California's Silicon Valley has had 30 years to develop a thriving tech startup scene, to which the rest of the world looks for inspiration. But hot on its heels are other global hubs of activity, including Toronto, New York, Tel Aviv and, of course, London.
Although London's ‘Silicon Roundabout’ in Old Street is overshadowed by Silicon Valley in terms of size and reputation, the UK capital's specialties in FinTech, AdTech and DataTech often see it feature high on the list of the world's top ten cities to begin a startup company.
And the UK’s European neighbours aren’t doing too badly either. Those startup rankings are quite likely to show Paris sitting in among Tel Aviv, London and Silicon Valley. Dublin, Barcelona, Sofia and Helsinki are also contributing to Europe's quest for innovation, with lively tech hubs of their own. But it is Berlin that is, arguably, one of the most attractive places for startup companies to grow and develop.
Berlin, where East meets West
Unlike other European startup hubs, and indeed other German cities, Berlin is not associated with one particular industry. Munich has the strongest economy in Germany, hosting large corporate headquarters including Siemens, Allianz and BMW, while Hamburg is known for media and Frankfurt for finance. Even though Berlin is the German capital, it is a much newer city and lacks the industrial identity of others.
Mathias Ockenfels, investment associate at Berlin-headquartered investment company Point 9 Capital, says: “There is no old-fashioned industry in Berlin, but some of the tech companies are the largest employers here.”
Pawel Chudzinski, co-founder and managing partner of Point 9 Capital, believes Berlin could become Europe's technology hub. “If every country has its own big hub, it’s a loss,” he says. “We should have one European hub and we hope Berlin can be it.
“When you go to San Francisco, tech is the main industry. In London, tech is important, but there is the financial sector and many other industries competing for attention, and the chances are very high that Berlin can become an area where tech is the most important industry [in Europe].”
More on Berlin and tech startups
Until it fell in 1989, the Berlin Wall not only separated East and West, it also separated business. When the wall fell, it left Berlin – which now has a population of 3.4 million – without much business culture.
But fashion, music, arts and entrepreneurs all helped to rebuild the city, and it is still known for its relaxed lifestyle and 'anti' culture, providing an inexpensive base for small businesses looking to connect with both East and West in Europe.
And with Berlin-based companies such as SoundCloud now gaining traction outside the city, the rest of the world is starting to sit up and take notice of what Berlin has to offer.
Big corporations are beginning to see Berlin as the startup centre of Germany, including German railway company Deutsche Bahn and one of Europe's largest publishers, Axel Springer, which are both actively using startups in their businesses.
A number of accelerators are also championing Berlin's startup scene, and one of them is Startupbootcamp.
“The scene is still relatively fresh,” says Luisa Maier, chief operating officer of Startupbootcamp Berlin. “But in comparison to Paris, we have the advantage that Berlin is very multicultural and open to all kinds of languages.”
Maier, who is originally from South Africa, says she had intended come to Berlin to improve her German, but found herself speaking English because of the city’s multicultural heritage.
Playing startup catch-up
Although Berlin's startup scene is rich, vibrant and full of enthusiastic entrepreneurs, the city has been playing catch-up with the rest of the world over the past four or five years.
“I always refer to Berlin as a little bit of Africa in Germany,” says Maier. “It’s a bit of a chaotic city, it doesn’t have the rigidity that other cities in Germany have, so it’s attractive to a lot of foreigners. Germany is in a great economic position at the moment, but Berlin is very cheap to draw in lots of people.”
But Maier says that compared with London, there is a need to educate investors in Berlin, because they are still new to investing heavily in startup technology companies. Point 9 Capital is one of only a few venture capitalists that are headquartered in Berlin, which makes it difficult for startups to find funding.
She adds: “In studies, Germans perceive themselves as being very risk averse, and are very cautious with their money. The ecosystem could do with a more of a free flow of capital. It’s still much harder than in the US to receive funding.”
Startupbootcamp Berlin is one of eight startup accelerators under the same brand around Europe. It runs programmes with startups, mentors, investors and corporates to help fast-track growth for new companies.
