Will The Real Berlin Please Stand Up? — A VC Puts The City’s Tech Boom in Context

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This is a guest post by Ciaran O´Leary, a Partner at Earlybird Venture Capital in Berlin. Earlybird manages €600m in funds and are investors in companies such as Carpooling.com, Peak Games, SocialBakers, The Football App, and Wunderlist. He usually blogs here. He’ll be among those attending Disrupt Europe in Berlin in October.

Some folks consider Berlin to be the next Silicon Valley. Some folks consider it to be a place where a bunch of hipsters are only building fluffy consumer apps, spare-time in between clubbing permitting. Others again are convinced that Berlin is in the tight grips of a clone army. Of course the truth is that it’s a bunch of hipsters and cloners building the next Silicon Valley!

I am of course kidding. I’d argue that all of the above views are exaggerated. But it’s fair to say this: Whereas Berlin’s ecosystem is still very young by any standards (even European ones), it is on a very promising trajectory and is already now one of the great places in the world to build a company – with plenty of room for improvement. If you haven’t read Matt Cohler’s post you should (“These are still the early days, and it’s good to be in on the ground floor” is a nice way to sum it up).

So the first key point I’d like to bring across is that all the excitement should be much more about the trajectory than the status quo.

It’s a movement. Guaranteed 100% organic

So, over the last 4-5 years thousands of startups have been founded, seemingly out of nowhere, some have already claimed their spot as global category leaders, many of the top-tier international investors have began investing here (USV, Benchmark, Kleiner, Spark, Atomico, Founders Fund, Battery, Index, etc.) and the first sizeable exits (at least a few hundred million) have been realized (more on that later). So how did this all happen?

The key thing to take away is that it’s not because of, but despite of what any government or city initiative did. There is no tax program, no special angle to the education system, no initiative to attract tech companies and entrepreneurs, no huge pots of money, no entrepreneurial powerhouse university, etc. – the list of ‘nos’ goes on and on.

That’s what makes Berlin’s tech ecosystem so hard to describe, so hard to nail down to a few points. The Berlin tech community is fueled by talented folks from around the world coming together to build companies, to the backdrop of an urban canvas. In a city which has only ever witnessed change and wants more of it. Berlin’s tech ecosystem is more about the type of people it attracts and the inspirational environment it provides than anything else.

No one is tactically engineering a tech hub – it’s a movement, 100% organic. The cab drivers know all the big startups, the local media has started tech blogs, large real estate owners now specifically construct buildings to suit startups, etc. The tech community is on its way to become the heart and soul of the city. This is also what makes it very different (not better or worse) than other urban ecosystems that are dominated by other industries.

So every $ we pore on to the fledging ecosystem is fuelling a fire that is already burning. We like that because organic things tend to be the most sustainable and it has us bullish about what can come if the community continues on its trajectory.

Berlin and the Urban Entrepreneurship Shift

But before I go in to some of the details on Berlin, its fair to point out there is a bigger trend going on that Berlin is profiting from extremely. For the lack of better words I call it the “Urban Entrepreneurship Shift”:

  • The internet in general, open source software, cloud services, app stores, etc. have really liberalized entrepreneurship in every way, also geographically. You can build and scale / distribute products and services from (nearly) anywhere
  • Capital is increasingly mobile. Everywhere you look the source of capital matches the increasingly global profile of companies. This is happening as early as seed and later stage companies are finding it even easier to attract very large amounts capital from around the world
  • Key to building a tech company and a community of many tech companies however remains the ability to attract and retain top international talent. Talent has also become highly mobile
  • International, talented folks have a strong preference for inspiring, English-speaking urban environments with a high quality of life

Therefore: inspiring, English-speaking urban environments that offer a high quality of life are going to become increasingly relevant entrepreneurial hubs: New York, London, Berlin, etc. For those of you who have not been to Berlin: good luck ordering that hand brewed coffee in German. English, Swedish or Hebrew is more likely to work.

The shift to urban centers is a long-term mega trend (even on the US West Coast the increase of activity in San Francisco is notable) and we’re in the middle of it here in Berlin. Long term. This does not mean this comes at a cost to say the Valley, which for the foreseeable future will remain the prime global tech ecosystem. This just means more additional entrepreneurial hubs in urban environments.

Berlin is not the next Silicon Valley. Neither is anywhere else (and that’s OK)

However each hub has a slightly different DNA and whereas its fine to copy best practices and some critical ingredients, I believe that focusing on your own DNA will yield better results than trying to copy each and every element of the Valley or any other tech hub for that matter – that’s why I always cringe at the notion of a “next Silicon Valley”. I’ve tried to sum-up Berlin’s DNA in this presentation:

So really it’s all about the normality of change and an urban green field, paired with the right attitude. I think what you can also take away is that, whereas Berlin is also all about more ‘serious’ linear businesses as e.g. e-commerce or ad-tech, a wild hacker culture – just taking plenty of shots with little experience and even less to lose remains one of the core DNA strands and is a key differentiator of the community for now.

