Could Berlin be the next Silicon Valley?

The road to becoming a tech hub, according to McKinsey, is paved with talent, capital, networks, affordability and infrastructure. INSEAD calls the factors the “five Cs: Cost, Convenience, Community, Calibre and Creativity”. Dublin—Amazon, Facebook, Microsoft and Google all run their European operations from that city—definitely has community and calibre. So, too, does London, with its strong venture capital (VC) networks—Accel, Index and Balderton are all located there. Stockholm, with its pervasive design culture and success stories like Spotify, is creative, and Tallinn, Estonia, with programming practically a national sport, definitely boasts high-calibre talent.

Berlin, which sustains some 2,500 start-ups employing 30,000 people—a figure that could more than triple by 2020—claims a bit from each column. Long famed for its punk art scene, Berlin is also low-cost: cash-poor creatives can find a 1-bedroom rental in the start-up centre of Berlin Mitte for about €450-€475 ($613-$647) a month, one-third of what its equivalent in central London would cost. According to global property company DTZ, a workstation office costing $8,410 in Berlin last year would have rented for more than $14,000 in either New York or London and for only slightly less in Paris.

“The city has always had a thriving artistic scene, and that, now married with the burgeoning tech ecosystem developing here, makes for a potent combination for new business ideas and technologies,” says David Noel of SoundCloud, a company considered the YouTube of audio and arguably Berlin’s most famous start-up. Its Swedish founders chose Berlin, Mr Noel says, in part because of its “sub-culture attitude and its affordable lifestyle”.

SoundCloud’s 220+ employees hail from more than 30 countries; indeed, growing international talent pools and Berlin’s famously welcoming atmosphere draw talented developers, especially from Sweden, Hungary and Romania. Nearly one-third of those living in Berlin Mitte are foreigners, as are 20% of those in the other neighborhood where start-ups are common, Friedrichshain-Kreuzberg.

With Chancellor Angela Merkel vowing to make it easier for foreigners to register to work in the city and English being the lingua franca of the start-up world in Germany, talented young people from around the world who otherwise can’t get jobs can more easily make the leap, according to Jens Begemann, founder and CEO of start-up success Wooga. Wooga, a contraction for “world of gaming”, develops games for mobile and social networks and has approximately 50m monthly active users. It has become successful enough to invest in other start-ups, as has SoundCloud, which reaches more than 200m people per month.

Other VC capital has been flowing in as well: Microsoft founder Bill Gates recently led a $35m investment in ResearchGate, a Berlin-based global network for scientists. Silicon Valley’s Sequoia Capital just invested $19m in 6Wunderkinder, the company behind the to-do list app Wunderlist. Microsoft has begun a four-month-long start-up accelerator programme in Berlin, and Google is backing a start-up campus, The Factory, in Berlin Mitte—SoundCloud, 6Wunderkinder and even Mozilla are tenants.

Whereas London is home to most of Europe’s VC firms, few funds other than Germany’s EarlyBird, which has invested more than $40m in more than two dozen Berlin start-ups, have offices in Berlin. Although Germany received $362m in first quarter 2013 in VC deals, beating out the UK by $90m, Berlin “still has some way to go to improve raising capital for businesses during the growth phase,” says McKinsey’s Katrin Suder.

The other factor needed for Berlin to become Europe’s start-up capital is a cluster of globally significant “exits”—part of the changeover when the initial investors that take the highest risk cash in and leave. Investors are currently watching Zalando, the German equivalent of online shoe retailer Zappos that has expanded to more than a dozen European countries since 2008. Zalando reported a 52% rise in sales in 2013, to $2.4bn, and has the potential for a multi-billion-dollar IPO this year.

If Berlin does inherit the Silicon Valley mantle, the most important question remains: will tech types still be able to get a seat next to an outlet at Berlin’s already crowded cafes?

This article is published in collaboration with GE LookAhead. Publication does not imply endorsement of views by the World Economic Forum.

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Author: Holly Hickman writes for GE Look Ahead.

Image: Emma Rose of Britain (L) and Nils Westerlund of Sweden work in the office of the HowDo, a “how-to-do-it-yourself” app, start-up at the Wostel co-working space in Berlin March 18, 2013. REUTERS/Thomas Peter.