Digital entrepreneurs are flocking to Germany’s cities, attracted by the availability of talent, affordability and the ever-expanding ecosystems. Markets Germany takes the pulse of the start-up scene, with a focus on Berlin, Hamburg and Munich.
Move over, London!
Germany is positioning itself to become Europe’s nerve center for digital start-ups, with Berlin, Hamburg and Munich competing to entice foreign entrepreneurs and investors to their riverbanks – along with other cities like Frankfurt and Dortmund.
When Germany took over the G20 presidency in December, Sigmar Gabriel, then head of the Federal Ministry for Economic Affairs and Energy (BMWi), signaled that it would be taking a global lead on digitalization. A month before, BMWi unveiled its Digital Hub Initiative (de:hub), an agency tasked with facilitating co-operation between start-ups, academia, SMEs and industry, to promote digital transformation.
There has never been a better climate for tech start-ups to come to Germany. Affordable rents, a thriving tech business ecosystem – from coding through to 360˚ drones – the availability of incentive schemes and access to the single market have all contributed to the shift towards mainland Europe.
Germany is an increasingly attractive location for digital start-ups due to affordable rents, a thriving tech ecosystem, incentive schemes and access to the single market. Now crowned the start-up capital of Europe, Berlin has reputation as a cool city for young and aspirational creatives and entrepreneurs, which helps it to attract global investment into businesses such as Factory Berlin, a technology co-working facility that houses tech giants such as SoundCloud, Twitter and Uber.
© Factory Berlin
Berlin versus London
In 2015, Berlin earned itself the title of “start-up capital of Europe” in the Ernst & Young (EY) “Start-Up Barometer” survey, as for the first time investment capital in the city (totaling €2.2bn) overtook that in London. This rapid growth was largely driven by the über-productive incubator Rocket Internet. But last year Berlin slipped back into fourth place with total investments of just €1.1bn. Start-up financing across Germany as a whole dropped by 30 per cent (–11 per cent across Europe), due to the absence of deals in excess of €100m; whereas in 2015 there had been eight such deals.
The EY report’s author, Peter Lennartz, notes that annual fluctuations in financing are not a reliable indicator of the health of Germany’s start-up scene. “The number of medium-sized deals is more indicative of the strength of Germany as a start-up location,” he says. And the number of companies that received between €5m and €50m rose from 81 (year 2015) to 116 (year 2016). “The more start-ups and the more funding is made in the field of seed, the greater the chance that a higher number of start-ups will be able to develop into successful medium-sized companies or even unicorns in the future.”
94.6 per cent of start-ups in Germany allow staff to wear hoodies.
When it comes to diversity and idea innovation, Berlin appears to have the edge over Germany’s traditional commercial hubs: 90 per cent of its start-ups are working on new products and services. It has the added cachet of being a cool city for young creatives and entrepreneurs to live in, with a local target market of aspirational thirty-somethings. Of Berlin’s founders, 94 per cent consider their city to be the best location in Germany.
For B2C start-up stars like SoundCloud, Go Euro and Delivery Hero, which all have foreign founders, this made Berlin the ideal location. Delivery Hero, the food ordering service founded by Swedish entrepreneur Niklas Östberg, which has 1,000 employees at its headquarters, cites the “progressive” attitude of Berliners, the cost of living and the “execute quickly mind-set” as the ideal conditions for a successful working environment.
“Berlin has a very vibrant start-up ecosystem,” says Stefan Franzke of Berlin Partner for Business and Technology, Berlin’s business development organization. “There are 6,000 tech companies here with innovative and scalable business models. They are here typically because they want to address the German and European market, but we also have a program called Start Alliance Berlin which helps them find routes into the U.S. and Asian markets.”
For Franzke, the advantages of his city are clear: “Firstly, you can use English everywhere. Then we have an ecosystem which is focused on start-ups – there are simply more service providers here. It is also easy to raise money: last year more than €1bn in venture capital was raised by Berlin start-ups.”
Source: Deutscher Startup Monitor
Berlin leads in B2C
The bulk of this funding went to e-commerce, financial technology (FinTech) and big data companies, mainly at second or third round, but the growth in seed capital is coming from new sectors like augmented and virtual reality solutions, InsurTech, property tech and the Internet of Things (IoT), according to Brehm. The new funding trends across Germany, by way of comparison, are energy, transport and health, according to EY.
“Tech start-ups come to Berlin because they want to get in with the likes of Siemens, Microsoft and Zalando,” says Franzke. “But the attraction also works the other way – established industry needs to digitalize and evolve. Many major businesses are now setting up their innovation centers here – for example, Würth or Cisco.” Berlin’s talent base is the lifeblood of its commercial renaissance. Every year 200,000 people come to Berlin, 70 per cent with advanced degrees. “We attract talent from 180 different countries; in fact nearly 50 per cent of the start-up workforce comes from abroad,” says Franzke. The challenge is finding enough of the right skills: “We really need more software engineers.”