Europe is sounding more and more attractive for young entrepreneurs who want to start a tech company. One city is in everybody's conversation: Berlin. The German capital, with its low rent prices and high quality of life, combined with a rare freedom and creative atmosphere, might become the new Sylicon Valley. Or maybe it won't...? Franc Camps analyzes what are the pros and cons of starting up in Berlin.

Photo: thenextweb.com
Gidsy's office in Kreuzberg

I met Heiko, a young German physicist, when we were both Erasmus students in Toulouse, back in 2005. We became close friends and a couple of years later, in 2008, I moved to Berlin, Heiko's residence for almost 10 years. He was doing a PhD in statistical physics. We both had studied physics but had a diversity of interests and were trying to figure out what our next step in life should be.

I was starstruck by Berlin. The freest, most creative city I had ever seen. Edgy and passionate about art and innovation, creative and enjoying an unquestionable quality of life. Everybody seemed to have a creative approach to life. Every space seemed open to transformation, susceptible to be reworked into some kind of artistic initiative. No rules, no limits but your own imagination. The possibilities seemed endless.

They were not. One night, chatting about our future over beers, Heiko told me that, as much as he loved the city, he was convinced he would leave after his PhD in order to find a job. "There is just nothing to do here for me," he said. Since the reunification in the early nineties, Berlin has been dragged down by very poor unemployment figures, which have been consistently doubling the national average (12.7% vs 6.6% in 2011).

But something happened. Four years after those beers we shared, Berlin has become a serious candidate to lead the startup revolution in Europe. Heiko stayed, and now works as a lead research engineer at MBR-Targeting, a fast-growing startup using machine learning to personalise online advertising.

When in 2007 SoundCloud, the music-sharing giant, moved its headquarters from Stockholm to Berlin, it didn't sound like the smartest business decision. Yes, it started as a service for DJs and producers, which Berlin can never have enough of, but business-wise, there was no startup scene going on in Berlin. The city had a lot of artists and creatives, but it didn't seem to attract the best engineers and entrepreneurs, let alone the money: venture capital (VC) funding was sparse.

Time has proved SoundCloud founders Alex Ljung and Eric Wahlross right. In 2011 Germany was second only to China and the US as the country where the most VC funded startups were created. And Berlin is aggregating most of those new players.  "If I were a VC firm, I'd be terrified not to be in Berlin." Ljung recently told Bloomberg BusinessWeek.

European start-ups are growing all over the continent. Other cities in Europe are thriving as startup hotspots (even somewhat unexpected places, like Tallin, the Estonian underdog). Perhaps unsurprisingly, three cities seem to be capitalising on this growth: London, Paris and Berlin. The competition seems to be really between London and Berlin, each one representing a different, almost opposite, set of attractions for entrepreneurs.

Why would Berlin stand out in this new wave of technology start-ups? The financial environment is favourable to London, a city with an incomparably solid landscape of finance firms, and Paris is the economical capital of its own country as well. Berlin doesn't have any of that. But it has something else: a very unique DIY (Do It Yourself) attitude.

Berlin has something else: a very unique DIY (Do It Yourself) attitude

US native Schuyler Deerman, creator of the communication app Moped, had a good answer when the Irish Times asked him exactly this question: "Berlin itself is like a start-up". Ciaran O'Leary, partner at Earlybird, a German VC firm, told Businessweek: "All Berlin knows is change and disruption, and there's nobody defining what the city should be or what an entrepreneur should be."

The density of artists and entrepreneurs, the amount of space and how cheap space and business costs are in comparison to other capitals around the continent have also played a role in making the city the perfect spot to start an idea.

Cheap also means cheap labour. Salaries for high-end software engineers are 70% lower in Berlin than they are in California, which makes the cost of starting a small tech company much lower. And the advantage is reinforced by the low cost of living, which makes lower salaries still attractive.

In addition, despite not being an English-speaking city, Berlin is relatively easy for foreigners. The city is open to those who are especially likely to embark on starting up companies. Next to Swedish SoundCloud there's Gidsy, the most recent new hit in the scene which was funded by a Dutch emigrant.

