During a visit to Berlin in mid September this year I was struck by the way the venture capital and start up scene in Berlin had shifted from being something of an exotic hothouse flower to one of the leading places for new business creation in Germany and indeed Europe. Ernst and Young in its 2015 study Liquidity meets Perspective: Venture Capital and Start Ups in Germany argues that Berlin is the new kid on the block and has already got some impressive milestones behind it. Between 2011 and 2015 17,000 jobs were created.
According to Ernst&Young, in terms of start ups and the mobilization of venture capital Berlin may have already caught up with London as the leading European location for tech based businesses. In 2015 Euro 2.9 billion of tech start up business took place in Germany. Of this over two-thirds was in Berlin with the lion’s share of deals being in IT and communications and E-Commerce. This placed Berlin ahead of London in that year.
The question is how did this come about given the special nature of Berlin and its complex post World War 2 history as an island economy which had lost much of its industrial base? Are there pointers that Australia (and indeed the major Australian capital cities) can learn from in developing our own start up eco-systems?
The special Berlin situation.
Prior to World War 2 Berlin was the natural centre for a wide spectrum of business in Germany. It was the centre of government, media and the film industry, the central bank was in Berlin as were the head offices of the main banks, the fashion industry was focused in the city, large technology and manufacturing companies like Siemens and AEG were headquartered in Berlin, it was the place to be for theatre,film and the creative industries of the time.
Following WW2, Berlin became an island surrounded by the German Democratic Republic with difficult transport links to the rest of West Germany. As a consequence, its attractiveness as a place to locate major German and international finance and manufacturing businesses was severely reduced. Many of the mainstays of the private economy shifted to other locations in Germany. The Government went to Bonn, the banking sector shifted to Frankfurt, the fashion industry shifted to Dusseldorf and companies like Siemens relocated to Bavaria and elsewhere in Germany.
By the time of German Unification in 1990, the Berlin economy was relatively weak and much of activity in education, culture and the arts depended upon large subsidies from the rest of West Germany. Cities like Hamburg, Munich, Frankfurt and Stuttgart benefited from the relocation of businesses from Berlin.
But what the city had going for it was a substantial higher education base with three major Universities – the Free University and the Technical University in the west and the Humbolt University in the east. It also possessed some significant national research centres. The higher education and research systems together with a large and thriving arts and culture scene meant Berlin was attractive to young German and indeed international students receptive to new technologies and ways of doing things.
The Ruling Mayor of Berlin from 2001 to 2014 Klaus Wovereit famously described Berlin in 2004 as being poor but sexy. When he coined the phrase it was likely that many people in Germany’s industrial and business centres would have agreed with the first part of the statement if not the second.
While the price of housing has increased in Berlin in recent years, prices remain well below those in Hamburg, Munich, Cologne and Frankfurt. The combination of low rents and a cool image makes the city an attractive centre for young people and creative industry businesses.
Since Wovereit made that memorable statement, much has changed in Berlin which has contributed to the current very positive outlook for venture capital and tech start ups many based on digital technologies.
Post Unification Developments
The Federal Government after the decision taken in 1991 shifted from Bonn to Berlin. This set a clear signal that Berlin was the capital of a united Germany. In addition to the capital city cachet Berlin also drew to itself a host of national business and social organisations and their staffs. Naturally the national media which with the exception of the Axel Springer organisation had been based elsewhere opened up significant centres in Berlin.
Major investments were made in the transport and communications system in east of Berlin to bring that part of the city up to the level achieved in west Berlin. The Humboldt University based in east Berlin received major new funding to modernize its infrastructure. Significant research entities in terms of Max Planck, Fraunhofer and Leibnitz Institutes were also opened in Berlin adding to the city’s already significant research base. The Charite Hospital in east Berlin and its associated medical research capabilities was upgraded and modernized and became one of the largest employers in the city.
Historically a significant part of Berlin’s population growth came from attracting people from lands which are now part of Poland as well as elsewhere in central and eastern Europe. With the expansion of the EU eastwards and freedom of movement of people Berlin is once again exerting a magnetic force on ambitious young people who want to live in a major metropolitan centre with global connections.
Berlin’s economic growth has largely come from the expansion of service industries of all kinds since Unification. It is the major centre in Germany of the creative industries.
Reflecting these developments, over the last decade or so a dynamic venture capital and tech start up scene has come into being whose growth is being driven by a mix of people, institutions, finance and government policy.
