Berlin’s Rise to the Startup Capital in Europe
By Danny Holtschke from StartupGeist
The digitalization of life cannot be stopped. It keeps establishing new patterns of thinking and acting. There is only one thing left that seems constant… change.
David Carr, the author of ‘Big Switch’ (2013), is convinced that we are right in the middle of an epochal technological transformation. A transformation that shows strong parallels to the ‘democratization of electricity one century ago’ where a shift in production of electricity power happened — a change from a privatized mode to a centralized one relying on one supply network.
Similarly, we are now experiencing a shift in computing capacity that is now provided through a unitary network — the Internet! Neither the internet nor “cloud” services will turn out to be a temporary fashion. Google Documents, Dropbox, Wunderlist and Evernote are first examples of ‘cloud tools’ that play an important role in our daily routines. This trend will even accelerate during the next few years and affect all areas of our lives.
Implications of the technological transformation for entrepreneurship ecosystems
We cannot provide a viable description of technology based ‘Entrepreneurship Ecosystems’ (which will be called “startup hub” from now on) without looking at technological trends and their effect on our economy. Therefore, I will discuss three reasons for the appearance of the current “startup spirit”, which also promote the creation of ‘startup hubs’.
Firstly, the Internet and the new possibilities of ‘Cloud Computing’ do not only connect computers with the web (Web 1.0) or people (Web 2.0), but will soon connect everything with the internet (Web 3.0 — ‘Internet of Things’).
Secondly, the improvements of broadband technology make internet connections faster, cheaper and accessible to more people.
Thirdly, new products — smartphones & tablets — allow people to ‘go online’ everywhere and in new ways (touchscreen & voice commands).
Fourthly, the number of internet users increases each hour — every third person is regularly using it by now. We see a remarkable acceleration of the diffusion of new technologies: the telephone 75 years to reach 50 million people, the radio 38 years, TV took 13 years, the internet only 4 years and the most popular ‘apps’ today do it in only a few weeks (PWC Study — Social Media in Deutschland, 2012). Through different demographics, people can be faster and more easily reached. On average, people spend 26% of their leisure time on the internet and 12% with mobile devices.
— Bottom line: Tech entrepreneurs everywhere use this magnificent range of the internet to offer their products and services on a global scale. Everywhere around us, we see acts of Schumpeterian ‘Creative Destruction’ (1911), replacing existing structures with new ones. The Economist (2014) calls this trend a Cambrian Explosion of digital startups, which pierces every angle of our economy with innovative products. Some even speak of a “Reinvention of Capitalism” (Porter, & Kramer, 2011).
Millennials see traditional career paths as unattractive
There is another trend playing a major role in the rise of the phenomenon called “tech startup”. In the past, most companies were being founded by people who were older than 50 years (GEM, 2011). However, economic and social shifts are giving an impulse to Millennials to consider founding a company more intense and much earlier than the generations before (18 to 30 years).
The consequences of the economic crisis in 2008 discourage Millennials on their strive for conventional jobs. On the other hand, the employment market will evolve from a demand-driven to an offer-driven market, because many “Baby Boomers” will leave it. This will decrease the pressure for Millennials to hold straightforward career paths while their courage to create a company will increase.
According to a recent survey of 12,000 young people in 27 countries (Kauffman Foundation, 2013), more than two-thirds expressed a high chance that they might become entrepreneurs some day. This number really indicates a cultural change.
If you think that a startup might be the right career choice for you too, then check out my article about startup life: the scary truth no one tells you.
Our society is experiencing a “Startup Spirit 2.0”
The goal of my essay is not to prove existing concepts and theories with reliable data. I rather want to give a subjective appraisal of current trends in the digital economy and answer the following questions:
Why will entrepreneurial activity and its concentration in a ‘Tech-startup Hub’ become much more important than they already are? Secondly, why is a 20 year perspective for the support of a self-sustaining Tech-startup Hub inevitable?
