Why Berlin is poised to be Europe’s new tech hub

Inside the offices of 6Wunderkinder

After the visual opulence of Paris, Berlin feels almost dowdy. Drab and dark, the city hardly comes across as one of the great capitals of the world. A city’s importance on a global stage is measured typically by the size and scope of its airport: Shanghai, New York, London, Los Angeles, Frankfurt and Paris are good examples.

Berlin’s Tegel Airport reminds me of another airport from my childhood in India. It is small – very unlike the city, which itself is sprawling and a collection of many neighborhoods. It doesn’t take very long for me to conclude that Berlin is one of the most un-German of German cities. That, it turns out, is its curse and its charm.

Earlier this year, Alexander Ljung, co-founder and chief executive officer, of SoundCloud and Christophe Maire, founder & chief executive, of e-book services company Txtr, separately invited me to visit Berlin. Their argument: something exciting is going on in Germany’s post-unification capital. It is, they insisted, beginning to attract talent and is becoming home to many new technology startups.

I am not the first guy to show up and write about Berlin and probably won’t be the last. The New York Times, Spiegel Online and several others have discovered the Berlin tech-scene. Our European correspondent, Bobbie Johnson makes regular visits to the city and reports for us. However, I wanted to see how real is this Berlin startup ecosystem myself.

Opportunity presented itself when folks from HackFwd (a startup accelerator) invited me to speak at one of their events (Build 0.8) and it dovetailed nicely with my visit to Paris for Le Web 2011. A few hours after landing in Berlin, I was beginning to rue my decision.

The second week of December is not an ideal time to visit, especially for someone who is used to the moderate climes of San Francisco Bay Area. Overcast skies, cold showers and temperatures dipping to 30 F at night are rough on those of us used to sunshine and blue skies. For the locals, it is still comfortable weather.

Minutes after I check into Motel One, one of the fast growing German equivalent of Hampton Inn, I run off to meet a group of HackFwd entrepreneurs and we go for a classic Bavarian meal. Nothing had prepared me for what I saw – a group that looked as if they belonged to TechStars or YCombinator. There are a lot more women entrepreneurs in the room. The energy in the restaurant was amazing, helped I am sure by a liberal serving of beer.

Location, Location, Location

SoundCloud CEO Alex Ljung

They are all very young – actually awfully young – and excited by the prospects of technology, most of them are here from across Germany, Poland, the Baltics and other countries east of Germany. In fact, the Pitch in Berlin contest organized by HackFwd attracted 100 applicants of which ten were selected. Three of them were from Poland, including MyGuidie, a start-up that “brings together people looking for a local guide, and locals willing to guide,”  co-founded by three women, won the contest.

And much later when I would assemble my rough notes into a narrative, I would spend a lot of time thinking that Berlin’s proximity to Eastern Europe and the Baltics gives its a natural geographic advantage over rival European hubs like London.

Berlin, even though an old city and stage for many Cold War spy tales, is relatively young in its current incarnation. Since the unification of two Germanys just 20 years ago it has been in a state of constant makeover. It doesn’t have the money – Frankfurt is home to the German bourse and hence the investment banking elite – or the heavy industry. Munich and the south of Germany have become the epicenter of global car business, and those traditional heavy industries that Germany is known for are spread across the south of the country — outside of Berlin. But Berlin does have politicians – a whole lot of them!

The lack of classical German industries means it is a city with fewer jobs than other parts of Germany. It also means the city has lower wages compared to the rest of Germany and much of Europe. The sprawling nature of the city means that Berlin has lots of real estate. And that means low rents – catnip for artists, musicians and yes, the start-up community.

The entrepreneurship is rampant in this city. Some say there are somewhere between 100 to 400 startups in Berlin. I was in Berlin for about 70 hours and I met with over 40. I am pretty sure – if I stuck around for another week — I would have met many more. The central Mitte district that is home to many of these is called Silicon Allee (aka Silicon Avenue.) They even have their own version of Coupa Cafe – Cafe St. Oberholz is a favorite gathering place of the Internet types.

Lars Hinrichs, the founder of HackFwd accelerator, points out that the presence of seasoned entrepreneurs like Marco Borries (who had started StarOffice and Verdisoft and sold them to Sun and Yahoo) is another advantage Berlin has over some of other tech-hubs in Europe. It is one of the reasons why he (and HackFwd) come back to Berlin for their startup school.

Destination Berlin

Pitch in Berlin by HackFwd contest

It is no surprise that young people from across Germany (and Europe) are making a beeline for Berlin. There are a lot of Americans, Australians and Kiwis too. This confluence of fashion, art, music and technology reminds me of Brooklyn and the San Francisco of yore.

SoundCloud’s co-founders are two such transplants. Ljung and Eric Wahlfross are both Swedish by birth, and music lovers. They started SoundCloud as a platform for DJs to remix and share tunes. It has now become a major audio sharing platform and has raised money from uber-VC, Fred Wilson of Union Square Ventures. Its success has turned SoundCloud into a poster child of the Berlin startup scene. Ljung, who travels to San Francisco, London and New York almost every month has become Berlin’s informal ambassador.

