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Berlin start-ups: Cool and commerce coming together?

  • Towering strengths
    Since German reunification, artists and small companies have been drawn to east Berlin, where rent is remarkably cheap and there’s plenty of space. (Copyright: M.a.r.c./Flickr)
  • Eastern promise
    The city’s burgeoning start-up scene flock to events such as Tech Open Air, a two-day event which draws together the tech, art, music and science worlds. (Copyright: Tech Open Air)
  • Room to grow
    Districts such as Kreuzberg are drawing start up companies. Cheap rental makes the area more attractive than other European cities. (Copyright: Getty Images)
  • The tech set
    Areas like Prenzlauer Berg are rapidly gentrifying, with bars and restaurants that cater for the tech-savvy crowd taking over its office buildings. (Copyright: Getty Images)
  • Factory of dreams
    Several tech companies – including Firefox web browser developer Mozilla and file-sharing Soundcloud – are moving to a new hub in Prenzlauer Berg. (Copyright: Factory)
  • High-profile move
    Soundcloud’s founder Alexander Ljung decided to move the company from Stockholm to Berlin to take advantage of the cheap rent and its music scene. (Copyright: Getty Images)
  • Big names
    Microsoft is one big tech company which has already set up a local campus, while internet giant Google has recently opened its third German office in Berlin. (Copyright: Microsoft)
  • Friends in high places
    The burgeoning scene has not escaped the attention of politicians. Chancellor Angela Merkel visited games company Wooga’s offices earlier this year. (Copyright: Getty Images)
In a new series Innovation Cultures takes an on-the-ground look at tech scenes around the world that hope in some way to emulate the successes of Silicon Valley. First up is Berlin, where Stephen Evans asks whether the cutting-edge, low-rent city is finally attracting serious investment.

When new businesses based on the computer chip began to cluster in Santa Clara Valley, it did not take long for someone to come up with the name Silicon Valley. That set a pattern, and soon there was Silicon Glen in Scotland, Kenya’s Silicon Savannah, Silicon Gulf in the Philippines, Silicon Taiga in Siberia – even the somewhat less romantic-sounding Silicon Roundabout in London.

Now there is Silicon Allee in Berlin (Allee, meaning alley or avenue in German, is part of many street names in the city), which to some observers evokes the atmosphere of the early days in Northern California. That was certainly the vibe at Tech Open Air Berlin, a gathering held earlier this month in a ramshackle complex of wooden and stone buildings in Kreuzberg, a trendy part of the city. There was soft acoustic music and falafel, and a lot of beautiful people exuding a studied coolness.

“You’re going to see a lot of amazing stuff coming out of Berlin,” says Tikhon Bernstam, who came over from Silicon Valley to attend the event. “This sort of culture that you see here, the hippy music, we had exactly the same thing in San Francisco a few years ago. I’ve been impressed by the quality of the companies I’ve been seeing here.” Bernstam’s cloud data service he co-founded, Parse, was recently bought by Facebook for $85 million.

Of course, Berlin is many leagues behind Silicon Valley. From Adobe through to Yahoo, via Apple, Intel, Google and Oracle, the Valley, as its occupants call it, has a combined wealth which most countries would envy.

Exact figures are hard to come by, but Berlin came ninth in a recent global ranking of cities with the most tech start-ups founded since 2002 that are global, or received angel funding or institutional venture capital. The top three spots were occupied by San Francisco-Silicon Valley with 201 start-ups, New York (144) and London (90). Berlin had 27, just ahead of Bangalore on 26 and Sao Paulo on 21.

But with its reputation for doing things differently, very cheap rents, and the ambition and optimism on show at events like Tech Open Air Berlin, the hope is that its scene will deliver on the buzz that has surrounded it for the past few years.

The city itself is in many ways a start up. From 1945 it was shattered and split for almost half a century. The eastern, Soviet-controlled zone was hardly a seed-bed for innovation. Industry moved out from the West. Students were exempted from military service, attracting a young, artistic and politically radical alternative scene.

Since the fall of the Wall in 1989, the city has been re-inventing itself. The vibrant alternative culture remains in place, and some see it as providing fertile ground for the creation of disruptive technologies – though others argue that a counterculture-led antipathy to money-making may hamper innovation.

One thing that is clear is that property is cheap – Berlin still has rents which are so low that they make visitors from London and New York gasp. The average annual cost of a workstation in an office in Berlin, including maintenance costs, taxes and rent, was $8,410 at the end of last year, compared with $14,050 for New York and $14,620 in the City of London, according to a report published by the global property company DTZ. Renting a 120 square metre apartment in Berlin costs around a third what it does in London and New York.

This combination has attracted many who aspire to be the next big thing in tech. In a few cases they have already succeeded, such as the social game developer Wooga or Research Gate, a networking website for scientists. The darling of the scene is SoundCloud, an audio sharing platform that has 200 million users every month. Alex Ljung, its co-founder and chief executive, moved the company from Stockholm to Berlin because he felt it offered a richer mix of people involved in music, and because of the ample and cheap office space.

However, Ljung admits his firm’s new hometown doesn’t cover all bases. “With start-up life, there’s never really much calmness. It’s all jet and no lag,” he says. “In an average month, I spend about a week-and-a-half in Berlin, about a week in San Francisco and the rest of the time split between Los Angeles, New York and London.” What Berlin lacks that San Francisco has is the sheer volume of people who’ve grown tech companies, where Ljung says he can bump into others who have trodden the same path, and who can advise him on short-cuts and pitfalls. In New York, London and Los Angeles, he can meet plenty of people with money to invest in good ideas.

According to Bernstam, investors from the US are scared to invest in Germany because they don’t understand the way companies are structured and corporate regulations. “We don’t understand what could happen if future investors tried to dilute us,” he says, “and investors from the States don’t understand yet how that works abroad – and are frankly scared of investing abroad.”

All of which created a chicken-and-egg problem in Berlin. Some entrepreneurs have stayed away because of the lack of investors, and those with the money have preferred to go elsewhere because of the greater number of companies to invest in.

But this resistance is beginning breaking down, on both sides, according to David Knight, editor-in-chief of Berlin tech scene blog Silicon Allee. “There’s been this streak of creativity and once you got a core of people, which started round 2009, you started to get a lot of investors from the US and Europe looking to Berlin. It’s still at a very early stage, but there’s a lot more money now than there was two years ago.”

Districts such as Kreuzberg, Neukoelln and Prenzlauer Berg, where would-be entrepreneurs congregate in the bars and cafes offering wi-fi, are now seeing the effect of this. In Prenzlauer Berg, Factory, which received €1 million in funding from Google, has rented space to over 15 companies, including SoundCloud. The city also now has a lot more of what might be called serious business people. Florian Lanzer is trying to build a website selling green products to people who are not necessarily committed environmentalists. He said the project has attracted a lot of interest, including the involvement of a former CEO of Sony Germany.

“What Berlin gets right is that it attracts the right kind of people,” says Lanzer. “Young people with talent and people with long track records and massive experience are coming together.”

Around a decade ago, Berlin was famously described as being “poor, but sexy” by its mayor, Klaus Wowereit. The hope is that creativity and commerce is now beginning to combine in tech in such a way that it might finally shed its poor tag.

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