TheEconomistApril16th 2022 Business 55What’s your magic?Sources:Crunchbase;CBInsights;TheEconomist *Startupsvaluedat$1bnormore †Eg,cloud-computing or artificial intelligenceRestofworldLatinAmericaSouth-EastAsiaEuropeIndia
ChinaUnitedStates1007550250OtherSoftware Deeptech† Fintech ConsumerShareofunicorns*bysector,%7550250
2011 2119171513BerlinBengaluruLondonBeijingSanFranciscoTop city ’s share of country ’s
venture-capital funding , %changes over time. Unicornrich Bengalu
ru, San Francisco, Singapore and Tel Aviv
all feature in the top ten of Mr Belderbos’s
ranking of cities based on the growth in
such linkages. Unicornpoor Tokyo has
seen a decline in connections.
Bengaluru illustrates how talent and
openness combine to create startup magic.
The city’s fondness for newfangled tech
nology dates back to at least 1905, when the
local maharajah diverted a nearby supply
of hydropower to make it the first city in
Asia with electric streetlamps. Four years
later it built the Indian Institute of Science,
a prestigious university that remains a
magnet for clever Indians. Migrants make
up more than half its population—a statis
tic India’s tech grandees invariably cite
when explaining the city’s success.
It has also long been connected to the
world. Texas Instruments, an American
electronicsmaker, chose Bengaluru for its
first regional office in 1985. Infosys and Wi
pro, Indian informationtechnology (it)
giants based in Bengaluru since the 1980s,
have served global software customers,
making the city “the world’s back office”.
When India’s closed economy opened up
in 1991, the city was the natural place for
foreign companies and capital eyeing the
country’s vast market, says Nandan Nile
kani, cofounder of Infosys. That in turn
drew ambitious domestic upstarts seeking
connections and cash.
Yet Bengaluru might not be where it is
were it not for a third ingredient: the pres
ence of local risk capital. For an enterprise
to thrive, it needs backers who understand
the ecosystem and are willing to feed it.
This can be founders and employees of ear
lier startups, who become angel investors
for the next generation, notes Rana Yared
of Balderton Capital, a vcfirm. Former em
ployees of Flipkart, which Walmart bought
in 2018, have gone on to found 225 startups,
including five unicorns, according to
Tracxn, a data provider. Those from Grab,
Lazada and Sea Group, a trio of Singapor
ean tech darlings, have founded or run
more than 1,000 firms.
A local capital base also encourages an
other important type of risktaking. Em
ployees must be able to leave existing firms
and join or start competitors. AnnaLee Sax
enian of Berkeley has argued that Boston’s
Route 128, also near to topnotch universi
ties, was outcompeted by Silicon Valley in
the 1980s because it lacked this free flow of
people between firms, perhaps in part be
cause of stricter enforcement of noncom
pete agreements than in California.
In some cases, the state can provide ear
ly backing. Besides having a long bench of
angels that stretches back at least to Bill
Hewlett and David Packard, Silicon Valley
enjoyed its share of government contracts
in its formative postwar years, particular
ly from the Defence Department. Fairchild
Semiconductor, whose employees includ
ed the future founders of Intel, Sequoia
Capital and Kleiner Perkins, depended on
government procurement for much of its
early growth. Bengaluru, home to military
research outfits, and Tel Aviv also have
strong links to their countries’ armed forc
es, which can act as buyers of first resort.
Some governments support startups
with capital rather than contracts. Take
Singapore, which has more unicorns perperson than anywhere bar Israel. Edwin
Chow of Enterprise Singapore, a govern
ment agency in charge of the citystate’s
startup policy, puts this down to schemes
aimed at attracting investors and founders.
For instance, a big programme from 2009,
modelled after a similar one in Israel,
matched every $1 from investors with near
ly $6 from the public purse. At least 15
funds qualified for the scheme, which al
lowed the investors to buy out the govern
ment’s stake at its original face value, adds
Mr Ong of Monk’s Hill.
How much credit such topdown poli
cies deserve is hotly debated. Attempts to
will clusters into existence have mostly
foundered. In 1999 Germany poured €1.5bn
($1.6bn) into a Bavarian cluster initiative.
France funnelled a similar amount to its
pôles de compétitivité in 2005. Malaysia’s
BioValley complex, launched the same year
at a cost of $150m, was soon derided as
“Valley of the BioGhosts”. A Canadian ex
periment in supporting startups failed be
cause it was so wellfunded that private in
vestors stayed on the sidelines. In 2009
Josh Lerner of Harvard Business School
concluded that “for each effective govern
ment intervention, there have been doz
ens, even hundreds, of failures, where sub
stantial public expenditures bore no fruit”.There be unicorns
Most investors and even some policymak
ers agree that Singapore’s success has more
to do with its entrepot status, probusiness
laws and political stability. That said, Jus
tin Hall of Golden Gate Ventures, a Singa
porean vc firm, reckons that the legup
from the state may have accelerated Singa
pore’s ascent by a few years.
The importance of talent, openness and
risk capital will persist. But the clusters
that thrive thanks to a combination of the
three will continue to evolve. As the youn
ger clusters mature, the “xof y” playbook
will gradually give way to more advanced
tech, as is happening in China. They will
also become more globally minded. Alrea
dy about 30% of India’s current herd of 60
odd unicorns primarily target internation
al markets, says Dev Khare of Lightspeed
India Partners, one more vc firm.
And new cities may join the ranks of
tech hubs. Lagos, Nigeria’s commercial
capital, already looks poised to become the
dominant player in the African fintech
scene. In March Nigerian startups were
better represented than those of any other
country except two at y Combinator, a
famed Silicon Valley startup accelerator.
Hot technologies such as the decentralised
world of cryptocurrencies and socalled
Web3 may seek out places with favourable
regulations (or lack thereof ). ftx, a crypto
currency exchange valuedat$32bn, has
just moved to Nassau, intheBahamas. The
weather is nice there, too.n