Canada is home to three of the top 20 startup ecosystems in the world, but is falling behind the pace of other leaders, according to an exhaustive study conducted by researchers at San Francisco-based Compass – formerly known as Startup Genome.

Vancouver and Toronto are among the ecosystems on the list that fell furthest since the last Startup Genome report was released. In the new report, Global Startup Ecosystem Ranking 2015, Toronto slid from ranking No. 8 down to No. 17, and Vancouver fell from ranking No. 9 to No. 18. Waterloo slid out of the top 20 ranking altogether. The startup ecosystems in these cities grew over the past three years, the Compass report says, but not at the pace as other top environments.

“Growth in Canadian startup ecosystems has slowed relative to the rest of the world,” states the report. “Exits decreased by yearly average of 11 per cent over the last three years and venture capital inflow decreased by seven per cent versus 99 per cent growth in the other top 20 ecosystems.”

At the top of the list, with no surprise, is California’s Silicon Valley, which also had the same top spot in 2012. But the rest of the top spots were shaken up with New York City jumping from fifth to second place. Los Angeles, Boston and Tel Aviv round out the remainder of the top five.

Compass released its updated startup ecosystem index for 2015 on Monday.
Compass released its updated startup ecosystem index for 2015 on Monday.

The decline of Canadian cities can be explained by exit values in other ecosystems growing faster, at a rate of 410 per cent in Europe and 150 per cent in the U.S. Not being able to achieve “big exits” – such as billion-dollar acquisitions or IPOs – is a clear challenge for Canada, says Bjoern Herrmann, the founder and CEO of Compass.

“This can have a pervasive effect on ecosystem growth because very large exits galvanize the local entrepreneur and investor communities, while a lack thereof depresses them,” he writes in an email. “Fewer exits also lead to lower returns on venture capital and lower investments… also does not produce the international poles of attraction that have benefitted top U.S. ecosystems.”

As a final blow to Canada’s startup credibility, the Compass report authors recommend that investors spend less time looking for opportunities in Toronto (along with New York, Seattle, and Boston), because it is less likely to have “fewer under-priced, under-discovered gems of companies.”

So what should Canadian cities do to climb in the rankings? That depends what they aspire to, Hermann says.

“If their goal is to rival Silicon Valley, Boston or New York, then they could aggressively incentivise the inflow of founders, talent and venture capital,” he writes. “That would not replace the process of building an effective local startup community with high organic growth and low talent/money churn but it would certainly accelerate it.”

The Compass report created its ranking by considering factors of funding, market reach, talent, and the overall startup experience. It collected its data from its benchmarking software, surveys from 11,000 startups around the world completed over the last five months, and 200 interviews conducted with entrepreneurs. It also had data provided by partners including Deloitte, Crunchbase, Global Entrepreneurship Week, Dealroom, and various other sources.

One difference between this ranking and the 2012 report is the new report doesn’t take “per capita” metrics into account. That would help explain why Waterloo was previously ranked higher up the list, because of the town’s small population compared against the number of startups there.

When the first Startup Genome report was released in 2012, it ranked Toronto in fourth place behind Silicon Valley, New York and London. The statistic was widely cited by those championing the entrepreneurial cause in Toronto, but report authors later clarified the ranking was only reflective of startup activity making use of its benchmarking software.

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