The success of SoundCloud has helped attract larger (and non German venture capitalists) to take Berlin with seriousness. Atomico, the venture fund started by Skype co-founders Niklas Zennström and Janus Friis has invested in collaboration and productivity startup, 6Wunderkinder, that has so far released one popular app, Wunderlist. Index Ventures are plowed in money into Felix Peterson and his co-founders’ newest startup, Amen.

The new hot thing from Berlin is Gidsy, a marketplace for “experiences” that was started by Dutch migrant entrepreneur Edial Dekker and his brother Floris, along with Philipp Wassibauer. They are said to have attracted big dollars from some well-known VCs but they are keeping it all very hush-hush. There were many whom I didn’t even get a chance to meet. Like Pipe, which is still in stealth is going to launch next month at the Midem music industry conference in Cannes, France.

Another company that didn’t find time on my calendar but be one worth looking out for: Uberblic Labs that is building a platform to link data across APIs (Factual.com competitor) and a mobile product to use that cross-linked data.

What is really impressive is the diversity of startups in Berlin. Over a much-welcome Turkish dinner organized by local tech blogger Nikolas Woischnik, I met with UPcload, a company started by Israeli entrepreneur Asaf Moses. The company has developed a technology that uses your laptop’s webcam to capture your body shape and share it with an online retailer and offer you the best fit for your clothes. It is already getting traction in Germany. Aupeo is a personal radio platform (somewhat like Pandora) that is targeting the connected car business and is finding a lot of traction in Europe.

Creative + Techies

A few members of Berlin Geek Squad

Holger Weiss who started Aupeo a few years ago is bemused by new interest in Berlin. In his opinion, it is the easy availability of engineering talent that makes Berlin very attractive for a company like his, which has to develop its product for multiple automobile platforms. Verena Delius, chief executive of Young Internet, a kids-focused game maker, shares that sentiment. Delius is rebooting her company to focus entirely on tablets: her company bet its future on Amazon’s Kindle Fire and other devices. Berlin’s blend of techies and creatives has helped the company make a fast transition to the new platforms.

Berlin, in my short visit, seems like a city that has a lot going for it.

I am pretty sure that technology is the best option for the city to overcome its disadvantaged position and its dependence on handouts from larger and richer parts of Germany like Bavaria. It needs to — otherwise the city will continue to suffer from the problems that come with high unemployment rates.

The Road Ahead

But to be candid, I think Berlin is a long way from being a booming tech-town. Even though it has a lot of entrepreneurs, the city still lacks a formal venture capital structure. The bigger slugs of money in city’s promising startups have come from outside investors – Fred Wilson’s Union Square Ventures is a big investor in SoundCloud for example, while Index Ventures of London & San Francisco has bet on Amen.

Berlin needs to show that it has staying power — it keeps attracting newer, hungrier folks with start-up dreams. However, in order to keep attracting more dreamers, Berlin needs a big company to rise from the rubble. Berlin needs one such big company to emerge in next few years – one that employs hundreds (if not thousands) of people.

And in order to do that, the city needs a mature venture capital infrastructure. That robust VC ecosystem has helped startups thrive and eventually grow into larger operations in non-Silicon Valley locations such as Boston and New York. Israel is another example of a country that has a robust VC ecosystem.

When I asked Hinrichs of HackFwd about whether we will see something like Tumblr or Pinterest emerge from Europe, he didn’t take long to say that those two companies “wouldn’t be funded in the Europe” as it would dismissed as just another cool idea.”The venture capital investors are not comfortable with the very idea that something might just be a col technology and could eventually become something bigger,” he added. The solution is more entrepreneurs turned investors (like himself and team Atomico) start making investments. “It is because we have a higher risk tolerance as such and know that sometimes you just have to try and build something bigger,” said Hinrichs.

The other issue Berlin needs to overcome is that of scale and international growth. Today it is commonplace for startups to talk about serving the global market almost from day one, but the reality is quite different. It doesn’t matter where you are based, but as a startup or any other business you need a domestic market which in turn can be used to grow overseas.

Silicon Valley startups have two advantages – the domestic U.S. market that has enough early adopters willing to try new Internet services. This gets the attention of tech media, which in turn allows companies to get more people signing up for their products. (Twitter, according to a MIT study, is a good example of this virtuous cycle.) That sets off a chain reaction and gets companies the global attention.

The overseas companies are on the opposite end of the spectrum. If a company is based in Berlin (or Paris or London), it doesn’t have the large domestic user base to get similar attention and adoption. That makes it difficult for companies to cross the proverbial borders. This, I sincerely hope, is a short term problem — one that can wither away with continuous emergence of clever ideas and great startups.

Despite many of its challenges, I am quite optimistic about Berlin. At the end of my brief visit, when waiting for my flight to Helsinki, I was jotting down my final thoughts. And as I did, I couldn’t help but listen to my intuition — there is something happening in Berlin. I can’t quite describe it. I can just feel it — it is electric. And it wants me to go back… but probably in the summertime.

Here are some photos from my trip to Berlin. Check them out if you have a few minutes.