Berlin Start-Ups: Chasing the Distant Dream of a German Google
Boosted by its hip image and low rents, Berlin has gained a reputation as the epicenter of the European Internet start-up scene. There is no question that it is attracting young entrepreneurs and developers. But analysts and industry insiders doubt whether the German capital can produce truly global leaders. By SPIEGEL Staff
The third floor is still a construction site. Workers are fixing the dividing walls and installing cables. Amid all the dust and confusion in this former bakery in Berlin stands Jens Begemann, arms crossed, calmness personified. "Our new employees will be sitting at their desks and working here on Friday," says Begemann, 36. It's already Tuesday afternoon, but he remains as optimistic as ever. Begemann needs the space. "We hire two new people every week," he says, and to make sure that everyone knows how quickly his company is growing, the current number of employees is displayed on a monitor at the entrance: 272.
This Thursday Begemann, founder of game developer Wooga, will be giving Chancellor Angela Merkel and Economy Minister Philipp Rösler a tour of the premises. They want to take a look at this brightly colored world of commerce that opens up beyond the rough wooden pillars of the lobby. It's a sea of desks and a jungle of potted plants. Young people sit bent over their computer screens. Using computer mice, they are busy coloring a flock of outlandish comic-book figures.
Shaggy monsters, clumsy knights and bilious green octopuses inhabit Wooga's world of computer games. With names like "Monster World" and "Diamond Dash," the games are designed to help smartphone users pass the time while they wait for the bus.
The latest game, "Pocket Village," will be produced in the rooms on the third floor that are now being finished. Merkel chose Wooga for her visit because it is seen as a poster child of the Berlin start-up community. "Wooga is profitable," says Begemann. That alone is a unique selling point in Berlin's nascent world of start-ups, where wild ideas are more important than turning a profit, at least initially.
What has happened in this loft building in Berlin's Prenzlauer Berg neighborhood is an example of both the glitz and misery of the booming Berlin IT elite. It used to house the social network StudiVZ, which was worth 85 million ($111 million) a few years ago and collapsed in the face of an onslaught by competitor Facebook.
It is precisely this short life cycle that has deterred top politicians from being identified with the start-up world until now. What politician wanted to be photographed with entrepreneurs whose business model might vanish into thin air a few weeks later?
But the trauma of the New Economy crash seems to have been overcome. This week, Merkel and Rösler will grace the high-tech world with their presence twice: first by attending the CeBIT computer trade fair in Hanover and, on Thursday, by visiting start-ups like Wooga. "If Germany hopes to hold onto its strength as an exporter, it will only succeed by taking advantage of the structures of information and communication technology," Merkel said at an IT industry summit late last year.
Hoping for a Fourth Industrial Revolution
Her advisors evidently believe that the hype surrounding Berlin as a center of the European start-up community is justified. Rösler, in particular, is supporting the owners and managers of up-and-coming start-ups with special programs offered by his ministry.
He recently took four young entrepreneurs along in a government jet to Silicon Valley. During the flight across the Atlantic, he spelled out what he expected from them. He wants them to launch nothing less than a fourth industrial revolution, in which information technology is to merge with products from the engineering and automotive sectors. He hopes that the companies being founded today will ensure that the German economy will remain among the world leaders 30 years from now. He wants German IT companies of global repute -- at present, Germany only has one in that league -- software group SAP, founded in 1972. "What we need," Rösler told his young entrepreneurs, "is something like a German Apple."
It's a bold -- some would say unattainable -- dream. Rösler's mood was practically euphoric by the time the government aircraft had touched down at the airport in San Francisco. The pilot parked next to the private jet of Peter Thiel, the German-born Internet billionaire who lives in San Francisco. The co-founder of Internet pay service PayPal had just returned from Hawaii -- just for Rösler, the delegation proudly announced. Later that evening, Thiel told Rösler about the unique entrepreneurial spirit of Silicon Valley, which gives birth to a new, billion-dollar company every three months.
