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CASE STUDIES:

Berlin–Bottom-Up driven start-up community

Background and facts

   If you are in the creative, art, or tech scene and you are in your twenties or lower thirties, Berlin is probably where you want to be! Berlin is arguably the trendiest place in Europe, if not the world, at the moment. It is still cheap so you can get by very easily with next to nothing, which makes it an ideal place to start up your mobile services company.

   Berlin is one of six hubs in Germany, the other ones being Hamburg, Mu-nich, Karlsruhe/Stuttgardt, Cologne and Dússeldorf. Of these, Berlin is the hub for social apps and commerce. The city not only attracts entrepreneurs and talents from all over the world, it is also very attractive to investors, especially Americans, who come here to look for interesting prospects to invest in. The start-up community is completely bottom up driven with basically no support from national, regional or local authorities.

Innovation climate

   What became most obvious during the interviews in Berlin was the lack of innovation history in the region. The legacy of World War II was to turn what was previously a cradle for innovation into an industrial no-mans-land. Be-fore the split into East and West Germany, German companies relocated to the West. Before the reunion of the country, the Soviet Union relocated the industries and businesses they had set up, leaving the region with nothing. Even today, the region is the poorest of the metropolitan regions in Germany, even though the country as a whole is rich.

   Even though the government, which began its relocation to Berlin soon after the Wall fell, a process completed in 1999, there have not been any initiatives or even pressure from politicians for companies to relocate or set up in the Berlin area. On the other hand, this means that rents are low, and cost of living is very affordable. Berlin is probably the capital of the underground scene in Europe, many artists and other creative people have moved to the city. Young entrepreneurs seldom have much money to live on, making Berlin the perfect spot to set up your business. Together with the cultural scene, Berlin is today one of the hottest places to be.

A large community of people from "the creative class"

   Just like the Shoreditch area of London, Berlin has a large community from the creative class. Within the city you will find not only entrepreneurs, but artists, DJ's, musicians etc. Berlin is the underground club Mecca of Europe, and the centre for electronic music in Europe. The population is young and up-to-speed with what is happening in the world.

   One of Berlin's biggest assets is its name; the city attracts people from all over the world. Every month people move in from all over the world to the city, to start their own business or work for someone that they met on the beach in Bali. This creates a big cultural diversity, which can be maintained thanks to the fact that it is relatively easy to get a work visa for Germany.

   Throughout almost all interviews it was made clear that the regional mar­ket can never be the target market for any company coming out of Berlin. The buying power is too low, due to the fact that incomes are low, and there are not enough large companies to support the community - even though Deutsche Telecom have set up T-labs facilities in Berlin at the university campus.

Bottom-up driven community

   It was very clear from the interviews that the start-up community in Berlin is very engaged. There is something going on every day for entrepreneurs to get involved in, most of which are hosted by the entrepreneurs themselves, making it a true bottom-up driven community with a real drive and spark. But they also feel like they have to fight each step. It is neither straight forward nor cheap to set up a business, there is too much red tape. On the other hand, work space is cheap and there is a lot of peer assistance. The Facebook group Berlin start-ups allows entrepreneurs share knowledge, network, welcome new entrepreneurs etc. There are regular hackathons, in addition to international events, exhibitions and matchmaking events.

Easy to employ cheap but highly qualified staff

   Companies in Berlin find it easy to recruit people from outside the city, country or even Europe. All around the world, Berlin is respected as a city and is famous for its "hip" factor. The low cost of living allows people to accept low salaries and Germany's generous immigration polities allow start-ups to re­cruit even non-EU citizens. However, after a few years many of the employees realise that they can achieve higher salaries by moving out of the city.

There are many universities in the area able to provide a skilled graduate workforce. Some, like the Hasso Plattner Institute have partnerships Ivy League universities in the US. Unfortunately many of the graduates from the local universities choose to move south to better paid engineering jobs in regions such as Bavaria.

Low acceptance of failure

   Like most of Europe, failure is not an option in Germany. Unlike Silicon Valley where failing is seen as a process on the road to success, the mentality in Germany is succeed - or you are out! Even though Berlin is more tolerant of failure than other parts of Germany, the problem still exists. Anyone who goes into personal bankruptcy cannot start another company for seven years. (However, from January 2014 this restriction may be lowered to three years under certain circumstances)

Access to capital

   Berlin does not only attract people to move in to the city. It also attracts investors to come. Berlin is increasingly becoming a hub in Europe where external investors meet with European companies. Also, investors from other parts of Germany come here to scout, or to set up funds. But, they admit that the majority of their investments go into companies outside Berlin. The Berlin area has the largest number of ICT start-ups per capita in Europe this year. Globally, this is only beaten by Silicon Valley and Israel. This of course attracts money to the city. There are grants for university graduates to apply to start their own business. However, without an education you cannot get this money.

