What is holding Berlin back from becoming a European centre for startups?

Berlin is one of Europe’s most up-and-coming hotbeds for technology startup companies, but red tape and legislation is preventing it from fulfilling its potential

Berlin is an up-and-coming hotbed for European technology startup companies, and is gaining traction ahead of its startup-friendly neighbours  – Barcelona, Paris, Dublin and lesser known gems of Helsinki and Sofia.

London is clearly the place to be for technology startups in Europe, especially financial services, but next to soaring rents and expensive lifestyle of Tech City, the hip and trendy capital of Germany has become very attractive to thousands of technology startups.

After the fall of the Berlin Wall in 1989, fashion, music, art and entrepreneurs began to rebuild the city, and it is still known for its relaxed lifestyle and anti-culture, which provides a cheap foundation for small businesses looking for a European connection to both the east and west.

While tech startups such as SoundCloud are becoming popular outside the city, the rest of the world is starting to sit up and take notice.

More on Berlin and technology startups

And large corporations are already noticing what the city has to offer, setting up offices in the heart of the innovation. Both the German railway company, Deutsche bahn, and one of the largest European publishers, Axel Springer, are both actively using startups in their businesses today.

Red tape and bureaucracy

But there are still several blockers for startups in Berlin. While Berlin’s lifestyle is very attractive to startups, its red tape and legislation can be difficult to overcome for small businesses.

“Germany is renowned for its bureaucracy and process,” says Kevin McDonagh, CEO of the Android consultancy startup Novoda. “The first few months were very difficult to get anything done. Doing it in a foreign language with foreign laws is difficult.”

McDonagh, who launched his business in the UK and now has an office in Berlin and New York, says changing simple details on business bank accounts in Germany is difficult enough, with banks wanting specific documents to bring into branch in order to set up a further meeting. “This is a barrier for a company,” he says.

He also says companies need a large amount of capital to set up company bank accounts, which is unfeasible for most startups. 

Christoph Fahle, one of the five co-founders of the startup accelerator 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 startups have to face.

He says one-to-two person companies have the same hoops to jump through as the larger companies when beginning their businesses. “This takes time, and keeps you back from doing your job. We need an easier solution for the really small companies,” says Fahle.

Berlin also suffers because it has no direct flight to San Francisco, Fahle says it may be easier to start in London because you are closer to the Silicon Valley ecosystem.

But McDonagh says startups see the future and are willing to put up with the red tape in order to grow.

“The general startup culture that’s taken off and been evangelized by America and the spreading of technology around the world, that is not prevailing here. It’s growing, and it’s exciting to be a part of it, but it’s challenging.”

Government involvement

Simon Specka, co-founder of B2C startup Zenmate, which took part in the Axel Springer Plug and Play accelerator also found Germany’s red tape was difficult to cut through.

The company, which provides online privacy and security solutions, was founded while he and his co-founder were studying in Manchester in the UK. After experiencing both the UK and Berlin startup scene he finds it more difficult in Germany to secure Series A funding.

Specka believes this is because Berlin is much younger than Silicon Valley and London in terms of startups and entrepreneurs and hasn’t had the time to foster a startup culture.

“UK Government was a lot quicker and started earlier to foster the VC scene,” he says. “It had already looked towards Silicon Valley and was looking at a policy level how to replicate in the UK and help economy and create jobs,” he says.

Berlin is around 25 years behind Silicon Valley and 10 years behind London, so it isn’t as easy to set up a business. Specka believes this culture of entrepreneurship and risk taking needs to be encouraged more internationally by the government.

But he is also noticing a shift in how the German government is reacting to the Berlin startup scene, which should lead to reducing some of the bureaucracy surrounding startups.

“It always takes a while, it’s not very fast and it could be faster, but you can tell that our chancellor and finance minister are getting interested and really acknowledge it’s one of the main drivers for jobs in Berlin.”

More on UK tech startups

The Senate Administration for Economic and Technology Research in Berlin said technology startup companies – especially ICT – have been encouraged as part of networking and marketing activities within the state of Berlin for a number of years now.

But to focus more on the needs of startup companies, the city has recently established a new ‘startup unit’ managed by a public-private partnership, Berlin Partner. The initiative is also directly linked to the Governing Mayor of Berlin Klaus Wowereit as well as the Senator for economics, technology and research Cornelia Yzer.

Co-founder and managing partner of the Point 9 Capital investment company headquartered in Berlin, Pawel Chudzinski, believes Berlin could be the central hub for technology in Europe. “If every country has its own big hub, it’s a loss. We should have one European hub and we hope Berlin can become this.”

“When you go to San Francisco, tech is the main industry. In London tech is important, but there is financial sector and many other industries that compete for attention and the chances are very high that Berlin can become an area where tech is the most important industry in Europ,” he says.

“German regulations for setting up a business are not very complicated even in international comparison. It is possible to register a business and get all the formalities done online and usually within a couple of days,” said the senate administration spokesperson. “The difficulties for startups may arise when they need to hire foreign (especially non-EU) experts.”

If more German and international companies continue to look towards Berlin to cherry pick talent and innovation from the hordes of tech startups that have settled in the city, Berlin could soon be viewed by the rest of the world as the centre of tech startups in Europe.

But government must continue to look towards other successful hubs across the world, including The Valley and London for inspiration and guidance on how to support its entrepreneurs in terms of funding, visas and other legislation. If the bureaucracy fails to ease, startups may find places such as Helsinki and Sofia lesser known, but more attractive places to build their businesses.

European media publisher goes digital with help from startups 

One of the largest publishing houses in Europe, Axel Springer, began to embrace digital business models in early 2002. First, Axel Springer was focused on strategic later-stage investments, but within the last two years the company started working more closely with the startup world.

Robin Haak, portfolio and operations manager of the Axel Springer Plug and Play accelerator, says the company began its “digital cultural change” two years ago by working with digital media entrepreneurs, taking part in tech startup events and building up internal incubators.

It also decided to send one of its chief editors and its chief marketing officer to Silicon Valley for nine months, as well as beginning a satellite program in the US where employees would experience the innovation in Silicon Valley, build networks there and bring knowledge back over to Europe.

A year ago it also started up a joint venture with Plug and Play Tech Center in Silicon Valley, which had invested in almost 2,000 startups to date and was interested in exploring the opportunities of the German capital.

The three-month programme in Berlin encouraged startups to come up with innovative media-related business concepts, and over the last year saw 16 companies come through the programme, and Haak says the publisher has worked with at least 80% of them in some way or another.

“Over the last ten 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.”

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