As I walk under a graffiti-covered railway bridge in Kreuzberg, Berlin’s version of London's Shoreditch, around midday on a cold Saturday in early February, I hear what can only be described as an “umph, umph, umph” reverberating from an unknown underground club that is more than likely hosting another one of the city’s notorious all-weekend techno raves.
But the underground techno raves aren’t the only thing keeping Berlin’s young population stimulated these days. Oh no. Those who prefer making money to spending money would argue that setting up a tech company is just as cool as surviving a 48-hour stint in Berghain – one of Berlin's most debauched nightclubs, found in the depts of an abandoned powerplant.
Since I was last in Berlin some five years ago, the tech start-up scene has really taken off, with a recent report suggesting that tech firms in the city created a whopping €8.9 billion (£7.3 billion) in sales in 2011 and another highlighting that tech companies now account for 25 percent of the overall companies in the city.
The two main venture capital (VC) firms in Berlin, Earlybird and Point Nine, are always on the hunt for the next big tech company and therefore they believe they are well placed to comment on what’s happening in the increasingly multinational city.
The arches underneath Berlin's railway bridges are home to several techno clubs
Maximilian Claussen, a tech investor at Earlybird, which has roughly €800 million (£656 million) at its disposal, told Techworld in Berlin that there's definitely more capital available in London for tech start-ups. “Berlin's tech scene is smaller compared to London. What the city is still missing is one or two household venture capital firms on the ground.
"But what I like about Berlin is that it’s not very formal and the cost of living isn’t very high. If you look at the people who start their business here, you’ll see people coming from every part of the world," he said. "The degree of people coming from the engineering and product side is getting better and better all the time, making it easier to recruit and set up a team.”
Pawel Chudzinski, a partner at Point Nine, a VC that is gradually investing €46 million in mostly German tech firms, said he believes London is the best-funded city in Europe.
On Berlin, he conceeded: “It’s a cool city in general, not only for tech. There’s lots of art and other culture. It’s attractive to young entrepreneurial people and ever since I came here five years ago the growth of the start-up scene has been tremendous. Right now you have people from all over the world coming.”
Berlin's start-up districts
So while Frankfurt has long been Germany’s finance capital and Hamburg is the well-established media hub, Berlin, it would appear, is now synonymous with tech start-ups. But where are they and how well are they doing?
Well, while California’s high-flying start-ups are spread across Silicon Valley, which spans roughly 1,000 square miles, Berlin’s start-ups have congregated in two trendy urban areas in the same way that London’s tech firms are clustered around the so-called “Silicon Roundabout” in East London's Shoreditch.
Kreuzberg, the largest Berlin district and home to tens of thousands of Turkish immigrants, along with wall-upon-wall of street art and dozens of kebab houses, remains the cheaper of the two and slightly more edgy than its northern counterpart, Mitte, which has recently seen a large number of commercial developments and shops move into the area.
There’s no denying the cheap rents, trendy coffee shops and hardcore tech(no) clubs make Kreuzberg and Mittle great places to live for any young entrepreneur looking to bootstrap a start-up, but some have started to question whether Berlin’s tech companies can ever emulate the likes of Facebook, with many asking when the city will deliver a globally significant IPO.
Of course, Berlin has seen its fair share of successful exits: Jamba in 2004 ($273 million/£180 million), Brands4Friends (€150 million/£129 million) and Citydeal (€130 million/£109 million) in 2010, and DailyDeal in 2011 (around €130 million/£109 million) to name but a few. However, billion dollar valuations are hard to come by in Berlin and tech companies in the city don't appear to be growing as big or raising as much money in comparison to those found in the likes of Silicon Valley, New York and London,.
Lack of VC cash
Many put this down to the fact that the number of tech investors on the ground in Germany remains relatively low, making it harder for start-ups to raise large sums of money.
There are, of course, a number of exceptions, such as online music sharing platform SoundCloud and list creating mobile app Wunderlist, who have raised $123 million (£73 million) and $23.9 million (£14 million) respectively. Then there e-commerce giant Zalando, which is tipped to become Germany’s first billion dollar tech IPO in some time.
But the reality is that many start-ups in Berlin aren't able to grow their teams or expand their operations because they can't access the cash the need.
“It’s relatively easy for companies to get [seed] funding up to €500,000 but raising Series A funding or anything over a million, is hard,” explains Simon Specka, co-founder of VPN provider ZenMate, which announced it has over a million registered users. “Series A is quite risky for investors because companies are asking for millions, often when the start-up doesn’t even have a cash flow. It doesn’t suit the German mindset, which is quite risk averse.”
However, Specka told Techworld that things are improving, adding that it was nearly impossible to found a tech company in Berlin five years ago. “There was no money, there was no venture capital. Now you have a relatively good investor scene.”
Even the venture capitalists on the ground in Berlin, who in theory get prime access to the city's best start-ups, want to see more investors in the area.
Claussen says the city is still missing one or two household venture capital firms, while Chudzinski argues its often easier for start-ups in London to raise money because the English capital is one of the world's three major financial centres, along with New York and Hong Kong.
All eyes on London?
Ophelia Brown, an investor at Index Ventures, one of the "big four" venture capital firms in London, said: "In 2012, VCs invested over $6.5 billion [in Europe]. $2 billion of that was in the UK alone.
"I think London's Tech City has rapidly evolved over the past couple of years and I think London has really proven itself as a tech hub. If you look at the opportunity, founders now have access to about €5 billion in early stage capital in London alone and that's just from four funds (Index, Accel, Balderton, Wellington)."
However, there have been some promising signs that things are starting to change in Berlin. For example, the number of large, curious US investors in talks with Berlin start-ups is on the up. “What you see now is Index or Accel here on a week-by-week basis,” said Claussen. “They’re spending a lot of time here meeting start-ups,” he said, adding that many of them go on to make investments.
Meanwhile, tech investor Uwe Horstmann from Berlin-based VC firm Project A said there are several Berlin start-ups that have been backed by US investors recently, such a Wunderlist creator 6Wunderkinder who has been funded by Silicon Valley heavyweight and Whatsapp backer, Sequoia Capital. “Americans are definitely starting to come here more often” he concluded.
Meanwhile, the number of new incubators – essentially spaces that act as breeding grounds for high-potential start-ups – is also rising, with Axel Springer's Plug & Play, Berlin Startup Academy, The Factory and initiatives from companies such as Mozilla, Microsoft and Google, all taking off over the last few years.
So there's clearly something happening in Berlin. But however loud the hipsters sing and shout about how great the city's start-up scene is, it would appear that it has a long way to go if it wants to achieve similar levels of success to the likes of London and Silicon Valley. Perhaps German chancellor Angela Merkel should create a "Tech-Stadt" of her own.