Uber's IPO Sends a Worrisome Signal About Geographic Wealth Concentration

Unicorns have gone conventional. Already this year some major technology companies—including Pinterest, Zoom, Lyft, and Slack—have gone public. Today, Uber joins them. In fact, Uber is the eighth technology IPO this week. This reinforces the other signs of economic strength: low unemployment, faster-than-expected GDP growth, rising wages, and so on.

Great news, right?

Maybe, maybe not. The strong market for tech IPOs this year is also an indicator of something else: continuing geographic disparities in growth. For the most part, the tech companies going public have been based in only a handful of U.S. regions. Especially Silicon Valley. Of the eight this week, seven are in either Silicon Valley, New York City, Boston, or Washington, D.C.

Why does this matter? These four regions are all ranked among the top 20 global startup ecosystems in Startup Genome’s newly released 2019 Global Startup Ecosystem Report (GSER). Three of them, in fact, are in the top 5; Washington ranks 19th. This is not necessarily surprising, but it is potentially problematic.

In our analysis, released with the Global Entrepreneurship Network (GEN), the top 10 ecosystems account for 68 percent of global exit value. That’s a decrease from 87 percent several years ago, but still a remarkable degree of concentration. The global startup economy is worth an estimated $2.8 trillion, yet much of that economic value is flowing to “usual suspect” regions.

Many regions are not benefiting from newfangled technological advances like artificial intelligence and blockchain. Worse, many cities in the United States have been pouring resources into supporting their entrepreneurial ecosystems, but with little payoff. This is what I call Startup Fever: a rush to create all the trappings of a successful startup economy—accelerator programs, pitch competitions, and the like—followed by a nasty hangover when public and private officials realize they haven’t become the next Silicon Valley overnight.

Business creation in the United States has been rebounding but remains far below historical levels. According to Census Data, new firm creation in 2016 (the latest year for which data are available) reached its highest level since 2008—but remains 15 percent below the 2000-07 average.

A broader measure of business creation from the Bureau of Labor Statistics shows that new business creation has risen more or less consistently since 2013 and is now at record levels. (The BLS measure includes establishments as well as firms; establishments include both individual businesses and new locations of, say, McDonald’s.) The rate of new business creation, however, remains lower than prior periods. From the second quarter of 1993 through the third quarter of 2008, the rate of new business creation never fell below 3 percent. Yet in the 25 quarters between then and the end of 2014, the rate was above 3 percent only seven times.

Since the beginning of 2015, new business creation has consistently been above 3 percent per quarter—yet still below the quarterly rate of the 1990s and early 2000s.

Meanwhile, the 2019 GSER highlights what we call “Challengers,” regions with fast-growing startup ecosystems. These are not currently ranked in the top 30 but are very likely the next top 30 ecosystems in the world. These are places like Hangzhou, Shenzhen, and Mumbai. Seven of these 12 Challenger ecosystems are in Asia-Pacific countries. How many are in the United States?

Zero.

True, a dozen of the top 30 ecosystems are U.S. cities—and five of them are what we designate “Momentum” ecosystem. In places like Miami, startup ecosystems are growing in size and vibrancy.

This still means that of our 22 Challenger and Momentum ecosystems, only five are in the United States. The top-tier ecosystems dominate the economic value created by startups, and no U.S. ecosystems are among the dynamic group of fast-rising regions. Meanwhile, we continue to pour public and private resources into incubators, university entrepreneurship programs, and the like. New business creation has rebounded but is still sluggish compared to prior decades.

That new business creation, moreover, is much more concentrated in those top-tier places than in the past.

Entrepreneurship has been just about the hottest thing in economic development over the past several years. But a handful of top-performing startup ecosystems are pulling ahead of everywhere else—and American regions are underrepresented among up-and-coming regions.

What gives?

The answer is obviously complex, and related to many factors, but we can speculate here about some. Elected officials love to make high-profile announcements: perhaps about a new publicly-backed venture capital fund, or a new publicly-supported incubator. They are less fond of doing the hard behind-the-scenes work to roll back obstacles to entrepreneurs that may include protection of incumbent companies or limitations on employment mobility. What often happens is that government appears to give to entrepreneurs with one hand, while taking away with the other.

Public policy also continues to be crowded with too many disincentives to growth, such as taxes and regulations that kick in at a certain employment size. Adopting a phased Startup Tax Credit (modeled on the Earned Income Tax Credit) that would encourage scale—rather than arbitrary size thresholds—would help orient policy toward growth.

Will reducing incumbent protection and reorienting taxes and regulations immediately level the geographic playing field? Not by themselves, but they’re a start. There are plenty of other areas where entrepreneurial reform is needed (technology commercialization from universities, immigration, land use). But the first step is for public and private leaders to stop and evaluate the impact of their current set of actions. Only then can we know what to do, or stop doing.