Cash Scarcity Threatening Berlin’s Thriving Startup Scene

Cash Scarcity Threatening Berlin’s Thriving Startup Scene
A man takes a photograph near the Reichstag in Berlin. Photographer: Krisztian Bocsi/Bloomberg

Naren Shaam spoke virtually no German and knew only one person in Berlin. That didn’t keep him from founding his travel planning website, GoEuro, there.

“Berlin was the right choice,” said the 30-year-old Harvard Business School graduate, who now has 20 people working for him at his offices in an old industrial building. “I would do it again here.”

Young people like Shaam have made the German capital a global hotbed for startups, drawn by a raw, artsy atmosphere that rivals Brooklyn’s as an icon of global hip. The city is home to 2,500 fledgling tech companies, employing some 30,000 people, according to the Federal Association of German Startups, which was set up in the city last year.

But even as Berlin jostles with London for the title of Europe’s latest Silicon Whatever, a lack of financing threatens its growth. Shaam, for instance, acknowledges that finding backers would have been easier and valuations higher in the U.S. or Britain, though he felt free-wheeling Berlin, with its growing talent pool, was a better fit.

A central concern for founders and investors is the ability to cash out, and Berlin’s record isn’t stellar. The city hasn’t seen any technology initial public offerings since multimedia software maker Magix AG raised 87 million euros ($115 million) in 2006.

Larger acquisitions have mainly targeted companies founded by the three Samwer brothers, who have built clones of big U.S. online retailers. London, by contrast, saw three tech IPOs last year, according to data compiled by Bloomberg, and a host of deals such as last month’s purchase of wireless-network startup Ubiquisys Ltd. by Cisco Systems Inc. for $310 million.

Frustrated Investors

Sales by founders or investors in Berlin are only slowly picking up. Axel Springer AG in January took a 75 percent stake in social television startup TunedIn Media GmbH, and Panasonic Corp.’s automotive arm acquired streaming radio firm Aupeo GmbH on April 8. Neither disclosed terms.

While it’s not difficult in Berlin to raise angel funding of a few thousand dollars and seed money up to about $1 million, the next round of financing -- essential for a growing community -- is a challenge.

“Companies may die even though they have good ideas, projects, and teams,” said Andre Eggert, a partner at law firm Lacore Rechtsanwaelte LLP in Berlin who advises entrepreneurs and their backers. “Early stage investors will be frustrated.”

Crumbling Facades

Despite those hassles, there are some signs that financing is getting easier. ResearchGate GmbH, a professional network for scientists, on June 4 said Bill Gates, Tenaya Capital Inc. and others had invested $35 million. SumUp Ltd., which allows credit card payments via smartphones or tablets, said May 28 that Groupon Inc., American Express Co., and existing backers would invest more than 10 million euros.

Berlin is brimming with faith in the notion that tech startups can help revive a city where the industrial base has never really recovered from the devastation of World War II and its decades of isolation when divided by the wall and surrounded by Communist East Germany.

Today, in districts such as Kreuzberg, Neukoelln and Prenzlauer Berg, grand 19th-century buildings with crumbling facades harbor sidewalk cafes and bars offering free Internet access to would-be entrepreneurs. Tucked away in shabby storefronts or industrial-age courtyards, startups are hiring legions of techies in their 20s and 30s.

“Berlin is well on its way to becoming one of the most vibrant startup hubs in the world,” YouTube founder Jawed Karim said in October at Hy!, a technology conference in Berlin.

More Competitive

Revenue from Berlin’s information-technology sector rose 20 percent last year to 2.2 billion euros, while the city’s overall economy grew 1.2 percent, according to Investitionsbank Berlin, a public development bank. Berlin has climbed to fifth rank among the most competitive cities in Germany from eighth in 2010, Berenberg Bank and the Hamburg Institute of International Economics found in a study that considered factors like education and wealth.

Henrik Berggren came to the city in 2008, working with fellow Swedes running SoundCloud Ltd., a startup that helps musicians share recordings. In 2011 he returned to launch his own company with backing from the SoundCloud founders, which he runs from a disused brewery.

“Berlin has the critical mass now,” said Berggren, the 33-year-old co-founder of Readmill Network Ltd., which makes e-book software for tablets and phones. “We are just getting started.”

Low Rents

The cost of living in Berlin is a big draw. Average residential rent per square meter is less than a fifth the price in London, according to brokerage Jones Lang LaSalle Inc. Office space averages 156 euros per square meter annually, versus 968 euros in London’s West End.

Helped by its location in the European Union’s single labor market and because of rising demand for techies, Berlin is drawing people from southern Europe as those economies struggle with high unemployment.

“I looked for cool challenges to help me grow,” said Cuchi Costa, a 25-year-old product designer at film fan portal, who moved to Berlin from Portugal a year ago. “Berlin is a startup in itself when it comes to technology and seemed more interesting and less ‘business as usual’ than other cities.”

And young Germans who might earlier have sought jobs at big companies like Daimler AG and Siemens AG are instead choosing the capital’s myriad technology startups, said Gabriel Matuschka, who in December opened a Berlin office for venture capital firm Partech International.

Nintendo Console

“Engineering talent is now increasingly interested in starting a company versus joining the large corporates,” Matuschka said in his bare office, far too big for the current staff of two but equipped with toys such as an old Nintendo Corp. gaming console. There’s also “a broader acceptance of taking risks. It’s OK to do something that might not work out.”

Germany’s government is trying to get in on the excitement surrounding Berlin’s startup scene. Chancellor Angela Merkel spoke at a March event featuring Jens Begemann, the chief executive officer of Wooga GmbH, a gaming company in Berlin. And economy minister Philipp Roesler has visited Silicon Valley twice this year, in part to convince German entrepreneurs to return home.

With billboards around the capital featuring smiling young people proclaiming new initiatives to attract tech entrepreneurs, Merkel is trying to develop a new economic engine to complement the country’s manufacturing legacy.

Basement Bar

In a 16,000 square-meter site along the former Berlin Wall, where East German guards shot people trying to flee to the west, Simon Schaefer is overseeing a compound where technology companies at different stages of development will work side-by-side and draw on each other’s expertise.

The Factory, which has 1 million euros in funding from Google Inc., has rented space to 13 companies, including SoundCloud and Mozilla Corp. Eventually, about 500 people will work at the compound, which will feature a basketball court, a gallery, a coffee shop, and a 250-seat auditorium.

Startups can “find better soil to grow in Berlin than in London,” Schaefer said. In a revelation typical of the city, builders discovered a basement, not marked on any plans, that may be converted into an event venue with a bar.

“We can now fill this great historic space with new life after its existence was forgotten for decades,” Schaefer said. “That makes it interesting and a lot of fun.”