The diversity and fast-changing pace of trends in art, fashion and music, combined with an incomparable nightlife scene, make not being in Berlin feel like a waste of time for the ambitious creative youth around Europe.

The streets of Berlin and "punk entrepreneurship"

It is easy to feel how Berlin is attracting a big young European community with ambitions in the tech space. Walking around the newly gentrified neighbourhood of Neukölln, full of hip coffee shops and bars, you can hear at least as much English as German and Turkish (the largest community in the neighbourhood).

Photo: angermann
The cafe St. Oberholz has become the office of many Berlin entrepreneurs

Young professionals populate their tables and almost become their offices, spending a big chunk of the day working there. They come from virtually every country in Europe, some looking to start a company, some to develop their skills as designers, programmers, artists - which is also a kind of entrepreneurship. Some are attracted to the simultaneously relaxed and exciting lifestyle.

The new type of coffee shop opens primarily in the daytime. Geared with fast wireless connections and large shareable desks, they are clearly focused on providing for the need of new professionals to have a sociable space to work. They dwell in coffee shops as if they were their offices, using them as a good opportunity for casual networking as well. One can clearly feel the atmosphere of a certain "punk entrepreneurship," a sign of the new type of professionals that are squattering the tech economic transition of the city.

The financial handicap

But there is still a lot of work to do. In fact, even though the excitement in the startup world is noticeable, capital is moving very slowly. Access to VC and angel investors is still a bit of a handicap for entrepreneurs in Berlin.

The Economist, traditionally very critical of fiscal policies in continental Europe, recently made a special report on the state of entrepreneurship (which it titled 'Les Misérables'), drawing a pretty dark picture for European entrepreneurs. A few statistics support The Economist's thesis. The share of the population which is starting companies is especially low in continental Europe, making up "2.3% of Italy's adult population, 4.2% of Germany's, and 5.8% of France's [...] below—in many cases well below - America's 7.6%, let alone China's 14% and Brazil's 17%."

Om Malik, tech guru and founder of GigaOm, one of the most respected tech business media sources in the world, has supported and given legitimacy to the rise of Berlin as the tech hub in Europe. However, in an article last year, he acknowledged that "the city still lacks a formal venture capital structure. [...] The solution," he points out, "is more entrepreneurs turned investors start making investments."

Probably partially because of that, VC firms still work with a lot of caution in Berlin. Even though there are successful profitable companies, none of them seem to have really hit the jackpot, and a series of legal obstacles make it more complex and somewhat paradoxically riskier to start a company in Berlin than in San Francisco.

Even though the excitement in the startup world is noticeable, capital is moving very slowly

Martin Varsavsky, a professor at Columbia Business School and a serial entrepreneur himself, attributes the VC climate in Germany to cultural reasons, in the form of a character traditionally more risk-averse than average, and to its fiscal policies and labour law. VC firms, starting to get very interested in German startups, he says, operate out of London because of its more business friendly policies, which are less protective of workers and more concerned about generating conditions for risky businesses, among which a few can produce explosive growth. Filing for bankruptcy is a bigger issue anywhere in continental Europe than it is in the UK or, especially, in the US. This makes it more difficult to start again after failing - and entrepreneurs like to point out that this is the key to business success in the tech world.

In London, business-friendly policies makes it much simpler to give shares to employees, a traditional incentive in Silicon Valley, and easier to hire and fire, essential for the volatile nature of startups. "Small, fast-growing companies succeed by trial and error," Varsavsky says," and it is important for them to be able to reproduce and apply these principles to every part of their structure."

However, given how slow policy changes tend to be, and the direction of fiscal changes in Germany's recent history, one expects the future only to get better for Berlin startups. It is unclear how changes in policies can affect the lifestyle in the Berlin we know, and how growth in the tech scene would come together with significant changes in the way the city thinks of itself. What is the art world going to look like after a transition into a technological hub? Would an increase in investments change the priorities for Berlin's lifestyle?

At this moment, the atmosphere breathed in Berlin is that of a young adult who recently discovered all her liberty and is exploring possibilities to take over the world. The brightest future might be around the corner.


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Cover photo: Campus Party Europe (CC)

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