Study says the US is quickly losing its entrepreneurial edge

Photographer: Daro Sulakauri/Bloomberg

According to a new study conducted by the Center for American Entrepreneurship and NYU’s Shack Institute of Real Estate, the US may be losing its competitive advantage as the dominant nucleus of the startup and venture capital universe. 

The analysis, led by senior Brookings Institution fellow Ian Hathaway and “Rise of the Creative Class” author Richard Florida, examines the flow of venture capital over 100,000 deals from 2005 to 2017 and details how the historically US-centric practice of venture capital has become a global phenomenon.

While the US still appears to produce the largest amount of venture activity in the world, America’s share of the global pie is falling dramatically and doing so quickly.

In the mid-90s, the US accounted for more than 95% of global venture capital investment.  By 2012, this number had fallen to 70%. At the end of 2017, the US share of total venture investment had fallen to just 50%.   

Over the last decade, non-US countries have propelled growth in the global startup and venture economy, which has swelled from $50 billion to over $170 billion in size.  In particular, China, India and the UK now account for a third of global venture deal count and dollars – 2-3x the share held ten years ago.  And with VC dollars increasingly circulating into modernizing Asia-Pac and European cities, the researchers found that the erosion in the US share of venture capital is trending in the wrong direction.

Growth of global startup cities and the myth of the American “rise of the rest”

We’ve spent the summer discussing the notion of Silicon Valley reaching its parabolic peak – Observing the “rise of the rest” across smaller American tech hubs.  In reality, the data reveals a “rise in the rest of the world”, with startup ecosystems outside the US growing at a faster pace than most US hubs.

The Bay Area remains the world’s preeminent beneficiary of VC investment, and New York, Los Angeles, and Boston all find themselves in the top ten cities contributing to global venture growth.  However, only six of the top 20 cities are located in the US, while 14 are in Asia or Europe.  At the individual level, only two American cities crack the top 20 fastest growing startup hubs.  

Still, the authors found the bulk of VC activity remains highly concentrated in a small number of incumbent startup cities. More than 50% of all global venture capital deployed can be attributed to only six cities and half of the growth in VC activity over the last five years can be attributed to just four cities.  Despite the growing number of ecosystems playing a role in venture decisions, the dominant incumbent startup hubs hold a firm grip on the majority of capital deployed.

China and the surge of mega deals

Unsurprisingly, the largest contributor to the globalization of venture capital and the slimming share of the US is the rapid escalation of China’s startup ecosystem.

In the last three years, China has captured nearly a fourth of total VC investment.  Since 2010, Beijing contributed more to VC deployment growth than any other city, while three other Chinese cities (Shanghai, Hangzhou, Shenzhen) fell in the top 15. 

A major part of China’s ascension can be tied to the idiosyncratic rise of late-stage “mega deals”, which the study defines as $500 million or more in size.  Once an extremely rare occurrence, mega deals now make up a significant portion of all venture dollars deployed.  From 2005-2007, only two mega deals took place.  From 2010-2012, eight of such deals took place.  From 2015-2017, there were 80 global mega deals, representing a fifth of the total venture capital activity.  Chinese cities accounted for half of all mega deal investment over the same period.

The good, the bad, and the uncertain

It’s not all bad for the US, with the study highlighting continued ecosystem growth in established US hubs and leading roles for non-valley markets in NY, LA, and Boston.

And the globalization of the startup and venture economy is by no means a “bad thing”.  In fact, access to capital, the spread of entrepreneurial spirit, and stronger global economic development and prosperity is almost unquestionably a “good thing.”

However, the US’ share of venture-backed startups is falling, and the US losing its competitive advantage in the startup and venture capital market could have major implications for its future as a global economic leader.  Five of the six largest US companies were previously venture-backed startups and now provide a combined value of around $4 trillion. 

The intense competition for talent marks another major challenge for the US who has historically been a huge beneficiary of foreign-born entrepreneurs.  With the rise of local ecosystems across the globe, entrepreneurs no longer have to flock to the US to build their companies or have access to venture capital.  The problem attracting entrepreneurs is compounded by notoriously unfriendly US visa policies – not to mention recent harsh rhetoric and tension over immigration that make the US a less attractive destination for skilled immigrants.  

