The FDI angle:

• Venture capital (VC) investment in the past decade has fuelled growth of start-up ecosystems outside established tech hubs. 
• Higher interest rates and uncertainty have recently squeezed capital availability, VC returns, tech valuations and exits. 
• Why does it matter? High-growth tech hubs could prove more suitable than mature ecosystems for founders to grow their start-ups and investors to deploy capital. 

Dubai has topped a ranking of the world’s fastest growing venture capital (VC) ecosystems, in a sign the emirate has progressively become more popular among start-ups and funds amid an uncertain climate for the global technology sector.

The emirate had a VC ecosystem growth score of 72.8, according to PitchBook analysis of its proprietary data between the third quarter of 2017 and the second quarter of 2023. It was closely followed by the Detroit in the US (72.5), Berlin (71.8) and Raleigh, the state capital of the North Carolina in the US (71.3). 

An impressive two-thirds of the 20 fastest-growing VC ecosystems are located in either the US or Europe, four times that of Asia (15%). Brazil’s commercial capital, São Paulo, was the only Latin American city to make it into the top 20.

PitchBook generated these growth scores by combining data on VC deals, exits and fundraising in start-up ecosystems. Size and maturity scores were then calculated, weighted and combined to assess overall development of the ecosystems. Each location was assessed over various shorter and medium-term periods to smooth out fluctuations in market conditions.

Macroeconomic uncertainty and changes to monetary policy have challenged unprofitable private start-ups in recent years. Global VC funding, exits and tech company valuations have all plummeted from the highs reached in 2021, after major central banks brought an end to more than a decade of near-zero interest rates.

While the top 20 high-growth start-up hubs have seen lower VC activity than more mature ecosystems, PitchBook analysts argue there is a possibility they could be the source of highly valued and successful tech companies in the future.

“They’re in the stage of potentially creating that next wave of ‘unicorns’,” says Nalin Patel, a PitchBook analyst behind the research, referring to private companies with a valuation of at least $1bn. He adds that these rankings provide a basis for start-ups or investors to consider less obvious locations when assessing where to expand into, target or launch a new fund. 

More on tech start-ups and venture capital: 

• Mind the tech gap: the AI divide in Europe
• Venture capital-backed exits disintegrate
• Unicorns face mass extinction as funding plummets
• Global venture capital-fuelled investment slows
• European start-up scene reckons with the end of boom times
• Big tech layoffs barely touch pandemic-era hiring

The growth of Dubai’s VC ecosystem has been helped by its development as a financial centre, tourism hub and popular place for businesses to domicile themselves in the Middle East region. More than 90% of all funds raised in the UAE since 2017 have been directed to start-ups based in Dubai, according to Dubai’s Chamber of Commerce. 

Detroit was assigned the highest growth score of any US ecosystem in PitchBook’s analysis due to benefitting from an exodus from more expensive and highly saturated tech ecosystems elsewhere. “Detroit has gone through a renaissance as it’s cheaper to set up a company and secure talent than New York or the Bay Area,” says Mr Patel, who adds that VC has spread to newer clusters in the US with lower costs, but underlying strong pools of tech talent.

Berlin, which ranked third in terms of growth score, attracted the largest amount of VC funding ($26.4bn) of any top 20 high-growth ecosystems, according to PitchBook. It was followed by Philadelphia ($19.6bn) and Miami ($17.9bn) in the US, and Nanjing in China ($14.6bn).

Despite a tougher environment in 2022, around 500 start-ups were created in Berlin — twice the level recorded in its closest rival Munich, according to the German Startups Association.

The Southern European cities of Madrid (Spain) and Milan (Italy) were the next best performing ecosystems in Europe by growth scores, followed by Estonia’s capital Tallinn, Vienna in Austria and Turkey’s most populous city, Istanbul.