Berlin’s New Techno Beat

CNBC Business, 1 July, 2011

With its cheap rents and hot nightlife, the German capital is a magnet for young techies. But can it create global businesses, asks Siobhán Dowling

It wasn’t hard for Juha Lindell to decide to move to the German capital last October. After all, “Berlin is the coolest city in Europe, if not the whole world,” he says. Yet that wasn’t the only thing that drew the 29-year-old Finn to the city. A tall blond in a T-shirt and sneakers, he may look like something of a hipster, but his intention wasn’t just to hang out in clubs, play in a band or make art in a loft. Instead, he is one of the thousands of young IT professionals who have thronged to the city to become part of its thriving start-up scene.

Lindell was recruited by Wooga, Europe’s leading social games company, to work as a product manager and says he jumped at the opportunity “to join a company with big ambitions”. But it’s far from unique in that respect. The city is fast becoming a major centre for gaming, e-commerce and other hi-tech firms, leading some to dub it the new Silicon Valley. In many ways, Wooga epitomises the dynamic edge and ambition that is making the city an IT hub. Two years after it was founded, it is poised to become a global player in its field, with the fourth-highest number of monthly active users on Facebook.

The fact that it enjoys this position is in many ways thanks to a series of factors that are helping to make Berlin such a paradise for start-ups: a cosmopolitan array of young, multilingual skilled workers, swathes of cheap, attractive, post-industrial office space, supportive public agencies, a good infrastructure and growing interest from foreign venture capital. Christoph Lang of Berlin Partner, the city’s business promotion agency, says that one or two tech companies are being formed every week. “It is developing into one of the most important locations for IT companies not just in Germany but in Europe.”

Ten years ago Munich and Hamburg were also major centres for start- ups, but Berlin has far outpaced them, partly because it is such a magnet for young people worldwide. Wooga’s head of communications, Sina Kaufmann, sees its hot reputation as something of a “positive self-fulfilling prophecy.” The city attracts young professionals like Lindell, who then contribute to the success of companies such as Wooga, which then increases the buzz surrounding Berlin.

Wooga, which produces social games including Bubble Island and Brain Buddies, has 29 million monthly active users on Facebook alone, according to research firm Inside Network. Its main market is Europe, where its strength is in part down to localisation. Games are played in the language of the user’s Facebook profile, and elements such as personalised items are designed to fit with local culture. In contrast, other games are “made by Americans for Americans,” says Kaufmann. (And since London-based Playfish was acquired by Electronic Arts in 2009, Wooga is the only social games company in the developers’ top 10 not headquartered in the US.)

Founded by Jens Begemann and Philipp Moeser in 2009, Wooga initially secured investment from HV Holtzbrinck Ventures and London- based Balderton Capital. It now has 80 employees from 20 countries and has plans to take on another 40 by the end of the year. Despite taking up an entire floor in a massive 19th-century former bread factory in East Berlin that houses a plethora of other media and technology companies, the company is already pushed for space.

Countless buildings like this, left empty after the collapse of the city’s economy following reunification, are dotted around the city – and this remarkable supply of office space is available at cheap rates, by European standards. A report by real-estate agency Knight Frank found that in the fourth quarter of 2010 the average annual rent for commercial property in Berlin was $326 per square metre. In Munich the figure was $469; in London, $915. So it’s no wonder that Adlershof, a modern technology and science park on Berlin’s outskirts, is home to 11 research centres and 800 companies, of which over 100 are IT and media firms.

When Daniel Haver moved his company, Native Instruments, into a former factory in 2000, it was one of the few businesses in this strip of industrial buildings along the Kreuzberg side of the River Spree. Now it forms part of a cluster of trendy companies and businesses, including Universal Music and MTV Germany, and clubs such as Watergate and Lido. The business came into being in 1996 when co-founder Stephan Schmitt, a musician and hardware engineer, developed a pioneering software synthesiser for his computer. As a leading manufacturer of music production software and DJ equipment, it has since become one of the city’s biggest success stories, employing 270 people in Berlin and Los Angeles. “Berlin has always been a creative place and then there is the Germany engineering ability,” says Haver. “It seems that we have a technology gene.”

“Berlin has a lot of youthful energy and talent, in particular a lot of engineering talent,” agrees Matt Cohler, the former Facebook executive who was involved in setting up LinkedIn. His company Benchmark Capital is a major investor in ResearchGate, a Berlin-based social network for scientists. Founded by medic Ijad Madisch in 2008, it enables researchers to share ideas and unpublished information. “I felt that if people could start communicating better and benefit from each other’s mistakes, we could speed up science,” says Madisch. As things stand, abandoning his research at Harvard to concentrate on the site looks to have been a wise choice. A year ago it had 150 new users a day. Now that figure is 3,000, and in May, ResearchGate notched up a million users in more than 200 countries.

“To me, Madisch is really a great example of this new breed of entrepreneurs that’s emerging out of Berlin,” says Cohler. “The past generation of Berlin- based internet firms and start-ups were mostly taking an idea that was working somewhere else and copying that for the German market. The current generation is much more about building a new thing and addressing global markets.”

Most experts agree, however, that where Berlin lags behind is in financing. “Risk aversion in German financial institutions is quite substantial,” says Jürgen Friedrich, CEO of Germany Trade & Invest, the government’s business development agency. “If your company is in a sector regarded as risky, like IT, it can be difficult to cross that threshold.”

Alexander Hüsing, editor of deutsche-startups.de, an online news site devoted to the sector, agrees. “There are fewer VC companies in Germany, and the ones that are here are more cautious than their US colleagues. They simply prefer to invest in more certain things.”