At a recent speaking event, Florida stated he believed the US’ fading competitive advantage was a greater threat to American economic power than previous collapses seen in the steel and auto industries.  A sentiment echoed by Techstars co-founder Brad Feld, who in the report’s forward states, “government leaders should read this report with alarm.”

It remains to be seen whether the train has left the station or if the US can hold on to its position as the world’s venture leader.  What is clear is that Silicon Valley is no longer the center of the universe and the geography of the startup and venture capital world is changing.

The Rise of the Global Startup City: The New Map of Entrepreneurship and Venture Capital tries to illustrate these tectonic shifts and identifies tiers of global startup cities based on size, growth and balance of VC deals and investments.

Salesforce acquires Rebel, maker of ‘interactive’ email services, to expand its Marketing Cloud

Salesforce’s Marketing and Commerce Cloud is the company’s smallest division today, so to help beef it up, the company is making an acquisition to add in more features. Salesforce has acquired Rebel, a startup that develops interactive email services for businesses to enhance their direct marketing services: recipients of interactive emails can write reviews, shop and take other actions without leaving the messages to do so.

In an announcement on Rebel’s site, the startup said it will be joining Salesforce’s Marketing Cloud operation, which will integrate Rebel’s API-based services into its platform.

“With Rebel’s Mail and API solutions, brands, including Dollar Shave Club, L’Oreal and HelloFresh, turn emails into an extension of their website or app – collecting data, removing friction from the conversion process, and enhancing the customer experience. Rebel will enhance the power of Salesforce Marketing Clod and fundamentally change the way people interact with email,” the founders note. It sounds as if the company’s existing business will be wound down as part of the move.

Terms of the deal have not been disclosed in the Rebel announcement. We have contacted both the startup and Salesforce for further comment and to ask about the price. To date, Rebel — co-founded originally as Rebelmail by Joe Teplow and Trever Faden — had raised only about $3 million, with investors including Lerer Hippeau, Sinai Ventures, David Tisch, Gary Vaynerchuk, and others, so if the deal size is equally small, Salesforce likely will not be disclosing it.

Salesforce has made a number of acquisitions to build and expand its marketing services to compete with Adobe and others. Perhaps most notable of these was buying ExactTarget, one of its biggest-ever acquisitions, for $2.5 billion in 2013. (And according to some, it even wanted to buy Adobe at one point.) Competition has been heating up between the two, with Adobe most recently snapping up Marketo for $4.75 billion.

But on the other hand, marketing is currently Saleforce’s smallest division. It pulled in $452 million in revenues last quarter, putting it behind revenues for Sales Cloud ($1 billion), Service Cloud ($892 million) and Salesforce Platform ($712 million). Adding in interactive email functionality isn’t likely to float Marketing and Commerce Cloud to the top of that list, but it does show that Salesforce is trying to improve its products with more functionality for would-be and current customers.

Those customers have a lot of options these days, though, in targeting their own customers with rich email services. Microsoft and Google have both started to add in a lot more features into their own email products, with Outlook and Gmail supporting things like in-email payments and more. There are ways of building such solutions through your current direct marketing providers, or now directly using other avenues.

What will be interesting to see is whether Rebel continues to integrate with the plethora of email service providers it currently works with, or if Salesforce will keep the functionality for itself. Today Rebel’s partners include Oracle, SendGrid, Adobe, IBM, SailThru and, yes, Salesforce.

We’ll update this post as we learn more.

Tencent backs fintech firm Voyager to set up battle with Alibaba in the Philippines

China’s internet battle is rapidly reproducing itself in Southeast Asia. One new hotspot is the Philippines, where Tencent just agreed to invest in Voyager, a fintech business started by telecom firm PLDT.

The deal would bring Tencent into direct competition with arch-rival Alibaba, which entered the Philippines 18 months ago when its fintech affiliate Ant Financial invested in Mynt, a financial venture from Globe Telecom which is a competitor to Voyager.

Following a week of speculation, PLDT announced a deal today that sees Tencent and KKR pay up to $175 million for a minority stake in the Voyager business. There have been reports that PLDT is looking to sell its majority stake, for now that has been retained but the firm did say that it has options to add other investors via the creation of new shares that would reduce its total holdings to less than 50 percent. Still, it plans to retain its position as the largest shareholder whilst bringing in expertise and more capital for growth.

