Australian review of the 2024 Global Startup Ecosystem Report (GSER)

The 2024 Global Startup Ecosystem Report (GSER) provides updated rankings for the top 40 startup ecosystems and top 100 emerging startup ecosystems around the world. The report offers insights into the global conditions and trends for startup ecosystems and data on the Australian cities of Sydney, Melbourne, Brisbane, Adelaide, Perth, and Canberra. The GSER also highlights an approach to understanding how to analyse startup ecosystems in the global and national context and over time.

To support headlines about ecosystems changing positions, we take a moment to review the high level observations from the report, dive into the methodology, and reflect on what it might mean for Australian innovation policy and practice.

Global and Australian conditions

Much has been said about the "VC Winter," a condition of low venture capital availability after the highs of 2021 attributed to global pressures of inflation, increased uncertainty, and post-pandemic factors. Many see the season's reduction as a rebalancing, such as Australian investor Steve Baxter, who reflected in December 2022 that "the stupidity is over." Related sentiments were echoed a year later, in December 2023, by investment firm AirTree Ventures Partner Elicia McDonald, who indicated the shift was in line with expected averages and that there is a need for balance between too much and too little capital.

The 2024 GSER reflects on the recent downturn with data showing decreased Series A funding, lower exit value, and Series A investment coming later in a firm's lifecycle. Global Series A funding fell 46% in 2023 compared to 2022, even as the average Series A deal size increased in H2 2023 compared to H2 2022. The annual value of large exits decreased in 2022 by 86%, followed by a 47% decrease in 2023. In 2019, only 18% of Series A deal startups were between six and nine years old. By 2023, this increased to 31%. The median age of startups that secured a Series A deal was 3.4 years old in 2019 but moved to 4.2 years old in 2023. Similar trends are seen in Australia, with April 2024 reporting on Australian investment data through the investment reporting platform Cut Through Ventures showing a 68% decrease in Australian angel or pre-seed funding between 2023 and 2024.

However, investment capital always seeks out value and opportunities. The GSER notes bright spots in technologies related to Generative Artificial Intelligence (GenAI) and Clean Technologies (related to energy, water, transportation, agriculture, and manufacturing). In 2023, 18% of all VC funding went to startups focused on GenAI and GenAI VC funding increased 3x in 2023 compared to 2022. This growth also resulted in greater centralisation, with U.S.-based GenAI startups increasing their share of all VC deals to 65%, an increase from 57% in 2022. Late-stage Cleantech startups raised 2.5x more funding in H2 2023 than in H1 2020 – a steeper increase than Advanced Manufacturing & Robotics.

These shifts are driven by the emergence of new technologies and platforms, specifically the release of ChatGTP, and policy drivers for climate-related initiatives, including decarbonisation initiatives and carbon targets. In Australia, the 2023 Cut Through Ventures report showed that CleanTech held the top spot in number of deals out of all the sectors, and Generative AI took the top spot for investor interest.

Review of the GSER and indexing/ranking approaches

Ecosystem evaluation continues to evolve and mature. In 2020, I mapped global approaches to evaluating and mapping innovation ecosystems and examples from Australia. Since that time, most Australian states and territories have advanced their approaches to managing innovation metrics through investment in internal platforms and capabilities, as well as external systems and tools. As one tool in these portfolios, there is value in providing a deep dive into what goes behind the GSER ratings. Thankfully, the GSER is transparent in providing details about the underlying methodology, including metrics, weightings, and changes over time.

Considerations

A review of the GSER needs to be prefaced with a few considerations.

First, the Global Startup Ecosystem Report can be considered best in class for global comparison of startup ecosystems. There are other reputable indexes, such as the Global Innovation Index, and other localised approaches to ecosystem analysis, like Israel's Startup Nation Central. However, in terms of a national approach with transparency and longitudinal reputability, we can double down on the GSER as it matures over time.

Second, longitudinal and cross-region startup ecosystem analysis is difficult. The data landscape is constantly changing, shared metrics may not be available across all regions and sectors, and early-stage startup data is notoriously hard to find and track.

