Is Germany the best place to start your start-up?

For those wanting to set up a tech company, there's a lot to consider. ZDNet takes a look at some of the major start-up hubs in EMEA and what each can bring for those wanting to get their own IT business off the ground. Next up, a look at Berlin.
Written by David Meyer, Contributor

For many in the IT industry, the dream is to set up a tech start-up and grow it into the next Google or Apple. Individual start-up scenes are thriving in EMEA, but from staffing to rent, exit potential to government support, there are huge differences between countries. But which country is right for your fledgling tech company? ZDNet examines some of the major hubs in the region, and what each can bring to the start-up table.

Berlin, Germany
The German capital of Berlin is home to one of Europe's fastest-growing start up scenes. Image: Shutterstock

Berlin can probably take the title of the world's most-hyped start-up hub. Whether that was triggered by the success of early hits such as SoundCloud, or by the city's aggressively experimental culture, the German capital now rivals London as Europe's most attractive place to set up a new tech firm.

London also has a strong cultural attraction, of course, along with its status as a financial centre. But Berlin has its own advantages, particularly its low cost of living and its status as an ideal location for budding entrepreneurs and developers across Europe.

It's impossible to adequately explain Berlin's situation without reference to its history. When the city was reunified, it had no industry to speak of

Earlybird venture capitalist Ciaran O'Leary describes Berlin as a start-up in itself ("It embraces change everywhere"), while Christian Reber, CEO of up-and-coming productivity firm 6Wunderkinder, describes Berlin as "the perfect city to start a company".

"It is creative, international, youthful, multicultural, safe, vibrant and boasts an incredibly high living standard while still remaining one of the most affordable cities on the planet," Reber said. "It has become a place where people really want to live, which made it easy for us to find people to start a business with and it has also given us a competitive advantage when it comes to recruitment."

Sascha Kellert set up cloud printing start-up Ezeep in the city two years ago, before the hype hit. "We decided to settle in Berlin primarily because of the economic and social circumstances that allowed for experimentation and great access to talent," he said. "I feel the foundation is being built today for Berlin to become an epicentre in Europe for the software industry in the long run."

These attributes aren't just attracting new start-ups – overseas successes such as Fab and Groupon now have offices in Berlin, as do the now-venerable Mozilla, Google and Twitter. Go to buzzy hangouts such as the Sankt Oberholz cafe, near the so-called 'Silicon Allee' district, and you'll see an impressively broad spectrum of wannabe and established players.

The old and the new

It's impossible to adequately explain Berlin's situation without reference to its history. When the city was reunified, it had no industry to speak of. As it had effectively been an island within East Germany, serious economic concerns had long since fled — and so had many of Berlin's inhabitants, leaving scores of empty properties.

What Berlin did have was art and media, along with very cheap accommodation and office space across the former East Berlin. When the current start-up boom began three or four years ago, it was only natural that creative types such as SoundCloud, the YouTube of audio, were the first to gain prominence.

SoundCloud probably remains the most instantly recognisable Berlin brand, but others have also garnered millions of users — examples include 6Wunderkinder with its Wunderlist task management app, academic social network ResearchGate, and social gaming powerhouse Wooga. Those are the big-hitters: there's also plenty of hype around the likes of experience marketplace Gidsy, Instagram rival EyeEm and opinion platform Amen.

Although the prominent Berlin start-ups are mostly consumer-facing, there appears to be a steady shift towards B2B as well. When financial advisors Torch Partners announced the opening of a Berlin office this month, the company said it was largely down to the city increasingly being a breeding ground for B2B SaaS products.

"It used to be very consumer driven; now there's a very healthy B2B push and also new techie stuff coming up," O'Leary says, pointing to Ezeep and developer-oriented services such as rules.io and Travis CI.

The Samwers

And then there's Rocket Internet, an e-commerce company that is simultaneously the best and worst thing to happen to the city's start-up scene.

Rocket is part incubator, part accelerator, and the vehicle for brothers Oliver, Marc and Alexander Samwer. The Samwers first made their name with Jamba (yes, the Crazy Frog company) before discovering a lucrative business in copying US successes and selling the clones back to the clonees. Alando (eBay) was first, followed by CityDeals (Groupon) and Betreut (Care.com).

"For the last two or three years, Berlin-based founders have started to think about business on a more of a global level" — Christian Reber, 6Wunderkinder

Rocket's strategy in the last couple of years has been very global in nature, involving dozens of companies in Europe, Latin America, south east Asia and even Africa that all copy models such as Zappos and Amazon. That, coupled with the Samwers' relentless focus on execution, has created hundreds of highly experienced Rocket alumni.

The Samwers and their many fresh-out-of-Goldman-Sachs MBAs have given Berlin a negative reputation for clones — but also a very positive reputation for internationalisation.

"For the last two or three years, Berlin-based founders have started to think about business on a more of a global level," Reber says. "As such, we have started to see localised products targeted at bigger markets, money has been raised from abroad and English has become the default language."

Fortunately, Rocket is far from the only incubator or accelerator that's active in Berlin. There are seemingly dozens of them these days, from Deutsche Telekom's hubraum to the likes of Team Europe and Liquid Labs.

Getting started

Around 1,500 tech companies have started up in Berlin since 2008, 500 of them in the last year alone. Then again, seed financing is relatively easy to come by.

There's a small angel network, featuring local luminaries such as SoundCloud founders Alex Ljung and Eric Wahlforss, serial entrepreneur and investor Christophe Maire (txtr, EyeEm, Phonedeck), and Felix Petersen, the Amen CEO who sold his previous start-up, Plazes, to Nokia. Some VC firms will also provide seed funding.

The Berlin authorities' support for the city's start-up scene has largely been more of the moral than practical sort, meaning most of the growth is happening organically. That said, entrepreneurs can also draw on certain public-private funds. The High-Tech Gruenderfonds (HTGF), for example, put €2m into 6Wunderkinder before cashing out in June.

Then there's the less tech-focused Investitionsbank Berlin (IBB), which offers grants rather than investments — with paperwork being the catch.

"The ProFIT program run by the IBB Berlin is an attractive option for innovative start-ups, but it requires patience on the part of the founders," says Jonathan Gebauer, whose business social network ExploreB2B is still eking out the last of its IBB funding.

"It allows start-ups to acquire a six-figure amount of money, in many cases more, without losing shares… but the process of applying is tiresome [and] changing plans means going through a bureaucratic process that can take up to six weeks to continue getting funds from the programme." 

Show Berlin the money

However, step up a level and funding becomes a scarcer resource. This, according to Earlybird's O'Leary, is why valuations for Berlin start-ups remain relatively low, compared to those in London and certainly those in the US.

"There still is a capital demand-supply gap in Berlin," he says. "Less so at seed up to a few hundred thousand, more so if you're talking €1m plus, and up to the very large rounds, which are easier again."

Right now, everyone is waiting for a big exit, preferably in the billion-dollar range

That may be changing, though, as evidenced by financiers such as Earlybird itself — previously based in Hamburg, the VC firm relocated to Berlin earlier this year.

"International funds are moving in, such as USV, Kleiner, Benchmark and Index," O'Leary says. "Established funds are raising new funds — Holtzbrinck and our new one, for example — and new funds such as Point Nine Capital are also establishing themselves."

Right now, everyone is waiting for a big exit, preferably in the billion-dollar range. This is partly a confidence issue — hype brings pressure — but also a matter of practicality. Exits create angels, and angels help launch more start-ups.

But, for now, all the pieces are in place. The talent and ideas are there in Berlin, and the money is starting to flow in earnest. The city may soon live up to all those expectations.

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