artists, etc.

(4) Urban integration and lifestyle
Population size, population density, culture and community (tourism resources and promotion), lifestyle (safety, medical facilities, and living environment), transport and access (internal and external), availability and density of flexible workplaces, etc.

The basic principle of the program is to ①concentrate support for internationally attractive and competitive locations, ②emphasize communities and human connections, and ③emphasize private supporters and private incentives in the creation of startup ecosystems. Detailed consideration and system development is underway, and we are happy to receive advice and suggestions from a number of different parties as we look towards implementation.

Furthermore, there will be criticism that we are not supporting regional cities and regional businesses specifically through this program. Supporting regional ecosystems and startups requires a different approach, which I would be happy to discuss on another occasion.

September 30, 2019
  1. ^ "Startups" are newly established businesses with novelty and growth potential. They are essentially the same as "new ventures." However, the terms "new venture" and "venture business" are not often used outside of the Japanese context, so from a policy perspective, the word "startup" has become more widely used.
  2. ^ Integrated Innovation Strategy, Cabinet Decision, June 15, 2018, p.40
  3. ^ According to the comments of many venture capitalists in interviews with Japanese and foreign VC firms with regard to the success of investment at the time of drafting the Tax System for the Promotion of Corporate Venture Capital Investment (2013).
  4. ^ Lerner, J. (2009) Boulevard of Broken Dreams: Why Public Efforts to Boost Entrepreneurship and Venture Capital Have Failed and What to Do about It, Princeton University Press.
  5. ^ World Bank (2019) Boosting the Japanese Tech Startup Ecosystem. Washington, DC: World Bank Group.
  6. ^ Bruce Katz and Julie Wagner (2014) The Rise of Innovation Districts A New Geography of Innovation in America, Metropolitan policy programs at Brookings
  7. ^ The Mercury news, 2016.2.25 "VCs leave Sand Hill Road, seek out new hot spots in Palo Alto, San Francisco"
  8. ^ Nakazawa K. (2018) "New York Has Become the World's Second Startup City," JETRO/IPA New York News, January 2018
  9. ^ Richard Florida (2002), The rise of the creative class, The Washington Monthly
  10. ^ (45th) Meeting of the Council for Science, Technology and Innovation, 19 June, 2019, Document 1-1

October 17, 2019

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