Clemens von Bergmann, investment director at High-Tech Gründerfonds, a public-private partnership seed investor, says that things are slowly changing, with German and pan-European VC firms opening offices in Berlin. “It’s the place to be, near the companies, near the start-ups. There is a reason why all the West Coast investors sit in Silicon Valley,” he says. One example is Munich-based Earlybird Venture Capital, which opened offices in Berlin in May and has already invested in IT companies there.

There is also plenty of public funding available for companies in their very early seed stages. High-Tech Gründerfonds has helped almost 30 get off the ground in Berlin since it formed in 2005. The fund, which operates nationally, can provide €500,000 of seed finance and may invest up to €2m in subsequent rounds. It also helps companies find other investors in Germany and, increasingly, abroad. “In 2010, we were able to attract more money from foreign venture-capital funds into our portfolio than from German VCs,” says von Bergmann. “They were primarily from the UK, France and the Netherlands.”

Transatlantic funding is still rare, though. As Cohler explains: “What VC investors do is to try to really get involved and help an entrepreneur build a really great company – and that’s hard to do across an ocean.” He thinks, however, that the major international airport slated to open in Berlin in 2012 could make US investors more willing to look at what the city has to offer.

Whatever the drawbacks, there is a definite interest in Berlin in making contacts in Silicon Valley. In March, Berlin Partner took a number of companies, including Wooga and the music technology platform SoundCloud, to Web 2.0 Expo, a conference and trade show in San Francisco. The folllowing month, Germany Trade & Invest and High-Tech Gründerfonds hosted an investment forum, dubbed Eastern German Ingenuity Meets West Coast Capital, in Menlo Park, California to showcase nine start-ups from Berlin and one from the state of Brandenburg.

“It was the first step in establishing relevant contacts to US investors,” explains von Bergmann, who helped to arrange the trip. The organisers didn’t expect to attract financing in the short term, he says, but wanted to “get relationships going, in order to get people interested in what is going on over here”. The start-ups that were selected, including hotel review aggregator Customer Alliance, social betting start-up Crowdpark, e-commerce outfit Mister Spex and cloud-computing company Zimory, had to undergo a boot camp before being primed to pitch their business models to 35 investors. The event went so well that they were invited the next day to address a meeting of 500 business angels.

Torsten Sabel, the 25-year- old co-founder of Customer Alliance, says the trip was “a great way to make contacts and to get to know how things worked in the US”. Christoph Jenke, COO of Crowdpark, was also impressed and says that being from Berlin was a definite advantage when speaking to potential investors. “They see it as Europe’s tech capital and the message has got out that Berlin is really, really exciting for start-ups.”

Crowdpark recently opened an office in San Francisco but most Berlin start-ups are not planning to set up shop in the States any time soon, as it is just too expensive to operate there. Friedrich of Germany Trade & Invest says that investors in California advised them to preserve their local base in Germany rather than head to Silicon Valley. “They would have no chance of competing with other employers there to get skilled engineers or other marketing experts,” he admits.

Meanwhile, as Berlin evolves its financial support systems and companies become more established, comparisons with the Californian innovation hub are growing. But is the city really going to produce a global company to rival the likes of Facebook and Google? “With so many small start-ups, the probability isn’t that tiny that one of them could be the next Google,” argues Lang. “If there is one place in Europe that compares with Silicon Valley in terms of having an ecosystem of start-ups and IT companies, then it is Berlin.”

Others, however, warn against overblown comparisons. “It’s a bit of a stretch,” says Friedrich. “The business environment is such a different model of bringing technology, innovation and capital together. Even by US standards, it’s a unique environment.”

“You cannot replicate what is happening in the Bay Area,” says High-Tech Gründerfonds ‘ von Bergmann. “It was built on the back of large semiconductor companies. Berlin is really about quick, fast, innovative internet companies and that’s a totally different thing.”

Whatever its international status, what is certain is that the influx of international designers, programmers and entrepreneurs has given the German capital an increasingly cosmopolitan flavour. Native Instruments’ Haver says that over the past five years or so, the city has definitely evolved. “It is not only underground but quite established at the same time,” he adds, arguing that people coming to the live in the city now expect to find decent shopping and good restaurants in addition to its famed nightlife.

Friedrich says that when he’s selling the city to foreigners, he is always careful to highlight its “family-friendly structures”. Young professionals with children can live in safe, leafy neighborhoods, paying rents that are still relatively low while having access to cheap daycare and good international schools.

Ironically, this reliance on foreign skilled workers in one of the city’s few booming sectors means that Berlin’s 13% unemployment rate has not been dented much. This is largely due to the mismatch between supply and demand.

“The long-term unemployed in Berlin are often people with few qualifications,” explains Lang. Many worked in low-skilled manufacturing and industrial jobs, which disappeared after reunification. “It doesn’t help them much if an internet start-up is looking for 10 programmers.” So it is mostly non-Berliners who are meeting the sector’s personnel demands.

Of course, with the influx of IT professionals the city is bound to lose some of the rough edges that make it so unique. There is already a rapid gentrification underway in many districts. “Berlin is what it is because of a strong underground scene,” says Haver. “It would not be good for the city if we erase all of that or push it out in the suburbs.” At the same time, the new companies are bringing prosperity to the city. “So it’s about finding the right balance.”

Having come all the way from Finland, Juha Lindell is pleased to be following in the footsteps of other creative types. “Start- ups tend to reside in areas where there is an already established culture of musicians, artists and designers,” he says. “Whether you are an artist or a fashion designer or a technology guy at Wooga, everyone is here to create something new.”

Originally published in CNBC Business Magazine.

http://www.cnbcmagazine.com/story/berlins-new-techno-beat/1417/1/