The office, located on the second floor of a pre-World War II building on Berlin's busy Tor Strasse, is open and inviting, if a bit loud. With bleacher-like seating in one corner facing a large open space, it feels like a small, neighborhood theater project.
But it's not. Reverberating with the roar of a construction worker's industrial vacuum as he puts the finishing touches on renovations, the office is the Berlin headquarters of venture capital firm Earlybird Capital. And the space was too small before it was even finished. The company, which invests in tech start-ups in Germany and abroad, first elected to establish a Berlin office in March -- only to decide they would move almost the entire company there this autumn.
They are not the only ones. While it is hardly news that the Berlin tech scene is among the hottest on the planet right now, the city has only just started to develop the vibrant financing scene necessary for it to remain a successful start-up hub for years to come. And the investors are flocking in from far afield: California-based investors have funnelled money into Berlin-based companies as have teams from New York. Atomico, the London-based investment fund started by Skype co-founder Niklas Zennström, just announced a sizeable 3.1 million ($4.2 million) investment in the Berlin start-up 6Wunderkinder in mid-November.
"Since 2009, it has become crazy," says Roger Bendisch, head of IBB Beteiligungsgesellschaft, a state-backed provider of venture capital in the Berlin tech scene. "Things are moving and we are starting to work with more and more international investors. Everyone wants to be here and invest."
'A Different Kind of Smartness'
The statistics would appear to back him up. The number of investors that have a finger in the Berlin pie has steadily increased in the last two years. In turn, the total volume of capital provided has spiked. Whereas venture capital funds sank 48 million into 64 Berlin-based high-tech companies in 2009, the first three quarters of 2011 saw 136 million invested in 81 businesses, according to statistics compiled by the German Private Equity and Venture Capital Association (BVK). Most of the companies receiving funds were Internet start-ups.
Furthermore, the city is also seeing a growing number of so-called "angel investors" -- non-institutional providers of capital -- who often come from the tech scene themselves.
"I'm really encouraged that angel investors are emerging," says Ciaran O'Leary of Earlybird. "It is a very healthy sign that you have successful entrepreneurs who are starting to support others who have good ideas. Venture capital has to be smart money, but angel money has a different kind of smartness."
Such exhilaration, of course, is enough to make some people cringe. After all, Silicon Valley wasn't the only victim of the dot-com bubble burst in 2000. In the years prior to the collapse, Berlin too had experienced solid tech-sector growth and was awash in venture capital. "Then came the crash, and the plunge was merciless," says Bendisch. Whereas there were 30 venture capital funds active in Berlin at the beginning of 2000, only five survived the dot-bomb.
For the moment, at least, investors insist that a repeat isn't in the cards. European start-ups, say investors, are simply a better deal than their counterparts in the United States and Britain at the moment. Indeed, according to Matthias Ummenhofer of the European Investment Fund (EIF), an EU-funded group which seeks to boost European venture capital activity, valuations of promising companies are up to 50 percent lower in Europe than in the US. "Prices are ridiculously low in Berlin," he says.
Burned in the Crash
Maximilian Claussen, a senior associate at Earlybird, agrees. "What you see going on here now certainly isn't a bubble," he says. "In Europe, we will have made a fantastic return if our exit is 200 to 400 million. With the pricing you see in the US right now, you would need exits of several billion."
Still, the 2000 collapse continues to play an outsized role in the start-up funding scene in Berlin. Many of the funds that have now zeroed in on the German capital are from outside of the country. Even the growing number of Germany-based funds are almost entirely fed by investors from abroad who are attracted by the potentially high returns of Berlin start-ups. German investors -- having been burned a decade ago -- play only a minor role in them.
The reasons for the German reluctance, say fund managers, are not hard to find. When it comes to the tech world, Europe has long lagged behind the US. The tech gold rush of the late 1990s was the first experience many German investors had in the field. Just as they had begun investing in new companies and salivating over their potential returns, the bubble burst.
"Investors had a bad first experience with it. The venture capital industry here was a bit of a stillbirth," says Earlybird's O'Leary, who is from Germany despite his name. "Those funds that have survived are now tarnished by the dot-com bubble."
Paltry European Investment
Figures collected by the European Investment Fund would appear to support that assessment. According to an EIF paper released in September, venture capital in Germany represented under 0.04 percent of gross domestic product in 2009. In the US that same year, venture capital was 0.13 percent of GDP, more than three times as high. O'Leary says that 80 percent of the investments in the 130 million fund they are currently managing comes from outside of Germany.
The wariness of start-up investing isn't just a German phenomenon, of course. Averaged across the Continent, European venture capital as a share of GDP remains less than half of what it is in the US. Furthermore, many of those funds that have been active, says Ummenhofer, have underperformed.
The reason for this has been a matter of some debate. Europeans are, as a rule, more conservative than Americans when it comes to potentially high-risk investments, say many. But it is also simply a function of a European tech start-up scene still in the process of maturing. In the US, the EIF paper indicates, many fund managers are successful tech entrepreneurs who have started up venture capital funds of their own, whereas in Europe, fund managers have typically come from the finance industry.
"In Europe, people don't have the experience in investing in this asset class over time," says Ummenhofer.
Keeping the Money Flowing
That may not be the case for much longer, though. Even as many in the industry continue to view European venture capital as being hopelessly behind the US, the ongoing excitement over the Berlin ecosystem may soon begin to change that.
"I think that in the next two to three years, you'll see a whole bunch of big exits," says O'Leary. "Pension fund managers in Germany will start to realize that stocks aren't that safe and government debt isn't either -- but that venture capital represents a huge opportunity. I think you'll begin to see a shift in awareness."
Furthermore, with the flood of money coming into Germany from investors and funds located abroad, it could very well be that German reluctance to invest and Europe's spotty track record simply don't matter. The growing strength of the Berlin ecosystem might ultimately be enough to keep the money flowing.
"As long as Berlin can foster strong opportunities, people will be willing to fly in and make the deals," says Jimmy Fussing Nielsen, a managing partner with the Copenhagen-based firm Sunstone Capital. "I don't necessarily think that you have to be based in Berlin."
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