Berlin start-ups attract Silicon Valley cash

In late January, Berlin-based music platform SoundCloud raised $60m in a series-D financing round that valued the firm at around $700m. The round saw capital commitments from The Chernin Group, the media company headed up by former News Corp executive Peter Chernin, alongside existing backers including GGV Capital, Index Ventures, Kleiner Perkins Caufield & Byers and Union Square Ventures. From term sheet to cash in the coffers, the deal took three weeks to close.

A glance at SoundCloud's shareholding structure reveals a high number of US-based investors, with the latest round led by Silicon Valley-based Institutional Venture Partners - symptomatic of a growing trend in the German venture market. In similar fashion, Sequoia Capital made its maiden investment in Germany in December 2013, lured into the market by 6Wunderkinder, the firm behind to-do list app Wunderlist. A few months earlier, Union Square backed iLiga, also known as The Football App, which offers real-time scores, news, videos and statistics for more than 100 leagues in seven languages. And Berlin has exerted its pull on start-ups too, with ResearchGate relocating from Boston in 2010.

"The return of American investors is especially visible in the German market," says Stéphane Valorge, partner at Clipperton Finance and head of the German office of the Paris-based corporate advisory boutique. "In France, VestiaireCollective raised $20m in a C round led by US corporate investor Condé Nast – a deal we worked on – and Talentsoft raised money from Highland Capital Partners, but both investors have teams in Europe. The German case is different."

The entrance of mature Silicon Valley investors is a positive indication of the evolution of the local market, though there is room for improvement. In 2013, the number of early-stage deals in Germany was up by 11% compared with the previous year, according to unquote" data. And while later-stage expansion deals last year were down on 2012, the value of such deals was higher, suggesting that larger rounds are also alive and well in Germany. But this bifurcation could leave a critical funding gap at the B-round level.

"The statistics raise the question of the equity gap," says Valorge. "But this applies to every European market, not just Germany. There is enough liquidity in the early days of a company, and a fair amount for the C and D rounds of growth equity, when companies get profitable. The problem is the intermediary step, when a firm has raised €1-2m and needs €5-10m before completely proving its model and moving onto the big, double-digit rounds. That's where liquidity is scarce, in the so-called Death Valley."

Where's the exit?
While the amount of cash being pumped into the Berlin ecosystem is reassuring, how much is being returned? The relatively low number of exits from venture-backed companies would suggest most of the cash remains in lock-down. But exits are expected this year; music to the ears of the relatively low number of LPs brave enough to buck the trend and keep skin in the venture game. Says Valorge: "I expect consolidation in e-commerce and ad-tech, for instance. There has been a lot of liquidity invested so far in a lot of companies, but very few exits. I think there will be a lot in 2014-15."

The long-awaited Zalando exit will no doubt prove significant. In October 2013, unquote" reported that the backers of online shopping platform Zalando were considering a flotation. In Q1 2013, Zalando's revenues stood at €372m, a 74% increase compared to Q1 2012. The group, which counts AB Kinnevik as its largest shareholder, generated revenues of €1.5bn in 2012. "Everyone is waiting for the Zalando exit. It could set the tone of the European ecosystem as far as e-commerce is concerned," says Valorge. But that could prove a challenge if the result is not compelling enough. The stakes are high, but recent history suggests Berlin is unlikely to disappoint.

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