Berlin was devastated and divided after World War II. Today, it’s a hub for tech innovation in Europe. In the capital of cool, a startup scene heats up.
With a time slot of just five precious minutes, each entrepreneur races through a meticulously rehearsed pitch. Among others, an environmentally friendly alternative to Airbnb and a group-gifting platform are on offer this afternoon.
It’s one of many mock pitch sessions held these days at a large, open-plan office in Kreuzberg, a borough that’s evolved from one of Berlin’s poorest neighborhoods to its hippest since the fall of the Berlin Wall. Managers from Axel Springer Plug and Play, the session’s host, as well as Amazon and other tech behemoths listen as seven young businesspeople from Germany, Austria, and Taiwan present their business models.
These young hopefuls pepper their pitches with metaphors to soften complex financial schemes and technical jargon. "Imagine helium balloons," says 34-year-old Nora Stolz from Karlsruhe, trying to explain the communal gifting that’s at the core of her startup, Cadouu.
The entrepreneurs act cool and confident, but flushed faces reveal their anxiety. All here hope to join the ranks of success stories like the Berlin based Swedes behind SoundCloud, an online audio distribution platform developed in 2008, or the Germans who created Wunderlist, a Cloud-based task management app that Microsoft acquired back in 2015.
Without a doubt, Berlin’s popularity among young internationals has spilled over to the startup sector. Germany’s capital, with its grungy flair, party scene and cheap living, has appealed to hipsters from abroad for decades. Time named it Europe’s capital of cool way back in 2009. Over the past few years, it’s become a European hub for new businesses too, and not just in the country’s traditional engineering and high-tech realms.
Business angels, company- and university-based incubators, and venture-capital funds have cropped up across a city where there used to be none. They’re all betting they’ll discover the next Big Tech Story out of Berlin – despite German red tape and other unique challenges that make it hard to compete against the likes of Silicon Valley.
The numbers speak for themselves. Back in 2012, Berlin was home to just two accelerators, or organizations that offer advice and resources to new small businesses. Three years later, that number had jumped to ten, according to a 2016 study by the Institute for Strategy Development (IFSE), a Berlin-based consultancy. That’s because more and more accelerators are trying to capitalize on both financial capital and young foreign talent pouring into Berlin. According to IFSE, the city saw an influx of 2.35 billion dollars (2 billion euros) in 2015.
Local universities and government provide additional support. University Startup Factory, for one, is a cooperation of several universities backed by public funding that supports local university graduates with solid tech startup ideas. Exist Business Startup Grant is another example. Established by the Federal Ministry for Economic Affairs and Energy, it supports students, graduates, and scientists from universities and research institutes who have business ideas.
Axel Springer Plug and Play, an accelerator that was co-founded four years ago by the German media giant (publisher of Europe’s highest-circulation newspaper, Bild) and Silicon Valley venture fund Plug and Play, is from the private sector. "It’s always about finding that one unicorn first and having that deal on the table," says Constantin von Bergman-Korn, an investment manager with the accelerator, referring to startup companies valued at more than one billion dollars.
That’s quite a change for a city left devastated and divided after World War II. At that time, industry deserted the capital, and it didn’t come back for half a century. Long after German reunification in 1990, Berlin still claimed one of the nation’s highest unemployment rates. Yet a budding new research landscape slowly took hold after the seat of government returned. Cheap housing and affordable living drew hip, creative foreigners.
Pioneers like Rocket Internet, a German startup incubator and accelerator founded in 2007, paved the way for Berlin to become a hub for tech innovation in Europe. Now, an annual average of 40,000 new companies, 500 of them tech startups, are founded in the city, according to Berlin Partner for Economy and Technology, a private-public initiative that helps foreign startups find a local footing. Some of these companies later fail, though hard data is hard to come by.
With more than 40,000 people moving to Berlin each year, many from outside Germany, both new and established companies have a fresh pool of international talent to choose from. In 2016, 42 percent of Berlin’s startup employees were foreign nationals, according to the European Startup Monitoring Report for Germany.
It’s easy to see just how far Berlin has come since the fall of the Berlin Wall at Factory Berlin, a giant campus situated in an old warehouse right along the wall’s former Eastern side. The building is just two blocks from Checkpoint Charlie and about five kilometers from Axel Springer Plug and Play.
Dubbing itself a next-generation business club, the 16,000-square-meter space is home to Sound- Cloud’s headquarters and Uber’s German operations, among others. Factory Berlin also has a history. In the 19th century, it was a brewery. Early in the 20th century, it was an air-raid shelter. And during the German Democratic Republic, one side of the main building ran along a part of the Berlin Wall known as the "death strip."
That same space now brings startups together with mature high-tech companies. It’s housed global stars Twitter, Zendesk, and Mozilla. Almost three-fourths of its 1,000 members come from other countries, according to Chief Marketing Officer Lukas Kampfmann. Members use the space for meetings and networking. Deutsche Bank and other big names in business, meanwhile, subsidize the initiative and test their own technology on-site while scoping out new talent.
Because a lot of the tech industry’s focus – and the clientele that goes with it – has shifted to Germany from elsewhere in Europe, Berlin now hosts major conferences such as Tech Open Air, a leading technology festival. "The scene is reaching a critical mass," says Elizabeth Osterloh, an American tech evangelist for the Berlin digital media agency DCMN. There’s a lot of bureaucracy, Osterloh concedes. But this being Germany, she adds, a lot of resources help to overcome it.
Jazmin Medrano, a 35-year-old Californian Factory member, left a job at Universal Music in Los Angeles five years ago to strike out on her own in Berlin. Now a freelance human-relations consultant for startups, she finds the business culture more forgiving to newbies. "I never would have been able to do what I’m doing in LA," she says.
It’s not all rosy, though. Venture capital in Germany still pales in comparison to the United States, home to more than half the 141 billion dollars (123 billion euros) in venture capital invested globally in 2015, according to data from US accounting firm KPMG. Berlin’s global share amounted to less than 2 percent that year – far ahead of the rest of Europe, according to IFSE, but far behind the US.
And the list of constraints is even longer. Bureaucracy, strict labor regulations, and Germans’ notorious risk aversion can slow a company’s founding considerably – and quickly dampen entrepreneurial spirit. "Europeans are always worried about breaking even," says Dagmar Bottenbruch, a German-American angel investor based in Frankfurt and Berlin.
The hype surrounding Berlin’s startup scene may be reaching a peak. In 2016, local venture capital investments fell to 1 billion dollars (871 million euros), the lowest rate since 2012, according to KPMG. Financial firms say they aren’t worried. Berlin continues to climb in global rankings, placing seventh in this year’s Global Startup Ecosystem Report by Startup Genome, a San Francisco- based pollster for the sector, and it outperforms all other European tech hubs in terms of attracting foreign talent.
The federal government sees the need for flexibility in Berlin’s startup culture – and more widely , Germany’s too. That’s why it has kick-started restructuring agreements with the government owned development bank KfW to double venture-capital commitments to 200 million euros by 2020, according to a Ministry of Finance report.
"If Silicon Valley is already fully matured, we’re still in adolescence," says Stefan Franzke, CEO of Berlin Partner for Economy and Technology. Eventually, Franzke believes, Berlin will become a unique breeding ground where more established firms cooperate with startups to create a new, hybrid tech ecosystem. It’s a development that’s already underway.