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The Real Problem With Starting Up in Berlin

Berlin’s Silicon Allee has attracted a lot of attention since the term started to gain traction in 2011. Ostensibly a rival to London’s Silicon Roundabout, and to a lesser extent to California’s Silicon Valley, the high tech hub in Europe’s cheapest capital has been waiting to be the next-big-thing for a while now.

The reality continues to fall short of the hype, however. Despite the noise at Rocket Internet, the truth is that a disproportionate number of start-ups in Berlin fail compared to London and California. The reasons for this are complicated, but there are two key issues. The first, a lack of structural support for young and young-ish entrepreneurs compared with the Roundabout and the Valley which leaves many start-ups without a clear direction. The second issue is less easy to rectify: the problem of raising capital in Berlin.

In California, there is no better marker of quality for a start-up than admittance to Y-Combinator (Y-C).  This is a highly prestigious start up academy and accelerator which provides start-ups with seed money to the tune of $120K as well as access to angel investors for A round funding and beyond. Y-Combinator is responsible for sites like Reddit, Uber and Dropbox. In London, Seedcamp is less successful, but offers much of the same as Y-C, albeit on a smaller scale. And where is Berlin in all this? Well, Seedcamp stops by for a week, and Rocket Internet continues on its quest to dominate the world, one pet food site at a time; but for entrepreneurs with a good idea, their best bets are off the continent, cheap rents be damned.

But the real kicker for start-up founders (and their underpaid employees) is the lack of angel investors willing to make the leap. Unlike their US and UK counterparts, start-up founders here face a formidable task in raising capital. For most founders, their seed money and beyond has to come from abroad, so risk adverse are the potential local investors (welcome to the horror of the perception of riskiokapital). Whether this can be put down to a kind of cultural aversion to risk or a lack of faith in the sustainability of the kind of start-ups in the scene is hard to tell.  There’s no doubt that many start-ups here have a Germany-orientated mindset (the so-called language island) and tend to have all-German leadership teams. The other half, the more internationally-orientated start-ups seem to have better success, perhaps because they are better placed to attract international capital, a sign perhaps of how to do things.

But with local investors apparently less and less willing to take the risk on start-ups – often preferring to wait for B or C funding rounds there are significant challenges for burnt out investors. For many, that means that they hit the so-called trough of sorrow where there is no end in sight for money problems, staffing issues and other essential start-up basics that are responsible for the collapse and closure of lots of start-ups.

Despite this, examples like Bill Gates-funded ResearchGate, Jamba, Brands4Friends, Quandoo and CityDeal prove that a successful exit is possible, but usually when start-ups look abroad.

By Sarah Coughlan
Sarah Coughlan is the managing editor of Berlin Logs.
You can find her at: www.bulletproofed.org where she hides her academic proofreading business.

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