Fintech is rapidly becoming a key focus for startups and larger tech companies in Southeast Asia, where the internet and mobile phone ownership promises to increase digital inclusion and give the region’s collective population of more than 600 million people new ways to save and spend. Microloan startups have raised significant funds from investors this year — Philippines based SME lender First Circle just closed a $26 million investment this week, for example — and the bigger fish in the pond are eying key infrastructure plays such as mobile wallets and payment systems.

That’s where both Voyager and Mynt come into the picture.

Voyager offers a range of digital services which include a prepaid wallet, digital payment option for retails, a remittance network for sending money, a digital lending service and a loyalty and rewards program. Mynt is similar, offering payment, remittance and loans for consumers and businesses.

The Voyager deal is the biggest investment in a Philippines-based startup — though you can debate whether a telco spinout is really a “startup” — and it only goes to reiterate increased attention Southeast Asia is seeing from China, and how fintech is becoming one of the hottest verticals.

Alibaba and Tencent are carving up Southeast Asia’s startup ecosystem

Tencent and KKR teamed up together as investors of $5 billion-valued Go-Jek in Indonesia, which is the largest rival to SoftBank-backed ride-hailing startup Grab but also a fintech company itself. Go-Jek offers a mobile payment service which includes loans and remittance payments. Grab, valued at $11 billion, has rolled out competing products across multiple Southeast Asia markets. Indeed, it recently received an e-money license for GrabPay in the Philippines so it’s all set to join the party.

The Philippines is a particularly hot market for fintech for a number of reasons. The country’s large overseas worker base makes it the world’s third-largest remittance market — worth an estimated $28 billion — despite a sharp drop this year. While, as we wrote when covering First Circle’s news this week, SMEs account for 99.6 percent of the country’s business, 65 percent of its workforce and 35 percent of national GDP but there’s few credit options or limited data for assessment.

Fintech is seen as a key driver that enable Southeast Asia to massively increase its digital footprint and reap economic benefits. More broadly, the region’s internet economy to tipped to grow from $49.5 billion in 2017 to over $200 billion by 2025, according to a report from Google and Singapore sovereign fund Temasek.

Upwork pops more than 50 percent in Nasdaq debut

Upwork, the rebranded merger of oDesk and Elance, debuted on Nasdaq this morning, after dropping its S-1 about four weeks ago. Shares opened at $23.00, which represents a 53% jump — shares were priced at $15 before the opening bell by investors, a significant uptick from the company’s revised projection of $12 to $14, which was already an increase from its original $10 to $12 target. The stock trades under the ticker UPWK, and the company will fundraise approximately $102 million of new cash for its balance sheet ($187 million total with existing shareholders).

Shares are still currently up 40% compared to their original price.

I talked with Upwork CEO Stephane Kasriel this morning about the IPO road show, in which he said he took approximately 160 meetings with investors. Investors were engaged on the “combination of the strengths of the business and the strengths of the mission,“ and he was clearly excited about the engagement the offering received.

Upwork, whose antecedent companies go back almost two decades, is a positive cash flow business, albeit one growing top line revenue only about 27.6% year over year. Kasriel said that the company should be able to “compound at that rate for decades” due to the growing number of workers who freelance around the world in order to have flexible work arrangements. “When you think about which jobs are being created in the global economy, in most countries it is these knowledge jobs,” he said.

Upwork CEO Stephane Kasriel (Photo from Upwork)

In addition, “When you really take a long term view, what really matters is to be good stewards of capital,” Kasriel noted, and said that the company was very focused on areas like sales and marketing ROI. His goal is to continue to grow the company with limited dilution to shareholders, a message that apparently has been well-received.

As for Kasriel himself, he becomes a public company CEO. He was elevated to the CEO role in 2015 from SVP of Engineering – a somewhat unusual path, even in tech-obsessed Silicon Valley. He emphasized that “we are a tech company,” and noted that every day is a learning experience. “I was just on CNBC, and for introverts, what really scares me is to be on live broadcast TV,” he said.

