Michael Scharf: Austin is the new innovation powerhouse, not the next Silicon valley, but the first Austin, we are adapting to the future in real time.
Jason Scharf: I'm Jason Scharf, a biotech executive, and early stage investor.
Michael Scharf: And I'm Michael Scharf advisor and board member for multiple private companies.
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Michael Scharf: In this podcast, we explore Austin superpowers, the people and companies driving our growth and the macro and micro trends that come together to create Austin.
Jason Scharf: This is Austin. Next.
We see all of these best of city lists being published best places to live most affordable tech job growth. How does Austin stack up when looking at our overall startup environment today, we bring on for shard with Hemi, who's going to walk us through startup genome's annual ranking of the global ecosystem.
We discussed the big observations in this year. What does the data say about Austin and how does our future look? Dr. Rahimi is the director of data strategy for startup genome and holds his degree in artificial intelligence, electronics, and robotics. He's now using global tech startup data to identify gaps in sort of ecosystems and scale up programs.
He's currently an advisor to data-driven companies and becoming greener and AI powered. Most recently, Dr. Rahimi served as co-founder and CTO of Sol RA and worked closely with general Atlantic and NuCalm group to build a full analytics solution on their recent portfolio company. He's published patents on energy efficiency failure prediction, and advanced manufacturing.
Dr. Rahimi started his first venture and managed his fund and UK horse betting markets using principles of AI and high-frequency trading
Farshad welcome to the Austin next podcast.
Farshad Fahimi: Thank you. Excited to be here.
Jason Scharf: All right, let's start with big picture here. Tell us about startup genome. What's the mission. And what is the research you guys.
Farshad Fahimi: The startup genome, we built the 10 years of research across the startup economy. And what you're planning to do here is be mounted, democratized, and started to kind of enable everybody across the world to grow their ecosystem based on their culture and the innovation that they have. And that is what we are doing here.
Jason Scharf: No, I like it. And I think one of the things that we always talk about is, you know, Austin having its own special sauce and. Having the innovation ecosystems with each individual geography kind of based on their culture, their secret sauce, it's kind of a great thing deal with. So, so today we're here, we're just releasing the 20, 22 local startup ecosystem report.
So I want to start before we get into the, what the report says. Can you talk a little bit about the methodology? What's the data that you're looking at? How are you measuring it?
Farshad Fahimi: Yes. Then just create it based on five main factors. So those are performance, funding, startup experience, knowledge and legacy.
As you know us in Austin with more companies, be companies moving to Austin, legacies becoming very important. This is the base of the start of the economy, because that's where the knowledge is also shared in terms of what is the old knowledge and how it is being transferred to the collaborations, to the startups, to the new start ups.
Knowledge is something you're measuring mainly based on the patterns on the innovation research that is done inside this system. And it's very important for universities, for example, for laboratories to work with the startups in order to build new and innovative startups that are not only having global missions, but also it's applies to the local and requirements.
We measure a startup experience. Because it is showing the experience of the investors in the startup ecosystem is important for the investors, for example, to work with this start ups and, you know, to help them grow into more successful. And obviously the performance and funding are the major factors in the ecosystem is very much linked to the size of the ecosystem, how it is growing in terms of the number of exits and also in terms of the count of exits.
Jason Scharf: So in this year's report, what are the biggest observations you've seen globally?
Farshad Fahimi: This is, I think one of the most interesting reports released and, you know, basically at the 10 year anniversary of, or report. Showing what happened in the past 10 years and how we see the start up to the economy growing in the next 10 years.
Obviously we had some forecast also 10 years ago. We are reflecting on those. And what you also want to talk about, it seems like how the share of earliest days latest funding change is important to see. For example, the investors have shifted focus recently to later stage and why there's been an inflation in the valuation of rounds in the U S and Europe.
We talk about that. We've seen a growing number of unicorns, for example, in ecosystems in India. So India has been rising the last year and we've seen the reverse effect almost in China. So eight out of 13 ecosystems in China that you're evaluating has been dropping in the ranking and also. Once we see a tremendous number of global increase in the number of unicorns.
So now we have 113 ecosystems systems globally that have at least one unicorn.
Jason Scharf: And did you look at the moment now, like with the stock market kind of in the way it's situating with inflation? Do you see this dispersion increasing? Do you see the late stage valuation staying up or I know kind of in the immediate we talked, we've heard a lot about kind of valuation starting to go down, but seed stage maintaining.
How do you see these kinds of observations? Maintaining is that at one year things are, let's say multi-year effects.
Farshad Fahimi: I think there's been a lot of smoke related. Well, what's going to happen next. You know, in the last year we've seen the valuation of companies have been across going up, especially in Europe and us.
We've seen that. And I, one of the conditions we have is that in the next year, this is going to slow down, especially because investors are going to hold on to some of the dry powder that they have. We have to see things can change.
Michael Scharf: Okay. All of us are asked to be prognosticators at one time or another, whether you're inside a company that strategic planning, whether you're a consultant or like yourself, you're an analyst.
