Silicon Allee A Hurdles Run for Berlin Start-Ups

Berlin is feted to be the place for young entrepreneurs to turn wild ideas into successful companies but start-ups are finding that the German capital might just be the place where they will wither away.
Many Berlin start-ups fail to make the cut.

When Béla J. Anda, the son of the former spokesman to ex-German chancellor Gerhard Schröder, wanted to start a company that connected European sports clubs with major sponsors, he didn’t pick Berlin, the German capital often feted as Europe’s startup mecca.

Even though he grew up in Berlin, Mr. Anda, 24, set up his firm, called Sponsoo, in Hamburg because that is where many of his customers, which are small and medium-sized businesses, are located. Mr. Anda and his co-founders Andreas Kitzing and Martin Prankl have ties to Bucerius Law School in Hamburg, where they can recruit interns and get legal advice on sponsorship contracts.

Mr. Anda said Hamburg’s work force was bigger and more reliable, and the wealthy former Hanseatic League port city also had a key ingredient Berlin lacked: a stable of well-heeled private investors and strong support from the local government for his sports marketing consultancy.

“There are a lot of good ideas in the Berlin start-up scene but a lot of these people don’t work hard enough,’’ Mr. Anda said in a telephone interview. “It’s a lot of fancy chat, it’s a lot of talk at the bar.’’

In Berlin, Mr. Anda added, there are too many people who won’t commit themselves to the hard work entrepreneurs need to thrive and grow small businesses.

There are a lot of good ideas in the Berlin start-up scene but a lot of these people don’t work hard enough. Béla J. Anda, founder of Sponsoo

To be sure, the German capital, which has struggled financially while flowering culturally in the quarter century since reunification, has managed to raise its profile for young entrepreneurs.

Last year, close to 800 new start-ups were created in Berlin, according to a McKinsey report on the Berlin start-up scene. The number of new start-ups in the city has been growing at a rate of 8 percent annually since 2007, which is faster than in any other German city, according to the report.

Digital and Internet-based start-ups make up the majority of the scene, at least 60 percent.

But in many respects, the flashy but relatively poor German capital city still trails behind much lower-profile, but wealthier German cities such as Hamburg, Cologne and Munich, which make up in financial resources and infrastructure what Berlin offers in glitz and gritty glamour.

At a networking event at Betahaus, a start-up hub in Berlin’s Kreuzberg neighborhood, a Swedish entrepreneur, a job seeker from Uzbekistan and an Australian developer all mentioned the availability of talented young people, the low cost of living and vibrant cultural scene as reasons they opted for Berlin.

But not everyone is jumping on the Berlin bandwagon. While the booming start-up scene is the talk of the town, few are speaking up about the serious challenges that start-ups in Berlin face.

Berlin boasts at least seven universities and 20 colleges. But entrepreneurs such as Christian Drehkopf, 34, still find that “the city is missing a really good university” that encourages entrepreneurship while equipping students with the necessary knowledge to succeed.

Mr. Drehkopf has founded and worked at several start-up businesses. Now he is a mentor at the Startup Institute, a type of educational center in Berlin that offers what the local universities are apparently lacking: experienced mentors who can encourage and teach entrepreneurship.

“There is not so much linking from the university to the start-up scene,” Mr. Drehkopf said.

“We still have very traditional professors. In other countries, students are founding more new companies based on the ideas they have created during their studies, compared to Berlin,” said Christian Malorny, a partner at McKinsey and co-author of the report on Berlin’s start-up scene.

More than 80 percent of graduates leave Berlin upon finishing their studies. Many are keen to stay but say they are unable to find well-paying jobs, Mr. Malorny said.

Based on advice from McKinsey, the Berlin city government has added incentive criteria for universities and professors to support start-up creation and boost their focus on entrepreneurship. In addition to the number of research publications and students, a professor’s success and salary will also be partly measured by how many students have founded start-up businesses.

Mr. Malorny said they “expect a huge increase of start-ups from the Berlin universities now” as a result of this initiative.