Data from aggregator platforms such as Crunchbase, Traxn, or Dealroom cannot be taken at face value and needs to be reviewed and verified record-by-record. Data can become more unreliable for earlier firm stages and periphery geographies. Our research for Crunchbase data in Australia consistently finds that around 30% of records are inaccurate. One example from research in March 2024 found discrepancies across platforms using Australian startup Goterra as an example:

• Dealroom ($11.7M) https://app.dealroom.co/companies/goterra ?
• Crunchbase ($13.6M) https://www.crunchbase.com/organization/goterra/company_financials ?
• Pitchbook https://pitchbook.com/profiles/company/229870-27 ?
• CB Insights ($15.52M) https://www.cbinsights.com/company/goterra ?
• Traxn ($18M) https://tracxn.com/a/d/company/d3yJdgYyNxRTdJkWLMna5Fd994pZR1vvWNknYXLPauA/goterra.au#a:funding-and-investors

Third, index rankings can vary based on changes in methodologies over the years and data sources may have different weightings in different ecosystems. In 2024, the GSER changed patent growth metrics from count to percentage to compensate for artificially inflated ranks of ecosystems that subsidise patent filings and might reward quantity over quality. The 2024 report also added data from the aggregate and analysis platform CB Insights, contributing to an increase of 8% in ecosystem value. This increase may also assume that CB Insights contribution is the same across all geographic regions.

A change in the definition of startup data to include firms with an earlier founding date contributed to an approximate 36% increase in the Ecosystem Value of the top ecosystems. There can also be questions as to what a startup defines as Series A, Series B, Series C, etc. funding, which can influence ratios.

Recent changes also acknowledged challenges with geographical attribution. The 2024 GSER has added the value of the top five startups and/or unicorns to the ecosystem where the startup is headquartered and originated.

The GSER is also reliant on the availability of data sources. Because meetup.com's adoption was uneven in less developed ecosystems, the GSER removed the Connection category and the local connectedness component. The ‘global connectedness’ component has been merged into the ‘market reach’ category, necessitating a slight reweighting of the remaining categories. We saw this in Australia with the reduced event and connectivity data from APIs into meetup.com and EventBrite from the increased popularity of competing platforms such as Humanitix which did not have a comparable API (API used as an interface to extract data from third-party platforms).

Fourth, the focus should be on what contributes to the rankings more than the position itself and consider unintended consequences. Count and funding of startup firm entries and exits are the primary contributing metrics to the GSER. An ecosystem going up or down in rankings is an indication of more or less entries and exits and funding events. It should also be noted the inequality is an inevitability in innovation ecosystems unchecked by social measures. The GSER does not include any measures for social impact, meaning a high ranking may accompany centralised wealth and social disadvantage.

And fifth and finally, this analysis is based on interpretation of the methodology outlined in the GSER. We are deconstructing the math after the fact and descriptions in the report may not accurately reflect exact calculations. I am also not affiliated with Startup Genome, which delivers the GSER, although as founder and chair of Global Entrepreneurship Network Australia, I am affiliated with the Global Entrepreneurship Network, which supports the report.

Methodology analysis

The 2024 GSER index is comprised of indicators across five main categories in order of weighting: Performance (30%), Funding (25%), Market Reach (20%), Talent & Expertise (20%), and Knowledge (5%). The index includes 76 indicators, 45 measures, and 42 metrics. For the purpose of this analysis, indicators are made up of a number of measures, a measure is an indicator with assigned metrics, and a metric is a data point that can apply to one or more measure.

The diagram below represents the information included in the 2024 GSER methodology. It is based on information interpreted from the 2024 GSER report and may not reflect the actual calculation used in the index. The diagram shows the relative weighting of each indicator in the GSER index.

The results are shown for the methodology applied to top ecosystems. Weightings are different for emerging ecosystems.