The emerging VC and tech start up scene
The tech start up scene is being driven by a combination of private sector initiative and considerable support from German government initiatives. These efforts intensified in the last decade and have led to
notable progress being made to the point where Berlin is now well and truly making a mark on the European scene more generally.
Many commentators see the listed company Rocket Internet established in 2007 as a key landmark for the city. The company builds online start ups and uses various models of internet retail business. It is headquartered in Berlin. Rocket Internet is often referred to as the Rocket Business School as a number of its employees have left the company to begin their own start ups. The company has a market capitalization of over Euro 3 billion.
One of Rocket Internet’s biggest success stories is a company called Zalando started in 2008 which is an E-Commerce platform with a market capitalization of over Euro 9 billion.
A further tech based company is Zanox started in Berlin in 2000 and now owned by Axel Springer and Swiss Swisscom. Axel Springer was the one major German media company that was headquartered in Berlin prior to Unification. Zanox is the leading performance advertising network in Germany and Europe.
To date medical technology start ups have only made a relatively small contribution which is a source of disappointment to the Berlin authorities. But a notable recent example is Scopis Medical which is based on a navigational system for minimal invasive surgery. The IP comes out of work at the Charite.
Recognition of the rising importance of Berlin in terms of the tech start up scene, global companies like Google and Microsoft along with a number of others have opened significant presences in the city. Google for Entrepreneurs is providing Factory Berlin, a campus for start ups and mature tech companies started in 2012 with financial support, mentorship and education for entrepreneurs. Microsoft is running an accelerator program.
Apart from Factory Berlin, there have ben a number of institutional initiatives designed to support the start up eco-system. One of the more notable was the establishment in 2002 of the European School for Management and Technology. This School has grown into a medium sized business school with close links to tech based start ups. In 2015 the German Tech Entrepreneurship Centre was established in Berlin on the campus of the European School for Management and Technology. This is designed to be a one stop collaboration shop for European start ups.
Taken together, the Factory, Betahaus and St Oberholz have expanded co-working spaces for creative and directly developed expanded space needed by start ups.
Reflecting the dynamic start up scene a number of German and international venture capital and seed funding companies have located in Berlin. Earlybird a significant German venture capital fund with Euro 1 billion of funds under management relocated from Hamburg to Berlin.
Many of the venture capital funding deals involve both German and international funds. About 35 per cent of venture capital comes from international sources which tend to be US and European based funds.
Arguably the single most important source of funding for tech based start ups comes from the German Government’s High Tech Gruenderfonds (HTGF) established in 2005 with investment by a number of large German corporations such as BASF, Bosch, Daimler and Deutsche Telekom together with the KfW Banking Group which is wholly owned by the German Government. The HTGF provides early stage seed investment focused on high potential high tech start ups. Euro 0.5 million is provided to each entity at the seed stage and Euro 2 million in later rounds. The HTGF takes a 15 per cent share in return for its investment.
There have been two funding rounds so far. The first in 2005 for Euro 272 million and the second in 2011 for Euro 288 million. Almost 90 per cent of the funding has come from the German government.
Pointers for Australia
The first thing that should be said is that the emergence of Berlin as a force in venture capital and tech based start ups is that it is based on a complex of factors that come together to form an effective eco-system. Key elements include a critical mass of tech savvy mostly young people, some lighthouse companies such as Rocket Internet, institutions supporting networking and collaboration and a lively and well funded venture capital market comprising both local and international entities.
All these elements need to be present for success. There is no one silver bullet that is responsible for success.
While Unification of Germany (and Berlin itself) came in 1990, it was not until the early 2000s that the elements of the start up eco-system started to come together. Notable results have only started to emerge in the last few years. Overnight success tends to have relatively long antecedents. The lesson is that it takes time and consistency of intent for a successful and self sustaining start up eco-system to develop.
Start up scenes in major cities tend to reflect the underlying competitive strengths of the cities concerned. Berlin as a major centre for higher education, research and the creative industries tends to more resemble New York than Silicon Valley. Similarly the start up scenes in Australia’s capital cities will reflect the relative competitive strengths of those cities and their ability to contribute to the global value creation process.
The Berlin story suggests that even with strong private sector input there is a place for government in investing in knowledge creation, facilitating collaboration and supporting the development of the venture capital and seed funding systems.
David Charles is a Director of Insight Economics. He was formerly Secretary of the Department of Industry and Commerce from 1985 to 1990. He co-founded the Allen Consulting Group in Melbourne.