As an author of the ‘Startup Ecosystem Report 2012‘ and a co-founder of Spotistic, I am mostly referring to high-growth software and hardware startups. Today we know much more about tech startups and their importance as enablers of innovation than ever before (Startup Genome Report, 2011). Startups are not small versions of big companies but should be seen as a temporary form of organization in search of a scalable business model (Steve Blank, 2013).
The costs of founding a software startup (and therefore the threshold!) have sunken considerably. Platforms like Amazon Cloud-Computing host applications for less than one-tenth of the original costs. Apple’s App Store or Google’s Play Store and their mobile platforms — iOS and Android — allow developers to reach their audience quickly and effectively. Facebook and Twitter allow them to merchandise their products cheaply. All this has been enabled by the mother of all platforms — the internet. Know-how on how to build a company is being democratized and can be retrieved by everyone who is eager for knowledge. This circumstance alone is increasing the number of startups enormously.
Furthermore, traditional innovation processes (like the waterfall method for product development) are being supplemented or even replaced by new approaches, for example, Lean Startup (Eric Ries, 2011) or Customer Development (Steve Blank, 2012). Quick learning sessions at the market and product iterations (‘pivots’) are the levers of contemporary product development. These innovation processes and modern business model tools like the Business Model Canvas (Alexander Osterwalder, 2011) — help startup founders, to validate their ideas quickly, create first prototypes and win paying customers. Innovation has never been a straightforward process, but we tend to understand it better and better.
Based on the mentioned technological trends and their implications, I assume that more young and well-educated people will indulge in the temptation of founding a tech startup. If you feel like getting started too, check out my guide on starting a startup!
‘Startup hubs’ are fundamentally based on talents, infrastructure, and culture. Where these 3 components are well-developed, young founders will set up their startups and support each other.
By discussing the example of Berlin’s Tech startup Hub, I would like to explore at which point such a system can become self-sustaining.
80/20 Summary
— Disclaimer: I originally published this post in my friend’s book “Beyond Silicon Valley” in 2014 and reposted it here.
Berlin Startup Hub: The Rise of the Future
The economic importance of tech startups is tremendous. A study of the Kauffman Foundation (2011) argues that almost all new jobs in the U.S. between 2000 and 2010 were created by fast-growing tech startups. But though their importance as a driver of job growth is so big, the actual chance that a startup will be successful is very small.
According to a widely agreed rule of thumb, 9 out of 10 fail. Furthermore, outside of the big hubs, this tiny success ratio is even smaller than zero. The result is that almost all highly successful startups (e.g. Apple, Oracle, Yahoo, Google, Salesforce or Facebook) were created in no more than 3 cities (Silicon Valley, Boston, Tel Aviv). However, this trend seems to be coming to an end now.
Simultaneously to a worldwide explosion of tech startups, the rise of new tech hubs has begun. A lot of cities like New York, Chicago, Atlanta, Toronto, London or Berlin managed to establish themselves as recognized tech locations (Startup Ecosystem Report, 2012).
Origin
In Germany, Berlin emerged as the most important hub for tech startups after the reunification in 1990. This rise to a leading location is actually closely associated with Berlin’s history. Berlin managed to reinvent itself as a booming cultural center — not only for politicians, artists or musicians but especially for young and brave startup founders. This development is shaped by a ‘Grassroot-movement’ which is strongly tied to the creative scene.
The former slogan of Berlin’s mayor Klaus Wowereit “arm, aber sexy” (“poor, but sexy”) doesn’t seem to apply completely anymore but it shows that the public cash boxes traditionally have been empty. Nevertheless, founders from other federal states and countries came and created companies without governmental support. The geographic variety of newcomers is really remarkable. Pioneers from Scandinavia, the Benelux Countries, France, Spain and Italy were drawn to Berlin and are still flowing in. This could be explained by the great attractiveness of the city, which has several reasons.
Firstly, Berlin has re-established itself as an adopted home for politicians. After Germany was reunited, most governmental departments and their employees moved to Berlin. This increased its attractiveness as an industrial location.
Secondly, Berlin has a comparatively low cost of living. Even most students can afford a flat or a shared apartment in one of the popular “Kiezes”.