A further analysis of the indicators shows how much each indicator contributes towards the final ranking. For example, the main indicator of Performance contributes 30% and includes the indicator of Exits, which contributes 11.25%, which then includes the indicator Volume of exits made up of measures for Log of number of $50 million+ exits and Log of number of $1 billion+ exit. These measures are made up of the two metrics of Count of $50 million+ exits and Count of $1 billion+ exit.

An understanding of how much each indicator contributes can be helpful to understand local conditions that may have a greater influence on outcomes over other regions.

The indicators are made up of one or more metrics, often shared across indicators. For example, "Count of $50 million+ exits" is used in indicators of Talent quality and access, Scaling experience, Local reach, and Volume of exits. Either stand-alone or as a ratio, the metric is used in measures that contribute over 16% towards the final rating. The majority of influence on the ranking relates to firm exits and funding, with other supporting metrics such as patents or investor counts contributing to less than 3% each.

Understanding the methodology helps us understand what contributes to the final ranking results. We can now look at how the index is represented in Australia.

Australia's position

The 2024 GSER provides detailed results for the Australian cities of Sydney and Melbourne and high-level results for Brisbane and Adelaide. Melbourne and Sydney are ranked according to weightings of top ecosystems, while Brisbane and Adelaide are rated with weightings for emerging ecosystems. City-based rankings for the Oceania region generally reflect population sizes.

Melbourne and Sydney have similar population sizes, but the funding results in access and quality & activity highlight the contribution to Sydney's higher ranking. Melbourne scores higher in the Cost indicator for Talent & Experience, the Global reach indicator for Market reach, and Startup success indicator in Performance, but they are only 0.60%, 5.00%, and 3.75% contribution to the overall rank respectively. Given the metrics that contribute to Funding indicators are also used for indicators in performance and Talent & Experience, Sydney's higher ratings in those areas may be expected.

Significant increases in Market reach from 2023 to 2024 can be explained in changes to the methodology rolling Connectedness into Market reach. Changes in patent calculations may also explain significant decreases in Knowledge ratings.

Reflections and application

There are a few takeaways from the GSER.

First, it is helpful to consider a methodological approach to evaluating innovation activity. While metrics such as $50 million + exits and unicorns may not be relevant to many regions, there is value in tracking firm progress. The index also provides insights into considering enabling factors such as knowledge and cost.

Second, we can consider additional proxies and weightings for what is valued by the local ecosystem. The index can perpetuate a base assumption that higher, more, and bigger is better. And yet growth and ranking for its own sake may come at a cost of what makes an ecosystem unique for those in that community. Would the community in Adelaide aspire to be more like San Francisco? What would Hobart give up to be ranked alongside Sydney as a startup ecosystem? The GSER has a specific focus on startups. The overall ecosystem concept may be expanded to consider other livability factors and inclusion lenses as additional weighting.

Third, we can continue and reinforce policies across the innovation pipeline and value chain. The innovation pipeline includes activities from idea and startup through to scale, while the value chain includes investment, talent, research, and markets. A significant barrier to startup activity is the staccato pendulum shift of government policy. Consistency is more important than large grant program sugar hits. We also need to support the ecosystem itself, the space between investment funds, incubators, and programs. The network aspect of the ecosystem is often overlooked.

Fourth, we can invest in data and measurement for greater feedback and control. The GSER is good as a global representation, but Australia needs its own measure that goes down to regions with smaller populations. We are operating in a deficit of reliable data. The GSER should be a validation of what is managed internally in Australia. We need a central, trusted custodian of startup data. This is currently distributed among peak bodies, intermediaries, and dedicated platforms, including Cut Through Ventures, Techboard, and Dealroom. There has been some talk among national research entities to advance the approach, and each state continues to invest in dedicated solutions, but more needs to be done at a collective national level.

These are just top-of-mind reflections. I am keen to hear your reflections on the GSER and approaches to understanding outcomes from entrepreneurs, startups, and innovation in your ecosystem. In addition to those with access and the capital cities highlighted in the report, I look forward to working with the collective leaders across the nation in advancing impact through innovation and entrepreneurship for everyone in Australia.