So let's talk about what's your prognostications were 10 years ago. And how good you bet?
Farshad Fahimi: Yes. We've seen a dispersion of a number of unicorns and also ecosystem value across globally. We look at 113 ecosystems, have no unicorns in the past year.. And we are evaluating now around 280 ecosystems globally that are no started hops.
So that, that has been growing tremendously.
Michael Scharf: That's great. Let's take a dive into Austin. Where do we rank this year? How does that compare to where previous ratings scan? What's driving our moving up or down the
Farshad Fahimi: Austin has been doing great past year. It was number 20 and this year is 25. The main reason is the Austin in comparison to the peers that have gone up is now whole quite big size in terms of the ecosystem where they.
No since last evaluation, the Austin, the ecosystem has grown to 119%. So it's around 43 billion in terms of ecosystem size. This means that the larger Austin thing gets it is harder for us to grow, need some exits. And recently we've seen the growth of exits also in Austin from 12 to 14. Since last year, CR we've had six exits over 50 million and that is a growth for Austin, but the peers are also growing fast, so it has to catch up.
Michael Scharf: Okay. So that's one of the hard things that we saw where we're both Jason and I used to live in San Diego was that when companies exited, they not only exited financially , but they exited San Diego. Do you see that same kind of thing happening when a company exits here in Austin? Do they leave the city or are they staying around?
Farshad Fahimi: I think the observation is correct in a way that we see ecosystems such as San Diego, Berlin, Sydney, that are Hobbs. And in terms of exits and Austin is this thing almost in the same place, but I think this could be shifting because also we are seeing this and as I speak legacy companies moving inside us that are able to acquire.
These are startups that are scaling.
Michael Scharf: So let's look at the comparison in north America. How have we been doing with regard to Silicon valley or Boston New York or LA?
Farshad Fahimi: In terms of comparison to Boston, what you see is the it's important to say Austin has been growing 47% in terms of number of exits. So it's been doing great when it comes to total funding.
Total, we've seen this. If you track Boston, Austin in comparison to Boston and Silicon valley, what you see is if you put them on a race on a map from 2002, Austin is catching up with one of these bigger core systems in terms of total amount of funding is still it's around 20% of Boston. So that it needs to capture, but again, when you're looking at the ranking, because you asked me in the previous question, one of the reasons that Austin is falling back five rounds is because there's been a lot of funding going inside Austin, and it needs to turn those funding into larger scale up some exits.
So that is the main reason. There's this oscillation in this sort of political system. That the ecosystems grow and then they have to turn those funding amounts into exits.
Michael Scharf: Absolutely. One of the questions I have is in looking at the different phases of fundings here in Austin, we've seen a whole bunch of startup money going into Austin companies.
Now obviously those companies won't be exits for 5, 6, 7 years, maybe more. How does that compare in terms of startups? funding. Between Austin and other areas?
Farshad Fahimi: , but funding in Austin, if you look at 2002, we pat around 172 million in terms of funding. Now we are seeing the volume in 20 21, 835 million. So what is that?
Around four times, five times. It is early stage funding in 2012. It's still a relatively small in comparison to Boston, 20% of Boston but it's a headstart, which means that we have to turn those early stage funding into a scale of with a scale-ups.
Michael Scharf: So if I was going to put my prognostication hat. Then I'd say we've grown five X in terms of early stage funding, then six, eight years from now, I'm hoping we grow five X in terms of exits.
Farshad Fahimi: Exactly. That is what we've seen
Jason Scharf: besides
translating these, you know, fundings into exits. What are the biggest gaps that we also need to change in terms to move up the rankings? You know,
Farshad Fahimi: Ben it's start up ecosystem is receiving so much. And it's been growing four times, five times its size. When in the past year, what is needed is the mentorships also found founders networking inside the ecosystem, helping each other in order to help the startups to scale up and turn them into globally leading companies.
So that is what we are seeing also in terms of legacy companies being there in terms of universities, handling this stuff.
Jason Scharf: As long as the fact that we were starting to attract now those those headquarters that the Tesla Oracles, the world creates a whole different structure and infrastructure behind what can make these companies going both from a talent perspective and from a knowledge perspective.
Farshad Fahimi: Yes, exactly. This is one of the things with the scale-ups and also legacy companies, helping the founders, collaborating to make new innovations and help them grow up.
Jason Scharf: What are the biggest things that we've observed as being kind of a powerful strength of Austin is our sector diversity. You don't just see, it's not just consumer internet, it's life science, it's crypto it's manufacturing.
It's cybersecurity. How do you see that data playing out?