However make no mistake – it’s much more diversified than you might think, ranging from high volume, high failure rates (due the low-cost combined with still low experience) in mobile consumer applications, more and more enterprise SaaS to the cut-throat e-commerce execution skills of Rocket, Project A, Team Europe & Co. There are highly disruptive companies, more linear companies and – yes – still the occasional copy-cats (more on that later and why it has died down significantly).

Entrepreneurship isn’t always ‘cool’ and Berlin can do the hardcore execution and ugly bits also. It’s not a one trick pony and I think we’re better off for it.

The produce and the rise of hidden champions

So what has Berlin achieved? We have to keep reminding ourselves that the Berlin tech scene as we know it today – international teams building disruptive global businesses, is really only 3-5 years old (even most European hubs have 10+ years under their belt, never mind key US hubs with up to 30-40+ years). Whereas the internet has shortened cycles everywhere, Berlin is not going to be a miracle ecosystem that catches up to others overnight that have been around for 10-40 years.

Having said that the number of globally relevant business, created with comparatively little resources have us very much exited about the years to come. You have probably heard of Soundcloud, ResearchGate, Wunderlist, Wooga, Zalando, etc. who have all claimed leadership positions in their markets internationally. Those companies are 3-5 years old – comparing this to some of the leading companies from other European hubs e.g. London (Mind Candy 10 years, King.com 10 years, Wonga 5 years, Hailo 3 years), Stockholm (Spotify 7 years, Klarna 8 years, iZettle 3 years), Helsinki / Espoo (Rovio 10 years, SuperCell 3 years) or Paris (Criteo 8 years, Vente-Privee 12 years) – it’s easy to see that the first wave of Berlin startups that are scaling internationally will really need another 1-2 years to be comparable.

But what has us pretty exited is that this year a bunch of companies have hit the scene that were virtually unheard of until very recently; most of them having already reached meaningful scale and are holding leading positions globally, such as:

  • GetYourGuide (globally leading activities platform / market place)
  • The Football App (worlds largest mobile football community)
  • ProfitBricks (next gen Infrastructure as a Service)
  • Auctionata (word’s leading online auction and market place for antiques and art)
  • Sociomantic (leading RTB ad tech player)
  • TradeMob (large scale app marketing platform)
  • Number 4 (SME SaaS, not launched yet but raised a $38m Series A recently – get’s them an honorable mention!)
  • Applift (leading mobile games marketing platform)

This is just a selection – but it’s an important sign of critical mass – big companies on great trajectories are now popping up at a higher frequency than 12 months ago.

The other thing that is very healthy it that we are seeing the creation of clusters – i.e. certain verticals where there is real critical mass leading to cross-pollination, e.g.:

  • Ad tech: Trademob, Sociomantics, Madvertise, SponsorPay, Adspert, Adeven, Applift
  • Gaming: Wooga, Hitfox, Game Duell, Game Genetics
  • Vertical Networks / Media: Soundcloud, ResearchGate, TheFootballApp, Tape.tv
  • E-commerce: Zalando, Home24, Auctionata, Mr. Spex, Wummelkiste, MySportsGroup, Tirendo

Again just a select few, but nice to see a few gangs forming.

Also the number of US companies setting up shop is increasing – e.g. Fab.com has its European HQ here; twitter, Etsy, google, Microsoft, Amazon etc. all are increasing their presences. To be fair though this is still a weak spot: we should have more established international tech companies with larger presences here. Right, now London and Dublin have the lion-share of these and have much better programs in place to continue to attract such companies.

On exits: the low average age of the companies and the fact that Berlin is just starting out means there haven’t been a lot of huge exits yet. This is not surprising – if you compare average VC hold periods to exit and look at when the most advanced companies in Berlin have raised their first significant rounds (max 2 years ago), at least another 12-24 months before we start seeing the first very large exits would be the norm. But of course there have been some nice liquidity events: Zalando’s secondary priced at $3bn, rumors have it some folks at SoundCloud were able to sell some shares at a significant triple digit million value, Brands4Friends sold for $200m, CityDeal for $1bn (got a nice uplift from Groupon IPO pricing), DailyDeal for $100m. All this in Berlin’s first 3-5 years of getting started. This was just the first salvo that had been largely dominated by Rocket & Co. The more disruptive companies of course take longer and we expect them to be in the next wave, starting 12-24 months from now.