Thirdly, due to having this low cost of living, Berlin has become the adopted home of many artists and creative professions. Especially in the last 20 years, a strong creative movement was visible. Through its open, alternative and rebellious nature, Berlin allowed many artists to find themselves and start successful projects. Like art, entrepreneurship is a part of the human DNA and spirit. It is another way of expressing personal creativity and sharing it with others. Therefore, we see a strong connection between the creative industries and entrepreneurs.
Fourthly, Berlin’s former status as a divided city has created many gray areas and underground movements. Like the Hippie culture in California, movements focused on ‘being different’ allowing their members to break social conventions — like founding a startup even though the chance of success was low.
Fifthly, Berlin has never had a strong industrial core. Schering (now Bayer) is the last DAX company which originated in Berlin and had its main office there. Because the industrial core was missing, Berlin had the unique chance to build an alternative industry based on software and the internet. Currently, the city feels like a startup itself — bustling, unstable, precarious — committed to a constant departure!
1. Generation: Dot-Com Crisis
The rise of Berlin was connected closely to the Dot-Com crisis in 2000. Right before the new millennium, there was a global boom of internet businesses. The general goal was to use the internet as a new distribution channel for existing products and services. First e-commerce platforms (Amazon & eBay), information portals (Yahoo!) and email clients emerged. These promising web 1.0 business models — mostly originating in the U.S. — were copied in Germany and offered to the German market.
A few first generation success stories from Germany helped to inspire more people to start their own companies. Founders at all age groups tried to digitalize traditional business models in order to use the inherent scaling and distribution opportunities of the internet (see the introduction on tech trends). Just like the soccer world cup victory in 1990, turned many young folks into football enthusiasts (Schweinsteiger, Lahm, Podolski etc), entrepreneurial success stories can inspire whole generations and provide them with the courage to try it themselves.
— To sum up: a tech startup hub needs a first group of successful ventures, which adopt effective best practices and pass them to the next generation. Rocket Internet and Gate5 are examples of such companies in the Berlin hub. However, most founders there are trying it for the first time. The rate of success has been very slow due to lack of experience, capital and mentors. I assume that Berlin has gone through this phase from 1998 to 2008.
2. Generation: Since 2008
During the second generation (for example, after Gate5 was sold to Nokia), successful founders become early stages investors, a so-called ‘Business Angel’, for example, Christophe Maire.
Others become serial entrepreneurs who started with new ideas and sold them on successfully, like for example Holger G. Weiss (formerly Gate5, later AUPEO!, which was sold to Samsung). In this phase, some successful startups in the B2C and B2B areas were created and provided really innovative solutions instead of just copying American businesses. Here is an exemplary though fragmentary list of second generation startups in Berlin:
Start Up Date of incorporation Venture Capital ($) Sold ? Type Soundcloud 2007 123.000.000 no B2C 6Wunderkinder 9/2010 25.000.000 no B2C Readmill 11/2010 n/a no B2C Gidsy 2011 1.200.000 GetYourGuide B2C AUPEO! 2008 n/a Samsung B2B SocialBakers 10/2008 34.000.000 no B2B Sociomantic Labs 1/2009 n/a no B2B
While the first generation had to travel through the internet jungle without any guidance, the second generation was supported by some upcoming university incubators (for example the Hasso Plattner Institute) and accelerators. Over the last few years, several accelerator programs have settled in Berlin: Startupbootcamp, Berlin Startup Academy, Axel Springer and Microsoft. First service providers focusing on startups emerged — for example the recruiting agency i-Potentials or startup company-builders like Project A. Altogether, an extensive infrastructure of lawyers, accountants, banks and venture capitalists for tech startups has been created. Due to this hype, winning young talents has also become easier for tech companies.