 

</a> Startups in Berlin and around the world

 

Obtaining funding is key for entrepreneurs, but in Berlin, there is a pronounced lack of capital available to carry businesses from their initial seed funding – often in the form of venture capital from “angel’’ investors – to a second round of financing, when businesses need to grow.

As a result, many promising young businesses in Berlin die a premature death.

“There is a gap,’’ said Gabriel Matuschka, an investor at venture capital firm Partech International, based in San Francisco but with offices in Paris and Berlin. “In many phases, there is a lot of money missing.”

Partech, which has €520 million, or $650 million, under management, has invested €16 million in German start-ups during the past two years and typically invests between €250,000 to €500,000 from its seed fund and €2.5 million from its venture fund in each start-up.

“Once the companies are really on to building a nice success story, there really is no shortage of money because companies will be able to raise money from the U.K. or from Luxembourg or from the U.S.,” Mr. Matuschka said.

Partech set up an office in Berlin two years ago “after having seen enough companies here’’ and noticing the lack of available funding in the city for start-ups” Mr. Matuschka said.

Christian Wallin, 27, an ex-Goldman Sachs banker who quit his job to start a data-driven retail analytics company called 42reports, which now employs 14 people in Berlin, recently obtained €1 million from investors.

Mr. Wallin is an exception in Berlin. He obtained exactly the type of bridge financing that his firm needs to sustain itself until it can win bigger investors.

But as a Goldman Sachs alumni, Mr. Wallin was able to attract investors in Berlin and beyond, tapping into a network of international investors that many local entrepreneurs don’t have.

There is still an insane shortage of people who can deploy a serious amount of funding. Gabriel Matuschka, Principal, Partech Ventures

“That’s something Berlin-specific. Compared to London or Israel or the U.S., fundraising is still more difficult just because there is less money here,” Mr. Wallin said.

The €1 million funding Mr. Wallin collected is less than the €1.6 million a Berlin start-up typically receives in a “series A investment round,’’ according to the McKinsey study.

International comparisons underline how far Berlin still has to go to match its start-up hype with reality. In London, a typical start-up receives more than twice as much as in Berlin, or €3.9 million. In Silicon Valley, a start-up on average receives €5 million at this stage.

According to McKinsey, Berlin start-ups received a combined €133 million in venture capital in 2012. That is a pittance compared with the €4.89 billion in venture capital invested across Europe that year, according to VentureSource, a Dow Jones database on the venture capital industry.

“There is still an insane shortage of people who can deploy a serious amount of funding,” Mr. Matuschka said.

 

</a> St. Oberholz café, a favorite among entrepreneurs in Berlin.

 

Berlin has the highest growth rate and number of start-ups in Germany, but it also has the highest rate of failure. About 20 percent of Berlin start-ups flop, according to the McKinsey study. Not just the lack of capital, but a lack of business acumen might be the reason.

“There are still quite a lot of start-ups that are not professional,’’ Mr. Wallin said. “There are fairly young people who start them and they basically don’t know how to run a company; they don’t know how to lead employees or how to build a business.”

Nokia, Microsoft and Deutsche Telekom have set up incubators and accelerators in the city to provide a guiding hand. The number of business angels who both fund and support start-ups is also growing. “But we need more of it. We need much more of it,” said Mr. Malorny from McKinsey.

Berlin’s low cost of living and cultural scene will continue to attract entrepreneurs. But “Berlin will never be the next Silicon Valley,” said Ansgar Oberholz, the owner of St. Oberholz, a coffee store at the corner of Rosenthaler and Torstrasse in central Berlin often crowded with young aspiring entrepreneurs busily staring into Macs, planning their next moves.

“In cities where the cost of living is higher, you have this economic pressure to actually survive and move on,’’ Mr. Anda said. “In Berlin, you can have a fantastic day that only costs you 10 euros a day.’’

 

Lára Hilmarsdóttir is a reporter with Handelsblatt Global Edition. To contact the author: [email protected].