Looking to start your next startup? Berlin doesn’t have to be your first choice!
Why smaller innovation hubs can be an attractive place to begin your startup journey
When we mention that we are an active investor in ecosystems outside of the large hubs like Berlin and Munich we often get the same question: “Does this even make sense? Don’t the pure network effects of a large hub diminish all benefits you could get from another ecosystem?”
It feels like it’s about time that we wrote down our perspective on the topic. In short: It’s complicated 😉
Network effects don’t just apply to software
Thinking about tech hubs in Germany your mind might instantly wander to the cities Berlin and Munich, which certainly have shown that they can be the breeding ground for many exciting companies. Depending on the stage of a startup, different arguments can be made for the value of these large hubs:
Both in the early days, as well as further along a startup’s journey, the more unrestricted flow of knowledge and ideas in a large and diverse ecosystem has an immense value. Just by being in the same place as a lot of other very smart people — of whom some already have done what you aspire to — will lead you to some very unique insights and solutions. This is true for both technical and operational knowledge, but also for best practices around founding and managing a growing company.
As startups mature they start looking towards expanding their workforce. Large hubs have the obvious advantage of a larger talent pool to draw from. Due to different infrastructural factors e.g. better connectivity through city airports, cultural offerings or cosmopolitanism, they are most certainly more attractive to both international as well as domestic talent.
Last, but certainly not least: Vibrant startup ecosystems offer significantly easier access to capital due to the density of investors, both business angels, and venture capital funds. Setting up a coffee meeting with a potential investor certainly is easier in Berlin than anywhere else in Germany. This can be a blessing or a curse, depending on how good you are in focusing on what truly matters at the moment.
No network without congestion
As it is the case with regular network theory, a network always experiences some degree of congestion with an increase in size — startup hubs certainly are no exception to this rule.
You can see some of the signs in a lot of large ecosystems with San Francisco and the Bay Area being the clearest examples. As the density of startups increases, competition around the same limited resources follows. Very immediate indicators are rent prices and wage levels, especially for software developers.
Another contested resource in today’s world — from a VCs point of view — are “hot” startup deals. By having access to a lot of potential investors, startups are able to increase their valuation quite significantly compared to startups seeking financing outside of the central hubs — even if they do not have much proof of their actual value yet. Even if some VCs try to tell you otherwise, FOMO does exist, and it’s amplified by the number of investors competing in the same market. I’d personally argue that this inflation in valuations can lead to startups raising too much money too early on, but this is probably worth a post on its own …
Besides the competition aspects, there are also factors related to the mindset some ecosystems can foster due to the fact that you have the ability to completely stay inside a bubble of other founders/startup folks. Hugo from The Family had some great thoughts on this, so I’ll just direct you to his piece.
Geography matters
Besides the different factors influencing the quality of a network, location and makeup of an ecosystem can play a huge role. Just take a look at how large corporates are still clustered in Germany.
Notice something? Berlin looks pretty lonely.
Depending on what customer segment a startup seeks to address, being based in western or southern Germany can mean that a lot of potential clients have their headquarters right at your doorstep. This is significantly more important to startups pursuing B2B rather than B2C business models. Even if you can complete a sale over the phone/internet, some face-to-face meetings and a solid handshake are still required. This asymmetry in the distribution of businesses often leads to founders commuting from Berlin after they’ve initially moved their company away from their customers.
Not just companies are unevenly distributed
Besides the proximity to potential customers, another argument can be made in favor of smaller hubs. If you would draw a map of the (technical) universities around Germany it would mirror the previous map quite closely. However, in contrast to e.g. the US, the role of universities has largely been overlooked in Germany — with the TU Munich being a clear outlier. This is more and more so shifting as the startup world transitions towards tech-heavier products and solutions.
Universities clearly have a direct impact on the genesis of startups by providing technical expertise, fertile ground to generate ideas inside and outside of research facilities and access to intellectual property. But more importantly, universities offer some extremely important externalities:
- Universities are a giant aggregator of future founders, with over 80% of founders having a university degree. This means that the likelihood of finding a co-founder is quite high as well as less complicated than in later career stages — just show up to different clubs and events and you’re sure to find like-minded people. (Want to know more about founding as a student? Check out our regional guides about entrepreneurship in various student cities!)
- With an increasing reputation for one or more of its faculties, universities will spawn a whole cluster of adjacent institutions and industries around those research efforts. Depending on the problem you are tackling, these institutions can be instrumental in your success.
- Not surprising to anyone: Universities churn out a lot of highly qualified and motivated graduates, looking to leave a mark. A startup with a great vision can take advantage of this, both through working student positions as well as hiring for entry-level positions. Offering an opportunity to take responsibility and work with exciting technologies can oftentimes be enough to compete against local corporate employers at a salary-level well below that of the major hubs.
There’s no silver bullet
Obviously, such a generalization is hard. Which location you chose for your startup depends on a lot of factors, both from a pure company perspective but as well as personal preferences. A decision in favor of a certain ecosystem doesn’t have to be a once-and-for-all decision. Maybe staying in the vicinity of a university with a good set of initial customers close by is the best choice in the beginning. As a startup matures and hiring for senior positions becomes more of a priority a complete or partial move to a larger hub could make sense. As with everything in the life of a startup, all things come with a trade-off. Just make sure to consider more factors than just what seems “sexy” because other founders have done the same thing. After all, startups aren’t a race but rather an individual marathon.
And for the capital side if thing: At least here we are working on providing an easier and more broadly available option in the early stages all throughout Germany 😉
As a pre-seed investor, we help your startup to gain its first momentum by backing you with a first investment as well as world-class mentoring, a strong community, and the required know-how. Read more at firstmomentum.vc, stay up-to-date with our newsletter or get in touch through Twitter, Facebook or LinkedIn