The third generation will find a fully established startup hub and more successful companies will grow. However, the most important question is how sustainable this development will be. Malicious gossip has it that Berlin’s startup party is over and now considered as a series of drawbacks, bailouts, and bankruptcies. “After a long-lasting boom, realism spreads in the internet stronghold at the Spree. Without further venture capital, the distance to Silicon Valley will stay exorbitant” was written by Michael Kroker at the Wirtschaftswoche and answered with a sharp critique by Berlin-based venture capitalists (Olaf Jacobi, Ciarán O’Leary, Christoph Janzi etc).
No startup hub is perfect
No startup hub is perfect — Silicon Valley isn’t either. A simple comparison of Berlin on the basis of the available venture capital seems wrong. Too much available capital makes talent expensive. This is why the Silicon Valley is suffering from an enormous lack of I.T. specialists, which in turn, increases the operative costs of tech startups tremendously.
Each startup hub must create its own identity and unique advantages. Therefore, the following appraisal is meant to create a better understanding of Berlin’s status as an internet stronghold and to infer the necessity of a 20-year plan.
You can’t fast forward because we are talking about experience which can’t be manufactured. You simply have dedicate the time. — Fred Wilson, American VC giver, wrote in his blog concerning the emergence of tech startup hubs.
Berlin 2014: Appraisal
Though it is competing with London and Tel Aviv for capital and talents, Berlin is being called an incubator for innovation or even a ‘European Silicon Valley’. Berlin is a magnet for talented founders like the Swedes Alexander Ljung (Soundcloud) or Henrik Berggren (Readmill), and is being chosen by notable investors as an adopted home (EarlyBird etc). In addition, American tech startups (AirBnB, General Assembly) are settling in the city in order to build their European operations and gain access to the local community. Matthew Brimer, co-founder of General Assembly, notes that “Berlin is an aspiring hub. Strong parallels can be seen between New York a few years ago and Berlin today”.
Based on 5 criteria — market, capital, talent, culture and infrastructure — I will appraise Berlin as a rising tech location in order to derive the necessity of a 20 year perspective for constructing it as a ‘self-sustaining’ startup hub from that.
#1: Market
As the capital of Europe’s biggest economy, Berlin offers enormous market opportunities. A young audience is working in Berlin’s music and marketing industries. These Millennials are tech savvy and open to innovation. However, focusing on the German market only does not seem promising. Therefore, most startups define themselves as ‘born global’, that is without any limitation on certain target markets.
Still, founders in Berlin could be more ambitious: When we created the Startup Ecosystem Report in 2012, founders in Berlin were almost twice as likely to tackle small niche markets than their peers in Silicon Valley!
A disadvantage is the absence of large technology corporations. However, in the last few years, some big players like Google, Microsoft and SAP have either moved to Berlin or strengthened their presence there. This is only a beginning and further established tech companies will also have to make the same move.
#2: Capital — Seed > VC > Exit.
Berlin makes a virtue out of necessity. When we did the Startup Ecosystem Report, we saw that Berlin startups raise 80% less capital than Silicon Valley startups.
However, because of the low living costs, the absence of capital in the first founding months, is not very grave for most companies. Many tech startups share an office or join coworking spaces (e.g.. St. Oberholz, Betahaus). This also leads to an increased sharing of knowledge and best practices in the hub. Business angels, accelerators and governmental programs (e.g. EXIST, Pro FIT seed stage support) help early-stage startups with cash injections and the access to networks. However, there is a massive lack of capital for growth stage startups — though there are some positive examples, which mostly rely on venture capital from the U.S.. Wunderlist (2013) collected around 19 million Euros and SocialBakers (2014) managed to receive 26 millions from the U.S..
Until now, there have been just as few billion-dollar acquisitions as there have been successful stock market launches. Investing in local companies is not very attractive for venture capitalists yet. As a result of not having established companies willing to integrate innovative solutions into their product portfolio (keyword: M&A), it is very unlikely that investment money will be multiplied after a few years.
#3: Talent — #talents, level of salary, language, #mentors
Due to it’s spirit, (#cheap #party #naive) Berlin seems very attractive and keeps pulling talents from all corners of the world. The number rises each day. Young people who came here to study stay and either join aspiring companies or start them themselves. The availability of young talent has resulted in lower salary levels, compared to other hubs in both Germany and Europe.
