Berlin’s start-ups want to go back to the future; With its tradition of high-quality engineering, a sizeable domestic market and the allure of Berlin, Germany ought to be the perfect European base for tech start-ups.

January 2, 2014 12:10 pm

Berlin’s start-ups want to go back to the future

By Jeevan Vasagar in Berlin

With its tradition of high-quality engineering, a sizeable domestic market and the allure of Berlin, Germany ought to be the perfect European base for tech start-ups. Yet the last time the country experienced a boom in entrepreneurship was during the final decades of the 19th century in the Gründerzeit, or founder epoch, when banks and industrial companies like Commerzbank and AEG were founded. The last German tech start-up to achieve global scale was SAP, founded in 1972.Angela Merkel’s coalition government is hoping to enable a new Gründerzeit with pledges to increase spending on infrastructure, research and development and education. But Germany is short of finance for entrepreneurs, while immigration is another bugbear. Businesses frequently complain that even though the German government has attempted to make it easier for non-EU nationals to migrate to Germany, the process remains time-consuming and bureaucratic.

The relevant government offices are short of English-speaking staff; in one case, a Berlin tech business hired its own interpreters to smooth the path for new hires.

Despite all this, there have been a few hints of progress in the past year. The venture capital sector in Germany is showing signs of recovery after a long barren spell, according to figures from the BVK, the German association of private equity and venture capital companies.

Meanwhile, Berlin is developing a crowd of technological innovators that are starting to attract the attention of major venture capital investors.

In recent months, Bill Gates led a $35m investment in ResearchGate, a social network for scientists; Sequoia Capital has invested $19m in 6Wunderkinder, makers of an app that manages to-do lists; Union Square Ventures and angel investors invested $7m in The Football App, a football news and networking service. Kleiner Perkins Caufield & Byers led a fundraising round which invested in SoundCloud.

The size of the SoundCloud investment was not disclosed, though it was rumoured to be the biggest of all – $50m, according to TechCrunch.

The size of these deals was relatively small, but they sealed closer personal ties; Mary Meeker of Kleiner Perkins will take an observer position on SoundCloud’s board while Sir Michael Moritz of Sequoia Capital is joining the board of 6Wunderkinder. The Sequoia funding is to aid in the expansion of the US operations.

Start-ups: One established and one to watch

SoundCloud

Year founded: 2007

Fast-growing sound distribution platform that enables users to record, upload and share audio. With 40m registered users, SoundCloud aspires to overtake YouTube in terms of the amount of content hosted.

6Wunderkinder

Year founded: 2010

Creators of a free cloud-based task management application, Wunderlist. Recently launched a subscription service aimed at businesses, Wunderlist Pro, which enables tasks to be assigned to colleagues. Around a third of its 6m users are in the US, where the company is looking to expand with VC funding.

Unlike in London, where being drawn into Silicon Valley’s orbit is a cause for concern, Berlin’s start-up community is keen for closer ties with San Francisco.

Ciarán O’Leary, a partner at Berlin VC fund Earlybird, described the sound of Silicon Valley wallets opening as a vote of confidence. “These guys are spoiled for choice,” Mr O’Leary says. “They are the pickiest of investors. So that’s a nice one in terms of where the ecosystem’s at.”

Berlin’s biggest successes to date have been companies that shamelessly looked to Silicon Valley for inspiration. A few of these have then sold to the businesses that inspired them. Groupon, the social buying site, acquired CityDeal for an undisclosed sum in 2010, while eBay bought Alando for $43m over a decade ago.

Both German sites were from the stable of the Samwer brothers, who have acquired a reputation for successfully transplanting American business ideas. Another business from their stable, the online clothing retailer Zalando, changed its legal structure in December 2013 in a possible prelude to an IPO.

Zalando had net sales of €809m in the first half of 2013, up from €471m in the first half of 2012.

It will be at least another year before Berlin generates a significant IPO, Earlybird’s Mr O’Leary reckons, saying the current crop of start-ups has only had three to four years in which to grow.

The low cost of living in the German capital therefore helps. Jörg Rheinboldt, chief executive of Axel Springer Plug and Play, a Berlin-based accelerator, said: “One could argue that it is possible to bootstrap for a bit of a longer time than in cities like London, San Francisco and New York.”