Rösler tenaciously courted Thiel and his investor friends, hoping to convince them to take a look at Berlin. He invited Thiel to bring his millions and his expertise as a developer to Germany. The entrepreneur promised to make a trip. Rösler later chalked that up as a successful outcome of his visit to Silicon Valley.
But the excursion to California also highlighted the vast differences between Silicon Valley and Silicon Allee, as the Berlin high-tech world is known. "This is a completely different ticket size," said Florian Nöll, spokesman of the German Start-ups Association, while visiting the Plug and Play Tech Center in Sunnyvale.
Fainthearted German Investors
Places like this are known as accelerators, where entrepreneurs work on new innovations in their office cubicles. Investors and the chief technology officers of companies like Google, Facebook and Oracle are constantly walking through the hallways here, searching for the latest, potentially profitable invention for the digital world, ready to turn millions into billions. The exaggerated hesitation of the Germans seems odd to them. "They're not afraid of investing money, just of overlooking the next big thing," says Nöll, who has a lot to say about the faintheartedness of German investors.
Silicon Valley is seen as the perfect "ecosystem," in which investors bold enough to take risks meet developers with ideas and the motivation to work around the clock to make them marketable. But where does the Berlin ecosystem stand in relation to Silicon Valley and other rising start-up centers in the world?
Nöll has a hard time answering the question. "There are no solid numbers," he admits, noting that his group is working on that. Rösler likes to cite a number of 9,000 new IT companies founded in Germany last year, and notes that 20 percent of the growth in German productivity comes from the tech world. "A critical mass of creativity has been reached that's comparable with New York, London and Tel Aviv," claims Rösler, a member of the pro-business Free Democratic Party (FDP).
According to an IT study by the Fraunhofer Institute for Systems and Innovation Research, there are 500 investors in Germany who have pumped millions into start-ups, especially in Berlin. For 2011, the Fraunhofer calculations have identified 926.1 million flowing from investment funds into so-called early-stage financing in the Internet field. "As a result, the available capital for future investments rose considerably," the Fraunhofer researchers conclude. As large as this number seems, it pales by comparison with figures in the United States, where investors pump 30 billion into start-ups each year.
Berlin a Center for Starting Firms -- Not Growing Them
The German tech community says it doesn't owe its success to the government. "A lot of things have happened here because of the entrepreneurs, not because of economic development policy," says Oliver Samwer, a legendary Internet entrepreneur who was involved in major start-ups like Jamba and Zalando.
German tech firms are deeply divided over what level of development their industry has reached. Lars Hinrichs, founder of the business contact network Xing, is a respected voice in the community, especially after engineering a brilliant exit -- the process of selling one's business to a corporation for many millions. The 36-year-old doesn't live in Berlin's Mitte district but in Hamburg's fashionable Mittelweg neighborhood. When asked about successful companies from Berlin, he takes a few moments to answer. "Even the successful ones are still irrelevant on an international scale," he says. Instead, he describes Berlin as a center for hipsters. "We have plenty of small businesses that lack a substantial business model but try their luck nonetheless." It's unlikely that any of these companies stands a chance of becoming a true giant in the industry, says Hinrichs.
Christian Nagel, co-founder of the venture capital firm Earlybird, deliberately moved his company headquarters from Hamburg to the German capital because of the entrepreneurial spirit there. "Berlin has always been a creative city, and that's now being combined with relatively affordable real estate prices and employees with few alternatives here," Nagel explains. He firmly believes that a start-up industry is taking shape in Berlin that is likely to be more enduring than the New Economy born in 2000. It's just that many haven't recognized this yet, says Nagel.
The results of one of the rare comparisons of international start-up cities are more sobering. It was done by analysts at Start-up Genome, which is funded by companies like Telefónica. According to the study, Berlin is something of a newcomer, heavily hyped and on a roll. Analysts see the German capital where New York was a few years ago. "Berlin might be the best place to start a company right now," they wrote. But they also warn against too much euphoria, noting that companies that hope to expand will eventually have to think about moving away. "For scaling it, Berlin start-ups might consider relocating as the ecosystem is not mature enough in terms of capital, support infrastructure, and mindset," the analysts write. As a result of these concerns, Start-up Genome puts Berlin only in 15th place in its ranking of the world's top start-up ecosystems, published late last year.