Philipp Stelzer, former founder Task36 notes:
We came from the MIT in Boston, where established companies and successful startups offer huge salaries. Here in Berlin, talent is cheap and easy to find. Furthermore, there are now more events in English language than in German.
Besides the massive talent pool, there is also a decent number of mentors — successful founders, professors or service providers (lawyers, accountants, bankers etc). However, there is room for improvement at this dimension, too. One of the findings of the Startup Ecosystem Report was that Berlin startups have 45% less mentors per company in comparison to Silicon Valley ventures. However, mentors are urgently needed. They play an important role in establishing digital business models, by acting as ideals and helping inexperienced founders to avoid common mistakes.
#4: Culture/Mindset — ideals, risk-taking willingness, acceptance of failure
Berlin’s advantage as a talent magnet brings in lots of different cultural influences. The Millennials there do not seem to share the general lack of courage and aversion to becoming self-employed in Germany. The risk-taking willingness and acceptance of failure seem to be much higher there than anywhere else in the country.
In an international comparison, both dimensions are still quite low and must be increased. The density of talent and mentors and their close proximity provide a great basis for increasing the success rate of local startups. The entrepreneurial density — number of people and organizations working for startups, divided by the adult population — is presumed to be especially high in the middle of Berlin (see fig. 1).
#5: Infrastructure — IT, logistics, community & events, legal aspects
It has been confirmed that the long-discussed provision of a free general WIFI-network will finally be activated. This will give an enormous push to the local I.T. infrastructure, which is already well-developed. The public transportation system and (still) 2 airports provide Berlin with a fine transport connection. However, there is a lack of direct routes to Silicon Valley.
As I already mentioned, the number of young talents participating in the numerous events each day keeps growing. By creating the incorporation type ‘Unternehmergesellschaft’ (UG), the disadvantage compared with the British legal status ‘Limited’ was reduced. It allows the setup of a company to happen much faster. The immigration rules of the European Union help talents to quickly integrate themselves at the local level. However, the traditional department structures and administrative formalities make the daily work of founders more complicated. Talents from outside of the European Union have big problems to receive resident permits. Because of this disadvantage, Berlin loses ground to more immigration-friendly countries.
Summed up, Berlin gains more significance as Germany’s internet stronghold. Many companies do finally collapse, but failure belongs to the creation of innovative solutions per definition. As a result, the assembly of a self-sustaining ecosystem is in full swing. The third generation of founders are getting ready and will find a richly set table.
Sebastian Rumberg, PR freelancing expert and Startupbootcamp mentor notes:
I wish there would be commutation between founders. I have seen far too many young founders trying to solve all problems alone, when they could have received help from experienced entrepreneurs. Furthermore, many of them try to ‘protect’ their idea at the beginning instead of validating it with feedback . Still, I think that the startup scene is much better than its reputation. There are so many successful companies which have no press coverage, but are still the best of their kind from an economic point of view.
The culture of ‘Pay-it-Forward’, which is well-known across Silicon Valley, must be spread stronger within Berlin.
At the end, I will now explore the question how sustainable Berlin’s development to an internationally renowned tech hub is.
The necessity of a 20-year perspective
I have tried to show the necessity of a 20 year perspective for establishing a tech startup hub by analyzing the development of Berlin. The core of each ecosystem is made up by a network of several generations of founders, which build upon each other. The first 2 generations create a hub (20 years). The following generations use existing processes, structures, ideals, mentors, incubators, accelerators, business angels and VCs to realize their ideas successfully.
Berlin’s development also shows that self-sustaining tech startup hubs can only evolve where a good infrastructure, a constant inflow of talents, the existence of mentors and ideals, as well as a culture of risk propensity meet. Nevertheless, the support for such a system cannot be initiated over night by a new economic development program. A long-term approach is required from entrepreneurs and investors. In his book Start Up communities, Brad Feld stresses the concept of ‘Leaders & Feeders’ which assumes that companies from different generations must establish and secure a tech startup hub (‘leaders’). Local governments can only support existing structures (‘feeders’). However, only those entrepreneurs who have at least a 20-year perspective and shape different sections in the life-cycle of a hub are truly relevant! (talent > serial entrepreneur > mentor > investor/advisor > ecosystem evangelist).