Maier says the programme’s corporate partners, which include Mercedes-Benz, Cisco and Bosch, have realised that they need to begin looking at startups to develop innovative technologies.
“They realise that innovation doesn’t just happen inside their own incubators and labs,” she says. “At the same time, these corporates are realising the power of partnerships, so the partners actually come together to find synergies to have access to new ideas and each other as well. It’s a whole network they have access to.”
Betahaus is another accelerator and co-working space in the city that fosters relationships between startups, investors and corporate partners.
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Microsoft, PayPal and eBay have also set up offices in Berlin, and many corporates approach Betahaus to find out how to connect with startup companies better.
Deutsche Bahn is a member of Betahaus and has moved a number of its engineers into the co-working space to experience the startup culture and meet companies with which they might collaborate.
Christoph Fahle, one of the five co-founders of Betahaus, says corporates want to know how they can find talent and ideas in the future. “They try to understand what is the startup culture and what is the difference from how they operate,” he says.
Matthias Patz, business development and innovation manager at Deutsche Bahn, says his company is not known for being the most innovative, but by using the Betahaus co-working space, developers and marketeers can experience the culture and mentality of startups.
The German railway company is using startup technology companies to come up with innovative solutions for its customers. Over the last nine months, it has experimented with ticketing machine technology that might involve hand gestures, as well as possible uses of augmented reality through the likes of Google Glass.
“Within our department, we try out new technologies and look at how we can make our processes more efficient, or a totally new product,” says Patz.
He says startups are comfortable with taking risks and their innovative solutions can be market-changers – which is not what large corporations tend to do.
“Deutsche Bahn has the market power to reach a million people, whereas a startup doesn’t,” says Patz. “We can take ideas from startups and bring them to a higher level.”
Patz says Deutsche Bahn worked with one startup on a product because its existing suppliers were not as flexible in the short term. “It’s a good opportunity [for startups] to prove they are able to work with large corporations and get a project done quicker,” he adds.
Another German company that has put its faith in startups is one of Europe's largest publishing houses, Axel Springer. About two years ago, the company began a “digital cultural change” by working with digital media entrepreneurs, taking part in tech startup events and building internal incubators, such as the Plug and Play accelerator.
The three-month programme in Berlin encouraged startups to come up with innovative, media-related business concepts, and over the past year, 16 companies have come through the programme. Robin Haak, portfolio and operations manager of the Axel Springer Plug and Play accelerator, says the publisher has worked with at least 80% of these startups in one way or another.
“Over the last 10 years, Axel Springer has changed to become a completely new company,” says Haak. “It will be an interesting time for every entrepreneur now there is a truly digital culture and mistakes are accepted as part of a learning process.”
One thing is for sure: if the number of German and international companies looking to cherry-pick talent and innovation from the hordes of tech startups in Berlin continues to grow, the city could soon claim the title of Europe's number one destination for technology startups.
Red tape and bureaucracy hold up Berlin startups
Although Berlin’s lifestyle is very attractive to startups, its red tape and legislation can be hard for small businesses to overcome.
Kevin McDonagh, CEO of Android consultancy startup Novoda, says: “Germany is renowned for its bureaucracy and process. The first few months were very difficult to get anything done, legal and day-to-day running. Doing it in a foreign language with foreign laws is difficult.”
McDonagh says new companies need a large amount of capital to set up bank accounts, which is unfeasible for most startups.
Christoph Fahle, one of the five co-founders of Betahaus, agrees it is difficult to set up a company in Berlin, adding that Betahaus has a full-time lawyer to go through the mountains of paperwork that startups face.
He says startup companies with only one or two employees have to jump through the same hoops as larger companies. “This takes time and keeps you back from doing your job,” he says. “We need an easier solution for the really small companies.”
Berlin also suffers because it has no direct flights to San Francisco. Fahle says it may be easier for companies to start up in London because it is closer to the Silicon Valley ecosystem.
This was first published in May 2014