A huge part of Upwork’s business today is focused on the enterprise, particularly complex workflows that require multiple types of talent. The company’s platform not only handles talent management, but the long array of tasks to manage people: HR, legal, procurement, information security, and others.

According to the company, it will host $1.5 billion worth of gross sales value across two million unique projects. The company estimates that its products are used by 30% of the Fortune 500.

Upwork, which has offices in Mountain View, San Francisco, and Chicago, has 1,500 employees – and as is to be expected – roughly 1,100 of them are freelancers. Kasriel said, “We use our own product, which we call drinking our own champagne.”

Among the major VC investors behind the company are Benchmark, which owned 15%, Sigma Partners, which owned 14.2%, and Globespan, T. Rowe Price, and FirstMark. The company is offering 6,818,181 new shares as well as 5,658,512 shares from existing shareholders. Citigroup, Jefferies, and RBC jointly led the book.

Now that the company has debuted, Upwork wants to refocus once again on its business following weeks of talking to investors. “We need to build this company for the ages,” Kasriel noted, and said that his message to employees was to “focus on the mission.”

Rich-text editing platform Tiny raises $4M, launches file management service

Maybe you’ve never heard about Tiny, but chances are, you’ve used its products. Tiny is the company behind the text editors you’ve likely used in WordPress, Marketo, Zendesk, Atlassian and other products. The company is actually the result of the merger of Moxiecode, the two-person team behind the open source TinyMCE editor, and Ephox, the company behind the Textbox.io editor. Ephox was the larger company in this deal, but TinyMCE had a significantly larger user base, so Tiny’s focus is now almost exclusively on that.

And the future of Tiny looks bright thanks to a $4 million funding round led by BlueRun Ventures, the company announced today (in addition to a number of new products). Tiny CEO Andrew Roberts told me the round mostly came together thanks to personal connections. While both Ephox and Moxiecode were profitable, now seemed like the right time to try to push for growth.

Roberts also noted that the merger itself is a sign of the company’s ambitions. “I think we’ve always been searching for how we could get that hockey stick growth to kick in,” he said. “I don’t think we would’ve done the merger if we weren’t hungry for that next level of success. So after two or three years [after the merger], we started to feel like we had the signs of a business that could grow into something significant and big and with some good numbers behind it. So were: ‘alright, now is the time.’”

While Tiny continues to offer its free open-source editor, it offers a cloud-hosted version of its service with a fee based on the number of users for developers who want the company to handle the backend infrastructure, as well as a self-hosted version that Tiny charges for based on the number of servers it runs on.

Roberts noted that quite a few developers try to build their own text editors. Yet handling all the edge cases and ensuring compatibility is actually quite hard. He estimates that it would take two or three years to build a new text editor from the ground up.

As part of today’s announcement, Tiny is also launching a number of new products. The most important of those from a business perspective is surely Tiny Drive, a file storage service that developers can integrate with the TinyMCE editor. Tiny Drive offers all of the file storage features that one would expect, including the ability to handle images and other assets. Tiny Drive uses AWS’s S3 file storage service and CloudFront CDN to distribute files.

Also new is the Tiny App Directory, which Roberts likened to the Slack App Directory. The idea here is to offer a curated list of TinyMCE plugins. For now, there is no revenue sharing here or any other advanced features, but it’s definitely a play for creating a larger ecosystem around the editor.

Tiny also today announced the first developer preview of the TinyMCE 5 editor. The updated editor features a new user interface that gives the editor a more modern look. Developers can customize it to their hearts’ content, with plenty of compatible plugins and advanced features to extend the editor based on their specific needs. There’s also now an emoticon plugin.

Talking about customized editors: You’re probably aware of WordPress’ efforts to modernize its text editor. The new editor, called Gutenberg, focuses more on page building than the current one, but as Roberts stressed, the underlying rich text editor is still based on the TinyMCE libraries. He noted that even the classic version, though, was always a subset of TinyMCE’s editor. What’s maybe even more important for Tiny as a company, though, is that none of WordPress’ changes will influence its business, even though WordPress and TinyMCE have long had what he describes as a “symbiotic relationship.”

“Tiny’s core business comes from a mix of software vendors, large enterprises, and agencies building custom solutions for clients that has little to do with the WordPress ecosystem,” he notes. “It is a popular and commercially viable project in its own right.”