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Berlin's Tech Scene Sizzles as Marquee Startup Fizzles

Leonid Bershidsky is a Bloomberg View columnist. He was the founding editor of the Russian business daily Vedomosti and founded the opinion website Slon.ru.
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Rocket Internet, the core company of Berlin's start-up scene, is not doing too well. It recently posted a profit warning, telling investors of big writedowns in its fashion business. Its stock performance since the initial public offering two years ago -- the biggest for a European tech company since the dot-com boom of the late 1990s -- has been abysmal. The Berlin tech scene, however, remains the hottest in Europe and isn't suffering along with the behemoth that helped create it.

Rocket Internet lost 617 million euros ($693 million) in the first half of 2016, in large part because the latest funding round of one of its more mature businesses, the Global Fashion Group, reduced its valuation and forced a writedown of goodwill and intangible assets. GFG sells mid-range clothing brands in 24 countries and it includes some of the oldest businesses created by the Berlin start-up factory. 

Rocket has never made money. Last year, it lost $1.1 billion, though one of its founders, Oliver Samwer, assured investors that the losses had peaked. To keep that promise, Rocket started cutting costs, especially marketing-related ones, and experienced a drop in revenue. The company's market capitalization is now well below the almost $6 billion valuation it puts on its portfolio. It's a rare illustration of how valuations based on venture investments can be much higher than market appraisals: Rocket's portfolio is a collection of venture-funded start-ups. 

Here's how Rocket has performed compared with a U.K.-based peer, the online fashion retailer Asos:


Rocket, though, is not just a retailer like Asos -- it's a unique company that produces, above all, other companies. It takes a service that's successful somewhere, mostly in the U.S., reverse-engineers it and runs it in some remote country where the U.S. originator of the idea hasn't expanded yet. It's a model that requires speed, courage and stellar execution. All three rarely come together, but the method practiced by Samwer and his brothers helped Berlin grow into London's biggest competitor for tech investment in Europe.

In a recent study of local start-ups, Hergen Woebken, the founder of the Berlin-based Institute of Strategic Development, wrote that "Without the Samwer brothers and their business models, Berlin today would be insignificant regarding startups." That sounds like excessive praise, but Alexey Kolupaev, who has worked as chief technology officer for a string of Berlin start-ups, confirms Woebken's assesment. "Lots of developers from all over the world have come to Berlin through Rocket," he told me. "They do, like, 10 start-ups a year, and each of these needs a team."

Not all those smart people tolerate Rocket's sweatshop culture for long. Many leave and start new companies. They tell others about living in Berlin, and one day, those people show up, too. So, the scene grows.

"While in 2012 Rocket Internet-backed companies prevailed in our dataset of startups with the biggest workforce in Berlin, diversity in this regard has increased in the larger (and presumably more successful) startups over the last years," the IFSE report says.

Using relatively strict criteria -- only counting businesses no older than five years that would have been impossible without the internet -- IFSE counted 620 start-ups in Berlin at the end of last year, compared with 270 in 2012. Their workforce has more than doubled in three years to 13,200 people; the start-ups could be the city's fifth largest employer, ahead of Siemens. There are now other incubators, inspired by Rocket. And, breaking with the Rocket tradition, a smaller share of Berlin start-ups than in 2012 are e-commerce operations. The share of social and service companies has grown.

Very few of the Berlin tech companies are household names yet, and there have been no big IPOs since those of Rocket's and affiliated Zalando, also in 2014. And yet some are based on cool ideas, like the social photo app EyeEm or the would-be coffee industry disrupter Bonaverde, are built on interesting, original ideas and technology. Berlin has moved on from Rocket's copycat model. 

In the first half of this year, Germany (which primarily means Berlin) drew $906 million in venture investment, behind the U.K. (meaning mostly London) with $2 billion. Yet the London investment dropped significantly in the second quarter compared with the first, while the inflow of capital to Berlin increased. Brexit is probably going to give Berlin a boost: As techies shop around for alternatives, they are sure to find out that life is much cheaper here than in London, and that English is the tech community's lingua franca: Many work in it for years without learning much German.

Rocket, even if it never finds a way to steady profit for its imitative start-ups, put Berlin on the tech map. Other companies and other business models are helping it mature as a tech hub -- not quite Europe's Silicon Valley, because Europe doesn't have one, but a city with a strong support network for developers and a market to match it. No matter what happens to Rocket, the scene is now bigger and more diverse than its erstwhile locomotive.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Leonid Bershidsky at lbershidsky@bloomberg.net

To contact the editor responsible for this story:
Max Berley at mberley@bloomberg.net