German capital stakes claim as internet start-up hub

Germany has long had a well-earned reputation for engineering excellence. But as times change, its capital aims to become an internet leader, too.

Angela Merkel watches an artist during a tour of local start-ups in Berlin. The German capital is gaining a reputation as a technology hub. Thomas Peter / AFP

Aided by its "poor but sexy" image as a hip, affordable place to live, Berlin is attracting legions of entrepreneurs and software developers who could end up making it very rich indeed.

The German capital is fast establishing itself as a European hub for internet start-ups such as Wooga, an online game developer based in the city, which was founded in 2009 and now has more than 50 million monthly players worldwide of its games that include Diamond Dash and Monster World.

Other well-known Berlin start-ups include the music-sharing site SoundCloud, the task management platform 6Wunderkinder and ResearchGate, which aims to be the Facebook for scientists.

If the momentum continues and it starts some big venture-backed exits, Berlin could cement its reputation as Germany's Silicon Valley - or Silicon Allee, as Berliners call it, using the German term for boulevard.

"We have huge momentum in Berlin and an influx of young talent from abroad and capital investors that primarily invest in internet companies," says Professor Stefan Gross-Selbeck, the former chief executive of the online business-contact network Xing and a former eBay executive.

Prof Gross-Selbeck, now the head of the Research Group Innovation and Entrepreneurship at Berlin's Humboldt University, says the city has become increasingly attractive to entrepreneurs from abroad.

"I used to work at eBay, which decided against putting its European headquarters in Berlin five years ago - with the explanation that they wouldn't be able to get top people to move to Berlin,"he says.

"At the time, to be honest, that wasn't entirely wrong. But it has changed fundamentally. The scene has become international."

The internet scene has emerged from a community of artists and creative people who started moving to Berlin after unification of East and West Germany in 1990, lured by cheap rents and the city's counterculture charm. In recent years Berlin has started reaching a critical mass of programmers, entrepreneurs and financiers who can exchange ideas and contacts and draw in new talent.

One new internet company is being launched per week in Berlin, on average. They include firms such as tame.it, which has devised a search engine for Twitter enabling users to sort through the chaos of tweets on the microblogging service. It managed to raise some €250,000 (Dh1.1 million) in capital through an internet crowdfunding platform.

Another example is 9Cookies - an iPad app for restaurants that processes food orders by instantly transmitting them to the kitchen and storing them for subsequent billing.

Start-ups work in offices strewn across the trendy districts of the once communist east of the city. In the former "death strip" of the Berlin Wall, a former brewery has been transformed into a business hub catering for nascent internet firms.

The development is called The Factory and the idea is to group established internet companies, early-stage start-ups and financial backers in one place. The centre will offer restaurants, a gym, a beer garden, basketball court and roof-top auditorium when it is finished later this year.

Several companies moved in last year. Google is part of The Factory venture and has announced plans to subsidise start-ups with some €1m in the next three years through its "Google for Entrepreneurs" scheme. One company that has already settled in to The Factory is SiliconAllee.com, an English-language news blog that covers the start-up scene.

"It has the atmosphere of a university hall of residence, we all know each other really well," says David Knight, co-founder and the editor of SiliconAllee.com.

"It's fun, we all work on different things but it's good to interact with each other. There's a lot of growth to be had in Berlin, economically it's not as important as London or Paris yet. But there's a great atmosphere and it's relatively cheap," he says. "The scene has grown enormously in the last two years. What we're really starting to see is that the large companies are waking up to the fact that there is potentially some good stuff happening in Berlin.

"This is starting to be more than a collection of innovative, adventurous people wanting to do creative things. One of Berlin's assets is that it attracts not just Germans but people from all over Europe.

"In fact, Berlin is benefiting a lot from the economic crisis in Spain and Greece and elsewhere in that we're seeing a lot of people coming from southern Europe and eastern Europe," he adds.

"They can just get on a plane and come to work in Berlin without having to speak a word of German."

The German government has only recently woken up to the potential of the scene and started to pledge its support to help it grow. Germany has realised that despite its strength in car making and industrial engineering, the future lies in the digital economy and internet technology, where it lags far behind international competitors.

In March, the chancellor Angela Merkel visited some of Berlin's more successful internet firms, dropping in at the offices of Wooga and ResearchGate.

"We want to create the conditions that enable the internet and start-up scene to develop well," she told a gathering of internet executives and developers.

"Berlin is a fascinating city because a wall fell here, because it overcame barriers. The world of the internet is basically also a world that keeps breaking down walls."

The government plans to provide so-called "business angels" - people who provide start-ups with seed funding and advice - with €150m in investment subsidies. It has also set up a board of young entrepreneurs and experts to advise the government on policymaking for the digital economy.

"What we need is something like a German Apple," the economy minister Philipp Rösler recently told a delegation of young German start-up entrepreneurs during a fact-finding trip to Silicon Valley.

But that is still a distant dream. Germany only has one IT company of global standing - the business software group SAP, which was founded in 1972. And even though investment funds pumped a considerable €926.1m into nascent German internet start-ups in 2011, that figure is dwarfed by the annual figure in the United States of €30 billion. The four top IT companies in the US Silicon Valley alone have a market capitalisation amounting to three quarters of all the 30 blue-chip German companies in the DAX stock market index put together.

Despite all the hype surrounding the Berlin tech scene, it has yet to produce a major exit in terms of the sale of a company by the original investor. And of all its creations, only SoundCloud, a music-sharing platform, is really well-known internationally. Lars Hinrichs, the founder of Xing, has doubts about how many of the start-ups sprouting in Berlin will turn into global giants.

"Even the successful ones are still irrelevant on an international scale," he says.

"We have many small businesses that lack a substantial business model but try their luck nonetheless."

According to an international study released last year, Berlin ranks only 15th among the world's top start-up ecosystems. Silicon Valley, unsurprisingly, came first, New York fifth, London seventh and Paris 11th. Berlin's problem, according to the analysts of the Startup Genome research company, is that companies do not get enough support in growing and bringing their products to market once they have matured.

"For scaling it, Berlin start-ups might consider relocating as the ecosystem is not mature enough in terms of capital, support infrastructure, and mindset," the analysts wrote in a report.

There simply are not enough big investors around yet, no self-made internet billionaires who can act as mentors and benefactors to young entrepreneurs. "We need tax incentives. In Germany, it's better to invest in an old building and write it off than in a start-up that creates jobs," says Ciaran O'Leary, a partner in the venture capitalist group Earlybird.

"There is also a lack of effort to attract big technology firms into the city with which founders can compete, rub shoulders and exchange views."

Mrs Merkel acknowledged in March that Berlin needed to become more "welcoming" to entrepreneurs, for example by making it easier for foreigners to cope with German bureaucracy.

Part of the problem is cultural, says Professor Dieter Kempf, the head of Bitkom, Germany's IT industry federation.

"Sometimes the German mentality also obstructs us. In the US, you tend to get rewarded simply for having the courage to set up a company. But in this country, failure still carries a stigma," he says.

"We need a culture of welcoming entrepreneurs."