Latin America's biggest city - São Paulo - has been ranked as the world's leading start-up centre among emerging-market cities by a new report. But the Brazilian megacity is not without its problems, as the author who lived there for over a year, writes.
The 2015 Global Startup Ecosystem ranking released this week (see below) ranks São Paulo as the 12th most attractive city for tech start-ups. Not surprising Silicon Valley is placed at the top, followed by New York. Moscow is at 13 position, second highest among emerging market cities, followed by Bangalore, India in 15th. Santiago, Chile, which was ranked as 20th in the 2012 report slipped out of the top 20.
Each ecosystem is rated on measures such as the ability for start-ups ability to expand internationally, the availability of local talent, as well as capital, start-up performance and market reach. São Paulo is strongest is the last three.
From the outset São Paulo’s biggest attraction is its size – with a metropolitan GDP of $431bn (compared to $535bn in Silicon Valley). Just fly over it if you want to see a concrete forest of epic proportions.
The sheer market size has attracted foreigners (many from neighbouring countries) and other Brazilians to relocate there and start up. Because of this the city has a sizeable tech scene - at between 1,500 to 2,700 active tech start-ups estimates the report (but no where near the over 14,000 in Silicon Valley).
It also has quite a significant amount of venture capital investments - higher than in Seattle and just below Tel Aviv. This may be because it's the financial capital of Latin America. However, notes the report, most venture capital funds have only started their first investment cycle after 2009.
In addition, when compared to the two other emerging market cities in the top 20 (Bangalore and Moscow) São Paulo’s start-up have a low average output.
While the report notes that the city faces key challenges such as high costs (Mercer's ranking this year placed it as the 40th most costly city in the world), high bureaucracy, and a burdensome transportation system, the current downturn and the lack of exists, have lowered investor confidence.
Still the city in 2013 was ranked sixth by business magazine Forbes, as the city with the highest number of billionaires (it had 26 of the country’s 46 billionaires). But things are now changing.
Last year São Paulo saw no growth in jobs (unemployment in the city edged up to 13.2% in June), while its economy declined by 1.5%, putting it only in the 284th spot for economic performance among the world's top 300 metropolitan areas, according to the Brooking Institute’s Global Metro Monitor for 2014.
Added to this, with Brazil’s austerity crisis, the city’s budget has been sliced by almost a fifth this year over last year. Further cuts could effect infrastructure projects, such as a further 150km of bus corridors planned for the city and 55,000 new homes for residents. That make it not so attractive economically.
Added to this the city is no San Francisco or even Rio. Its graffiti and tag-covered high-rises mean it's often listed among the world's ugliest cites. This is ironic because its highly mixed and varied population easily make it one of the world's most attractive.
Quality of life is also poor. A survey last year found that 57% of paulistanos – those living in São Paulo – said they would leave the city if they could. They listed work as the principle reason that kept them from moving. Traffic and violence are also listed (although the murder rate has fallen - to 9.7 per 100,000 inhabitants in April, versus Rio’s 35 per 100,000).
São Paulo's air pollution particulates average 20 to 25 micrograms per cubic meter – over twice what is deemed safe by the World Health Organization. Part of the problem is that about a thousand more cars are being added daily to the city's roads.
While the smell of sewerage alerts you that you are passing what was once a stream or river, graffiti and tagging are smeared across every wall, grill, door and building. The city centre is also dotted with dilapidated high-rises that have been invaded by groups of people, either homeless or from the favela
On the Estado avenue – one of the city’s main links between the north and south neighbourhoods – drain covers are so sunken that they form holes themselves. The highway is marked with cracks and potholes. It's more like something you would imagine from central Africa than in a thriving tech centre.
Added to this for much of last year and the beginning of this year the city was suffering water shortages, even though dam levels are slowly recovering after higher-than usual rain in February. The chance that rationing might be instigated by the government, has not gone away though.
A little hope is that on street corners in Pinheiros a few hipsters gather regularly to tend to green patches and chat over beers and braai while others paint graffiti murals. A slow reaction to the urban alienation that the city bares.
Part of São Paulo’s problem is that it is an unplanned city, founded in 1554 by Jesuit priests. It only really came of age as the coffee boom ended near the end of the 19th century, and emigrant workers flooded into the city from the coffee plantations of the interior.
Arguably a more exciting start-up city is Bangalore (pictured right). It first gained fame a few years ago as the world’s leading outsourcing city. It moved from 19th place to 15th place in this year’s rankings. The report estimates the city has at least 3,100 tech start-ups.
When it comes to IPO exits and acquisitions Bangalore leads among emerging markets, achieving five times the growth between 2012 and 2014 than the average among top 20 startup cities. It’s second only to Berlin (20 times) and surpasses Silicon Valley (just 0.5% growth). Moscow saw no growth in exit values.
While total venture capital investment across the top 20 ecosystems rose 95% from 2013 to 2014, Bangalore was second only to Berlin when it came to growth in VC investments.
In all over $2.2 billion of VC was deployed in Bangalore last year - four times what it was in 2013 (VC deployment in Berlin has increased 12 times, Silicon Valley almost doubled over the same period).
Over the two-year period Bangalore also saw the biggest increase in seed-fund disbursements (53%), followed by Sydney (33%).
The report said Bangalore-based start-ups benefit from the second lowest time to hire, and software engineering salaries that are below $40,000 annually. However, it said the average quality of the local talent is not yet on par with the elite start-up ecosystems around the world.
But the ranking - which is based on interviews with over 200 entrepreneurs and start-up specialists from 25 countries and with 11,000 founders of start-ups as well as investors - is flawed.
The authors admit that the index has its flaws, by for example not currently start-up ecosystems from China, Taiwan, Japan, and South Korea. They attribute this to the language barrier and expect to have these ecosystems included in its ranking later this year.
Added to this the report also doesn't seem to touch on Africa, even though cities like Lagos, Nairobi, Cape Town and Johannesburg are teeming with tech talent.
Future reports may get this right, but what is clear is that many emerging-market cities have some way to go before they can compete with Silicon Valley - just shedding red tape and attending to visa restrictions would greatly help things along.
Timm is a South African who writes on small business in emerging economies. He lived in São Paulo from in 2014 to June this year. Follow Small Business Insight on Twitter at @Smallbinsight and on Facebook.
Stephen Timm is a