The war of the European tech hubs: Is Berlin really stealing London's thunder?

In Europe, venture capital is getting increasingly spread out, with countries like Germany and France challenging the dominance of the UK.
Written by Michael Filtz, Contributor
Berlin, Germany
The German capital of Berlin is home to one of Europe's fastest-growing start up scenes. Image: Shutterstock

About a year ago, the founders of T Dispatch, a startup specialising in cloud-based taxi dispatching and booking software, decided to move the company from London, where it had been based since 2010, to Berlin.

"We had the opportunity to do a presentation in Berlin, at an event called Seedcamp, which is where we were exposed to a lot of investors," said company chief executive Bryony Cooper.

"And when we came here we realized what a tech startup hub it was here, it seemed to be even more lively than London, which I was quite surprised about."

After being offered a place in an incubator in Berlin, they made the move. "It seemed like an attractive proposition for us," Cooper said.

T Dispatch has since raised about €500,000 in seed and angel rounds, and has grown its staff substantially.

However, not all startups have been as successful in their Berlin ventures. Last month, online retailer Fab.com (which expanded to Berlin from New York, by way of London) announced the lay-offs of more than 100 employees from its Berlin office, after rapidly growing in the city.

There's a shift under way in European startup activity, and whether T Dispatch or Fab.com is more representative of the larger movement is still up for debate.

In investment terms, Germany and other parts of Europe are certainly beginning to give the once-dominant UK a run for its money. Whereas the UK once had the lion's share of the continent's major investments in startups, both Germany and France are now nipping at the country's heels.

According to a report by venture capital firms DFJ Esprit and Go4Venture Advisers, based on data from about $1.8bn in venture deals over the first half of this year, France secured 22 percent of the total European venture capital, and the DACH countries (Germany, Austria and Switzerland) received about 19 percent. With 36 percent of the total investment, the UK still leads, but in previous years that number has normally been over 40 percent.

However, this doesn't mean that London-based startups should all pack up and move to Germany or to France. In fact, across the continent, later-stage capital is still relatively hard to come by, at least compared to the US. According to the DJF Esprit and Go4Venture Advisers analysis, "while the seed funding of early-stage European startups is healthy, there is a scarcity of follow-on capital for later-stage businesses".

Ciarán O'Leary, of Germany's Earlybird Venture Capital, saidthat this is because the later-stage capital is generally provided by European VC money, which has traditionally been at an undersupply. "It's relatively easy to get up to €1m" through angel and seed investment, he said, "it's really hard to get €2m to €7m, and then once you're raising €10m, it becomes easier again," because at that point companies can tap into larger growth funds.

But according to T Dispatch's Cooper, being in Germany is not all about chasing investment. "Geographically it's quite central," she said of Berlin, "which makes it easier for us just travelling around, because we sell in different markets as well."

And for budget-conscious startups, the costs of simply doing business tend to be lower in Berlin than in London, at least for now. "Apart from the fact that the rent and the salaries are lower than in London, it's also a lot easier to attract good talent here," Cooper said. In London, for instance, many talented web developers want to work in larger, more established firms like Google or Facebook, which generally pay a lot more than a startup can offer.

However, the larger companies aren't as established in Berlin, and in any case are not exactly what they city's talented web developers are looking for. "They know what the startup scene is in Berlin, and they know that it's an opportunity to join a company and grow really quickly," Cooper said.

Democratising entrepreneurship

Earlybird's O'Leary said that the shift should be seen in larger terms, rather than just focusing on which tech hub is more active or which place offers the cheaper talent. "I think it's part of a wider trend that the web has democratised entrepreneurship," he said, "so it's cheaper and easier to build companies anywhere, so they do get built anywhere," noting the rise of other tech hubs in Europe, such as Stockholm.

"And the other thing is that capital has become a lot more mobile."

Indeed, one main reason that investment in Germany-based startups is on the rise is that the larger US venture funds like Founders Fund, USV, and Spark Capital are all now operating in Germany. This is driving up the sizes of investment rounds: ResearchGate recently raised $35m in its Series C round, almost exclusively through US-based funds: Bill Gates, Tenaya Capital, and Founders Fund all participated.

Because of the influx of new capital and a maturation of the startup scene in Berlin, Ciarán O'Leary expects that things will move pretty quickly from here on out. "I think a lot is going to start happening in the first 12 to 36 months," he said.

But he also noted that VCs aren't necessarily going to favour one city's tech hub over another. "In terms of Berlin taking over London, I don't think it's that big of a deal."

"It can change from quarter to quarter, but it seems that right now that most international capital is pretty excited about both Berlin and London."

In all, T Dispatch's Cooper is optimistic about her company's future in Berlin, but plans to maintain a presence in both cities for the near future. "We'll probably be going through Series A in just about January," she said, "and I'm feeling pretty confident about that."

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