Farshad Fahimi: Boston Austin comparison to other ecosystems that are major ecosystems. It's relatively good in subsidiaries, such as AI MBD, but then it's also within things such as cyber security, which is not so strong in ecosystems usually. And also a strongly clean tech
the combination of the sub sectors together with the legacy companies can create also successful advanced manufacturing. And this is this thick to digress. You also mentioned, I think we had a short conversation before the interview. You mentioned the PropTech company and I looked into it. I think these are also innovative companies that can shift the startup inside, Austin
Jason Scharf: is one of the interesting things that we noticed is that kind of, you said that you had these big waves coming. I mean, I remember it, you go back to early podcasts and talks a lot about Samsung is possibly opening up another manufacturing plant and that was kind of almost every every week conversation.
And then they announced that. And then now every week it's a different semiconductor manufacturing company covering. And I think it's usually you say the same thing with the prop said, you know, we saw a set point, just announced $600 million plus, but that was after homeword last year raised 300 million and it began, it just starts to be that kind of wonderful flywheel effect that keeps going when we have to hear about the first one, the second, third, and fourth learn far behind.
Farshad Fahimi: Exactly. I didn't want one. I statistics from where the economic farm is that 70% of the value in the next 10 years is created in a digital economy. And the importance of things such as setpoint or advanced manufacturing is creating more efficient workers. Where everybody, and because you help this strongly, I am beating in Austin that is going to create an impact in putting this sort of efficient approach to different sub-sectors of
Michael Scharf: one of the things that has obviously rocked the world for the last two years is the pandemic. And I'm sure that your report last year was all about the decline due to the pandemic and the lockdowns. How has the pandemic impact. The startup genome and the startup ecosystems around the world. And how do we expect coming out of that pandemic this year and next to impact.
Farshad Fahimi: We had around one or two years is slow down in terms of number of funding at exits. Overall, there was more attention to the latest stage funding because of risk aversion, because the investors wanted to focus on the quality of rounds. And now we saw a couple of more activity, more than ever in terms of also valuation and those valuations. And now. Stage of chilling now, which means that we might go back to the normal valuations for awhile and we need quality rounds.
We need innovative companies to also solve problems locally and globally so that we can go back to the various space. So we really need to focus on this innovation is that we are going to,
Michael Scharf: it's kind of interesting, just kind of aside. We were listening to a podcast where our good friends over at the Austin forum and in 2019, they talked about what they were looking forward to happening in the next couple of years and actually several years out. And it seems like even with the pandemic, we've kind of turbocharged, the Austin ecosystem here accomplished everything they said was going to be years a way and done. So just an observation that at least for Austin, in some ways the pandemic speeded things up, you know, we're, we're moving on you on Elon time, not on pandemic time.
It's kind of interesting to see.
Farshad Fahimi: Yeah. And also it's the problems that really on a global level, meaning things such as an electric, electric cars, electric machines, vehicles, and also battery production. These are the things that are coming also funding down to the green. Substitute, which not only locally, but also globally.
And I think that is also attracting attention from the investors.
Jason Scharf: So building on the change in the last two years, as I see the Austin ecosystem kind of rising to the next, you know, the next bar, right? The next level up in his case. We've seen a bunch of VCs, you know, main brands of bedrock, Breyer, 8VC move here, or established offices.
We're seeing, you know, our local VCs also step up and all of them raised one of the biggest funds ever for each of them. And at the same time we're seeing this. So I think we're seeing Austin funding Austin A. Little bit more. And we're seeing, I think, you know, with this, as you said, these legacy companies here, it'd be interesting to see if we also see.
You know, M and a Curry Austin, but Austin is Tesla by any local companies. Does Oracle buying local companies? How do you see that either in the data or just, you know, looking forward?
Farshad Fahimi: Yep. There is Terrance's seven accelerators. I mean, us, that's what we see. These are needed for creating new artists.
They're just startups to promote innovation. And then there's around 160 investors that we see. There are data. As you mentioned, this is very important in order to make also legacy company, as you mentioned, it's very important to make these acquisitions. Otherwise the companies are scaled up and then the money has to recycle it back to the ecosystem.
And this is very important for that. Yeah,
Michael Scharf: obviously it is just as important to see money recycle from magnets back into early stage companies, as it is to see new money coming in from other areas. Yeah, may 16, Z, and everybody else seems to be opening offices here. What else do you see in terms of what's happening both in Austin and globally over the last year.
And what do you expect to see in the next year?
Farshad Fahimi: What is interesting about Allston is that it's generating a tremendous number of exits. As I said, 12 to 14 from the last year, CR six exits over 50 million and 5 unicorns. At least there are data. We have a street. They are finishing this there's the more unicorns if you remove that criteria for us.
And that's what we see. So in comparison to everywhere else around the world, I see that the advantage is that there's more exits. There's really more recycling of the money into this ecosystem and it ministers.
Michael Scharf: . Thank you for being on the Austin podcast. We always end with the one simple question.
Farshad What's next Austin.
Farshad Fahimi: Yeah, you have a great mixture of and the foundation of legacy companies. I'm looking forward to see how this is going to attribute to the ration, create new innovations inside to ask them. There's a lot of on the board inside this ecosystem, and that's what they see. Novice game ups, unicorns, looking forward to see what's happening with.