Berlin: Europe's fastest growing tech hub

Carmen Reichman
09 October 2012

Tweet
Facebook
LinkedIn
Google plus
Send to

As adventure-hungry young people flock to the capital and technology fuses with Berlin’s creative community, a thriving entrepreneurial culture has formed and is growing at a rapid pace. So what comes next? Carmen Reichman reports

For many, the Berlin start-up scene was a ticking time bomb. Home to people from all parts of the world, the German capital offers an array of different languages and a lively party scene. Armed with the teachings of Eric Ries and Fred Wilson, young Berliners have stormed the market helped by incubators such as Samwer Brothers' Rocket Internet. These young entrepreneurs are ready to challenge the German status quo that has earned the nation a reputation of being too scared to take risks. They benefit from a dense and supportive ecosystem, a good geographical placement within Europe and low overheads due to the city's vast amount of real estate, including old factory buildings.

Berlin's venture scene can be traced back 10 years to the dotcom bubble, which saw many new entrepreneurs setting up for the first time. The current boom in Berlin venture, however, started only about five years ago, with the last two years in particular seeing an acceleration of international interest in the city. Berlin has become particularly strong in creative technological development such as consumer oriented tech, e-commerce and mobile, with eight out of 10 start-ups falling into these sectors, as estimated by Christian Thaler-Wolski, investment manager at Wellington Partners.

"It's all coming together in Berlin", says Thaler-Wolski. "The city now has enough well-known angel investors and companies that are funded by well-known international venture firms to build up a reputation for itself. I think a few years ago, big US start-ups went straight to London for their European base, whereas now they either head to Berlin directly or they look to Berlin as the next step after London." Start-ups that have internationalised out of Berlin include Airbnb, Etsy, Fab.com and Citydeal, which was bought up by Groupon.

Berlin is home to a number of angel syndicates and small funds operating in the €5-10m under-management range. However there are also large international venture capital funds that invest in the city, including Sunstone Capital, Index Ventures, Wellington Partners and Union Square Ventures, which invested in SoundCloud.

The capital also features venture capital-like organisations that specialise in helping young businesses off the ground between the seed and series-A rounds. Alexander Kölpin, co-founder of German Startups Group, explains: "While we know that you need a series A or B to grow a company internationally, we believe that you can start a business with a relatively small amount of capital nowadays. Young businesses are increasingly looking for smaller amounts of money and to give away smaller stakes. We are here to bridge that gap."

Start-ups from scratch
Unlike London's early-stage scene, Berlin's has grown organically and not profited from government-backed initiatives. The city has an investment bank, IBB, that offers loans and makes a few investments, but the amounts they work with are not really relevant, says Thaler-Wolski: "If they ten-folded their resources I'd be impressed, but that would also create market distortion".

What Berlin profits from is a special dynamic, says Stefan Glaenzer, founding partner at Passion Capital: "Berlin is probably the quickest growing digital hub. It still lags behind London but it's got a very good dynamic. I've been involved in the German start-up scene since 1997 and it has never been as vibrant and active as it is now. What's really changed is the Anglo-Saxon interest coming from the UK and the US to invest in German start-ups."

For some, what is still missing in Berlin is a mega-exit to really drum up interest and provide a role model that young entrepreneurs can aspire to.

The city enjoyed a few big exits 10 years ago and in 2010 it saw Brands4Friends, a company operated by Private Sale, sold to eBay for $200m. But a grand exit in the leagues of Skype is what Berlin still needs, says Thaler-Wolski: "In the past three years there has been a number of promising companies emerging including Gameduell, Wooga and SoundCloud, but the real big bang is still to happen. And that's what everyone is waiting for."