Three components make up the core of each tech startup hub: People/Talents, Infrastructure, Culture. Along this core, other important components like capital, governmental support, legislation etc. are building up. Berlin is a talent-driven hub while for example Boston can be called an institution-driven hub due to the strong influence of the MIT. Figure 3 is a first attempt to visualize the concept of generations building upon each other.
— To Sum it up: each technology based ecosystem is unique. It would be a mistake to compare an aspiring hub like Berlin with Silicon Valley on each dimension. Each location is so complex and singular that none can be ‘copied’ elsewhere. Prof. Dr. Daniel Isenberg, Management Practice, Babson College and initiator of des Babson Entrepreneurship Ecosystem Project — BEEP — argues that
Silicon Valley is the result of a very particular set of circumstances that occurred 20, 30 years ago, 40 years ago that are very difficult to replicate. I don’t think Silicon Valley could replicate it even if it wanted to today.
Experienced investors are holding the same opinion:
Silicon Valley is not something that was created overnight; it was probably 50 years in the making. So with each generation, the ecosystem just gets stronger. Therefore, I would assume that it might take another 40 years for Berlin or other places in Germany to have a vibrant tech community. It’s not something that just happens from one day to the next. — Paul Singh, partner at 500Startups, an American Hybrid of Accelerator and VC.
The Startup Revolution is unstoppable. The global condition of entrepreneurship is very positive. While Silicon Valley is still the strongest location, there are lots of new hubs now which didn’t exist at all 5–10 years ago.
There is much to be improved — Berlin must succeed in carving out its strength’s. There must be accessible growth capital as well as a convenient talent pool and unique, risky ideas.
— Only where the risk can be spread on several shoulders, new Facebooks and Googles might emerge!
The 2015 Startup Ecosystem Ranking
Since its first publication in 2012, the Startup Ecosystem Ranking has changed. As a co-author of the Startup Ecosystem Report 2015, we updated the 2012 ranking.
Not surprisingly, Silicon Valley is still on top — being following by New York, Los Angeles, Boston, Tel Aviv and London.
Berlin jumped up 6 places to rank 9 from its former rank 15. Berlin is now among the top ten startup hubs and closing in on London.
Generally, Berlin grows faster than any other startup hub (data refers to exits). It’s expected that Berlin climbs higher and overtakes London as the number one startup hub in Europe.
Get a copy of the 2015 Startup Ecosystem Report here.
As a sneak preview, here is the 2015 Startup Ecosystem Ranking:
StartupGeist Knowledge Base
StartupGeist summarizes insights and experiences from startup experts and founders. This article is based on …
- Brad Feld on Startup Communities on his blog (here is a link to his book “Startup Communities”)
- Steve Blank on Secret History of Silicon Valley (here a 62 min video)
- Kauffman Foundation on How did Silicon Valley become Silicon Valley?
- Compass on The Startup Ecosystem Report 2012 (Disclaimer: I was a co-author of the report)
- Daniel Isenberg initiated project: Babson Entrepreneurship Ecosystem Project (BEEP)
- Daniel Isenberg on What an Entrepreneurship Ecosystem Actually Is
- Daniel Isenberg on Not so Tech; Not so Startup.
- Nick Beim on The Rise And Future Of The New York Startup Ecosystem
- Marc Andreessen on Silicon Valley: A Place Or A State Of Mind?
Share your ❤ below — and respond with your thoughts.
I am looking forward to hearing from you.
I am Danny and started StartupGeist to help students and recent graduates build a business — and have a good life. Why? To be free, financially independent and healthy. How? Build a growth mindset and deliberately practice skills that turn your ideas into something bigger.
Originally published at startupgeist.com on January 12, 2016.