Public infrastructure

   It is twenty five years since the Berlin Wall fell, but there are still huge differences between former East and West Germany. The West remains one of the richest regions of Europe, while the East is one of the poorest. However, the infrastructure is good and is getting better. Berlin is the hub for the former East; but Frankfurt remains the major hub for Germany as a whole and even Europe. Lufthansa use Frankfurt as its main airport, and do not have any international flights departing from either one of Berlin's airports. This creates a disadvantage for Berlin compared to south-west Germany as well as other capital regions in Europe.

German Technology and innovation support mechanisms

   There are few initiatives from public authorities in Berlin to support the innovation climate and a lot of red tape to start up a company. Private initiatives are however booming. Privately funded incubators to support companies are being built, and cluster organisations to support companies are being for­med. In Brandenburg the cluster organisation is located in the same building as the regional finance organisation, which eases access to public funding.

   The EIT-ICT KIC a European initiative, but supported by the federal govern­ment in Germany has a node in Berlin, and is located in the same building as the Hasso Plattner Institute and T-labs. Even though the EIT-ICT KIC supports business throughout Europe, the close proximity of this centre for entrepreneurship within ICT is an advantage to companies that want to take advantage of its services: office space, pitch training, business model deve­lopment, and matchmaking.

R & D

   Even though there are good universities in the city, the companies coming out of Berlin have a low level of R&D. On a university level there is high level research, e.g. the Hasso Plattner Institute started in 2010 the HPI Future SOC Lab focusing on service oriented computing. If they manage to trans­fer research from the universities into start-ups in the region there is great potential in what they can achieve. The lack of buying power in the region leads to the creation of solutions that are low-end and inexpensive. But one has to remember that the start-up community is not more than five years old.

Large multinationals

   The lack of large global companies in the region is another issue for potential growth. Deutsche Telecom's T-labs seems to be the most important in the city and are engaged in the start-up community, which shows potential. Nokia (now Microsoft) have a big office here for apps. Siemens and SAP have offices, but their headquarters are located in other parts of Germany. The lack of big companies and heavy industry can however be positive, as well as the lack of engagement from public authorities. There is no one that defines what the community should look like and how they should act, start-ups can chose their own path, which is a positive environment for the creative sector.

Strengths and weaknesses

There are several recurrent themes from all interviewees:

Strengths

Berlin is a good brand, and easily attracts entrepreneurs and competence from all over the world. Salaries are low, which benefits companies, and the cost of living is low which benefits workers. Having the most open immigration politics in Europe enables this. A young and creative population, with a "can do" attitude sets an inspirational and creative touch in the city. At the moment Berlin is one of the most attractive places in Europe for investors. The international scene in Berlin means that the spoken language is English in the region, even though it is German generally in Germany.

Weaknesses

The local home market can never be seen as a potential market for companies, since the buying power is too weak. This affects the R&D quality of the companies, which can have a negative effect in the long run on the growth of the region. Even though the city is "cool" and has a large number of start-ups, not many companies succeed in the long term. Most companies start up and then die out. The star of the region so far SoundCloud (started by Swedes, note). Even though most of the city speaks English, language is still a barrier and any product targeting the German market needs to be translated to German. It is easy to start-up a company in Berlin, but creating sustainability will sooner or later become a problem.

Challenges

The focus is mainly on apps, e-commerce, music and art. These types of companies are usually lightweight and with apps the challenge is how to make it profitable. There are also a growing number of high-tech and bio-tech start-ups, which have been partially created by authorities. In the future there is a need to develop companies whose products have greater use of high level R&D, and whose employees stay in the city. It will be a difficult ba­lance to maintain the current climate with low cost for a good quality of life,

and at the same time grow in to a more mature mobile services city. With a fairly young population that is mobile and online, it should be a good test market. The lack of buying power makes it difficult to launch and test more expensive products at home, which can have a negative effect on the R&D level in the medium to long-term.

Sustainability and future

Berlin has good potential to be one of the strongest regions within mo­bile services if it continues to develop. The cultural diversity and the lack of historical influences make it possible for Berlin to define its own future and path. American investors are happy to come to Berlin to scout for new companies, making access to large-scale finance for Berlin-based companies easier. With high quality universities and research institutions in the area there is a constant supply of young highly skilled workers, but they need to have a bigger incentive to stay, rather than move on for higher salaries.

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