April 13 (Bloomberg) -- On a rainy day in March 2011, Ciaran O’Leary and two colleagues crammed into a Berlin taxi and raced for the station to catch a train back to Hamburg. While snaking through the city streets, it hit him: Leaving Berlin was a bad idea.
“We looked at each other and knew in that moment that we’d be crazy not to move here,” said O’Leary, a partner at the German venture capital firm Earlybird. “There was just so much happening -- founders everywhere, in every bar, cafe, every corner.”
Two weeks later, Earlybird rented office space in a former dance studio in central Berlin and opened shop, Bloomberg Businessweek reports in its April 16 edition. By late March of this year, the firm had raised $100 million of what will become a $200 million fund for investing in European Internet startups, primarily in German-speaking regions.
The new fund signals that at least some of Germany’s traditionally risk-averse financiers realize their capital city has become a global tech hub, one which foreign money discovered years ago. According to data from Thomson Reuters, 103 Internet startups received global venture capital funding in Germany in 2011, more than in any country except China and the U.S.
While the numbers are not broken down by city, Berlin is where most German startups congregate. “It’s one of my next stops, and I’m not the only one going,” said Yoni Cheifetz of Menlo Park, California-based Lightspeed Venture Partners. “Berlin is not overcrowded like the Valley, but it will be pretty competitive.”
Alex Ljung, co-founder of Berlin audio-sharing startup SoundCloud, put it this way: “If I were a VC, I’d be terrified not to be in Berlin.”
The city experienced a short startup boom in the late 1990s and early 2000s along with the rest of the world, but that quickly faded as German investors lost money on ill-conceived companies.
Among the Berlin Internet startups to survive were clone versions of American companies, many of them started by the Samwer brothers -- Marc, Oliver, and Alexander -- who’ve made more than $1 billion over the past decade by copying EBay Inc., Zappos.com Inc., Groupon Inc., Pinterest and now Amazon.com Inc.
“Five or six years ago, you felt like you were kind of alone, fighting windmills,” said Christophe Maire, a Swiss entrepreneur and one of the city’s major angel investors.
Things began changing as several Berlin startups scored funding from international sources. In 2010, SoundCloud Ltd., among the scene’s biggest success stories so far, received funding that included a $10 million infusion from New York’s Union Square Ventures and Switzerland’s Index Ventures. The service now boasts more than 12 million members.
Other hits include Wooga GmbH, Europe’s largest developer of online social games, which last May announced a $24 million investment led by a Massachusetts venture capital firm. In November, Atomico, the London-based venture capital firm of Skype co-founder Niklas Zennstroem, invested $4.2 million in 6Wunderkinder, a maker of productivity applications.
Encouraged by all the interest, and the money, many Berliners have gotten startup fever. The Berlin Chamber of Commerce reports that 1,300 Internet startups have been founded in the city since 2008, 500 of them last year.
Germany’s capital is home to the Chaos Computer Club, one of the world’s biggest hacker groups. In recent years, hackers, along with tech-savvy expats and engineers from Berlin’s universities and clone companies, have combined their know-how with the softer skills of designers, artists and musicians who have long flocked to Berlin.
“Berlin’s attitude is very punk, and that’s really important for startups, because they’re basically saying, ‘OK, I’m going to do things my own way,’” said Ljung, who was a sound designer before founding SoundCloud, and is still an active electronic musician.
O’Leary said: “All Berlin knows is change and disruption, and there’s nobody defining what the city should be or what an entrepreneur should be.”
It also helps that Berlin has started to move past its focus on challenging, esoteric art and design. Ljung said that when he arrived from Sweden in 2007, the websites and apps from Berlin were “very aggressive and difficult,” featuring tiny fonts and black backgrounds. While the aesthetic is still edgy, “now there’s more focus on being global and on the user experience,” he said.
O’Leary encourages entrepreneurs to build their apps on independent platforms, as opposed to Facebook, because people are increasingly unwilling to cut through the clutter on the sprawling social network, he said.
O’Leary also pushes startups to make products with a narrow focus. He cited Amen, a service hyped by actor Ashton Kutcher which encourages people to rate opinions and products, and Readmill, which lets people take and share notes on e-books to create a communal reading experience.
Many Berlin startups focus on products for urbanites. Examples include Gidsy, an online marketplace for real-life experiences such as street-art tours led by local graffiti artists. Others specialize in business-to-business products. 6Wunderkinder, for instance, creates apps such as Wunderlist, which lets employees share to-do lists.
Berlin’s innovative frenzy is a significant shift for Germans, who tend to be risk-averse, said O’Leary.
“Obviously after the Second World War,” Germans “didn’t have a great risk appetite -- they wanted to focus on rebuilding and being safe,” he said. “I think just now a generation is surfacing that isn’t bothered by the post-World War II mind-set and is instead focused on changing the world.”
Still, Germany’s own interest in Berlin’s tech scene lags behind that of foreigners. Roughly 80 percent of Earlybird’s $100 million fund comes from international sources, an imbalance that O’Leary said is a result of the country’s distrust of venture capital, which in German has the discouraging name Risikokapital, following the dot-com bust a decade ago. Since then the number of German venture capital firms dwindled from hundreds to just a few.
“International investors have been quicker to realize, OK, if there are only a handful of VCs left for such a big economy, this is a huge opportunity,” O’Leary said.
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