A Lack of Big Investors
What Berlin lacks are the big investors, the ones sitting around in every café in Palo Alto. "People who have already invested in Microsoft and Apple," as German Start-ups Association spokesman Nöll says. There's no equivalent start-up aristocracy in Germany to fund promising newcomers. Most of the 10 richest Germans inherited their wealth, while "seven out of 10 of the superrich in the United States are self-made billionaires," says Nöll.
So far the only big Internet names Germany has produced have been famous for the wrong reasons, like Kim Dotcom, the founder of Megaupload, and Fabian Thylmann, owner of the YouPorn empire. Both men have spent at least some time in prison because of their business activities.
The industry would rather associate itself with names like SoundCloud, a platform for musicians to exchange their compositions. Founded by Alexander Ljung, who emigrated from Sweden to Berlin, SoundCloud is not only considered successful but is also pursuing an original idea.
Ravi Kamran would like to write a similar success story. His company, Trademob, places advertising in Smartphone apps for other apps. EBay, one of its customers, hopes to use this approach to introduce an app for classified ads to the millions of iPhone users. "We've hit the nail on the head with our product," says Kamran.
Only two years ago, Kamran and three fellow students at the Vallendar private university were programming the prototype for his advertising app. At the time, the four entrepreneurs were crowded into a 20-square-meter (215-square-foot) room in Prenzlauer Berg. Conditions are still cramped today, with more than 100 employees working in the old auditorium of a former school at Berlin's Oranienburger Tor subway station. "I've been searching for a 2,000-square meter office space for the last three months," says Kamran, adding that it has to be in a cool location. "I need a wow effect for when my customers walk into our office," says the 30-year-old.
Five employees look after the new staff the company is recruiting from around the world. Kamran is especially proud of Ben Martinek. "Ben comes from Silicon Valley. He used to work for Apple." Martinek says people in San Francisco view Berlin as having the same kind of counterculture as their city. "Berlin is the only affordable metropolis left in the world," says Martinek. That alone makes it worth putting up with the fact that city authorities still don't have forms in English, he adds.
Berlin Has Much to Learn
Good developers like Martinek have become scarce in Berlin, and annual salaries of more than 100,000 are sometimes needed to attract them. Kamran needs a lot of them. An investor recently gave him $15 million to turn Trademob into a global corporation.
At the moment, it appears that Kamran has prevailed in the tough fight for survival in the IT industry. Most start-ups, however, fail.
The story of DailyDeal illustrates how close together success and failure can be in the Berlin start-up community. The company's offices are also in the former bakery, not far from those of game maker Wooga. DailyDeal is a bargain site founded in 2009 by brothers Fabian and Ferry Heilemann. The company seemed to be looking at a bright future. The market for online couponing was growing rapidly at first. From 2010 to 2011, DailyDeal managed to increase its sales from 1.6 million to 10 million. The company quickly hired 200 employees. In late 2011, the Heilemann brothers sold DailyDeal to industry giant Google for the equivalent of 85 million.
Recently, they bought back the company. If they hadn't Google would have shut down DailyDeal, at least according to rumors in the industry. Fabian Heilemann declines to comment on the size of his workforce or on the company's earnings. "Our goal is to preserve as many jobs as possible and create new jobs in the long term," he says.
He may be comforted by what Silicon Valley IT giants told Economy Minister Rösler about the California tech industry's "culture of failure," namely that "investors are suspicious about anyone who hasn't had a bankruptcy yet."
It seems that the German IT start-up community still has a lot to learn, about both success and failure.
BY SVEN BECKER, MARTIN HESSE, MARTIN U. MÜLLER and GERALD TRAUFETTER
Translated from the German by Christopher Sultan
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