Although to be fair most of the above companies (that are not exited yet) could have been sold for healthy, but not outstanding values over the last 1-2 years; but as a next generation of European VCs and US money is fueling the ecosystem we don’t do that kind of stuff anymore. Good riddance ;)

Not Berlin vs. London, but Berlin AND London AND Stockholm AND…

Whereas competitiveness is a healthy thing, I tire of the “my tech hub is better than yours” attitude, not only because it signals low opportunity costs and insecurity to engage in such a discussion – but much more because I have the firm belief that there are really several great places to build a company, also within Europe. The evidence also suggests nothing else. Hell even in Germany – Trivago, based in Düsseldorf, was just acquired for $1bn – our largest company by revenue – B2X Care, churning out hundreds of millions in annual revenues – is based in Munich.

But here’s the really amazing thing and what matters most to me – Europe is right now in the middle of witnessing the creation of several tech hubs with barely an hours flight from each other: Berlin, London, Stockholm, Espoo (yes, Espoo, near Helsinki), etc. Heck, even Tel Aviv isn’t too far away.

So I think the right way to view it is not e.g. Berlin vs. London but Berlin and London and Stockholm and…. Each have their individual strengths and weaknesses, but together Europe is really a mind-blowing different place in terms of creating global category leaders than even 5 years ago.

No serious participant in the Berlin ecosystem is seriously wasting a single thought on “beating” or “challenging” another tech hub, there is simply too much homework to do here on the ground.

Copy Cat Factories: Deal with it – they are (by shifting their strategy because cloning doesn’t work so well anymore)

To make a long story short: since the daily deal frenzy there has not really been a breakout successful clone created in Berlin. It’s just become a lot harder – innovators are being more aggressive, the web has moved on from plain vanilla – it just doesn’t work anymore to the extent it did.

The clone factories have shifted their model mainly in two ways: i) seeking to partner with genuine innovators, offering their execution and internationalization skills in return for equity ii) building largely vertical e-commerce or other more ‘plain vanilla’ companies, that build on their core execution capabilities – without the pixel-by-pixel copying piece. Like it or not they have contributed to the creation of talent and wealth in the ecosystem.

Local Funding Environment and the Death of the Old School Euro VC

Getting seed financing up to say $500k at reasonable terms really is not an issue and mostly done in angel syndicates. Seed financings in the $1m +/- range usually always have an institutional fund involved. This is a direct result of the young age of the ecosystem – there haven’t yet been too many exits with broad wealth creation, so the capability of private individuals to cough up a few hundred $k is still limited. There is also a bizarre amount of independent and corporate backed incubators, leading to a more than healthy capital base to get started. Even international funds are fueling the seed fire – e.g. Index, SV Angel, Betaworks, Lerer, Battery and many more have made investments at the seed stage in Berlin.

However if you get to the $3m – $5m A rounds things are a little more tricky; too small for the larger US growth funds, too far for the smaller ones to make a larger commitment (although some like Blumberg are very active also at this stage) and there just aren’t that many active $100m+ funds in Europe. However good news there is now really a sustainable gang of high-quality VCs around Europe that is active in this range and willing to invest across Europe and especially in Berlin – e.g. Index, Balderton, DN Capital, ProFounders, Passion, etc. from London – Sunstone from Denmark – Partech, VenTech from France and of course Wellington, Holtzbrinck, Target and Earlybird in Germany, Prime from the Netherlands – there are more I have forgotten for sure. The cluster is arguably still to small but is vastly better than even just 2,3 years ago.

However (interest declared) Earlybird is the only large-ish VC (ability commit to $10m+) with its main presence in Berlin. Whereas capital has become highly mobile and Berlin is a great showcase of this, it’s an obvious weakness. Whereas you can fly-in and make great investments (and many do), the community would benefit from more money and ideas bumping into each other. It may take a while for more established funds to move here, but really promising is the creation of entirely new funds such as Point Nine, Paua Ventures and Global Founders Fund.

However, as mentioned before, it has to be said that in addition to US VCs all of the major pan-European VCs have investments in Berlin, from Index, to Accel, to Balderton to Wellington and others. Even smaller UK funds are very active here. So I am not convinced it’s holding back the ecosystem for now.

In general the European VC landscape is going through a phase of renewal, as old European VC partnerships that lack the agility to adapt to an entirely new environment, where close to all startups are global and demand that VCs see themselves as a product for entrepreneurs, not ‘deal makers’, are dying out. We will continue to see the death of these partnerships over the next years, the strengthening of those that have been willing to make tough changes and the rise of new teams, which is exactly what should be happening in any ecosystem.

Great Trajectory, Lots of Homework left

So it really seems like Berlin is on to something. But on an international scale Berlin is still an underdog. It so far has managed to turn its greatest weaknesses into some of its greatest strengths (don’t have local talent – great let’s get the best from around the world, don’t have a lot of VCs locally – great lets raise from the best around the world, etc).

So Berlin needs to continue to hustle – and that just may be a good thing, I’d like it to stay like that for just a while yet.

P.S.: See y’all at TechCrunch Disrupt Berlin!