SoundCloud, a Berlin start-up that aims to be the YouTube of sound and music, is one of Europe’s hottest young tech companies. The company, which allows users to record audio such as podcasts, crunch it, and then share it with friends, attracted funding from Hollywood movie star Ashton Kutcher's A-Grade Fund and has just raised a reported $50 million C round led by venerable Silicon Valley firm Kleiner Perkins Caufield & Byers.
SoundCloud is the latest in a new breed of truly innovative start-ups popping up on the banks of the Spree, creating a lot of buzz around Berlin.
“Berlin has a rare combination of finance, tech, style, youth and grit to make it a fertile ground for start-ups who push conventional limits and entrepreneurs who take risks to achieve big goals,” says David Blumberg, founder of San Francisco-based Blumberg Capital. “It has the same young entrepreneurial energy that one feels in the streets, offices, gyms and night clubs of vibrant hubs such as San Francisco, New York, London and Tel Aviv."
Blumberg recently invested in madvertise, a mobile advertising start-up nurtured by Team Europe, one of a number of Berlin’s active incubators started by experienced and ambitious entrepreneurs-turned investors that identify, coach, and back young teams (See chart of Berlin incubators).
Berlin is clearly now on the map of the tech sector, competing against London and Tel Aviv to be a global hub. The city is also attracting a great deal of interest from European VCs. Among those active in Berlin, although not based there, are Atomico, Balderton, and Highland Capital, as well as France’s Seventure and Partech and Russian funds Kite Ventures and DST Global. (See chart for a list of recent investments).
“London may be the primary location for venture capital, but for early-stage investment, you have to go to Berlin,” says Paul Jozefak of Hamburg-based venture fund Neuhaus Partners. It is a view shared by Jens Munk, an M&A advisor and an investment director of CF Partners’ recently-created venture capital fund. “Berlin is a start-up play, as opposed to London which is an enterprise play,” he says.
Incubators are playing an important role in linking start-ups to capital. Springstar, an incubator founded in 2007 by German entrepreneurs and angel investors Klaus Hommels and Olivier Jung, has co-invested with Mangrove Capital at least twice, while Team Europe, founded by a group of successful entrepreneurs, has attracted the likes of Earlybird, Blumberg Capital, and Hasso Plattner Ventures as investors in its businesses.
Berlin snagged one-third of the venture capital raised in Germany in 2011. Of 270 deals in the German market totaling €920 million, 79 were Berlin-based deals worth €300 million, according to data provider Majunke Consulting. Earlybird Ventures has even moved its headquarters to Berlin, closing down its original Hamburg location. It’s rare for a venture capital investor to relocate, but Earlybird says it did so because Berlin has become by far the largest source of deal flow.
Berlin’s good exits have been, in large part, clones of U.S. companies that have been churned out by the Samwer Brothers’ Rocket Internet. Most recently it wasGroupon’s acquisition of Citydeal, which had been funded by the Rocket Labs, Holtzbrinck Ventures, eVenture Capital and Kinnevik. Its shareholders owned about €750 million worth of Groupon shares at the time of the IPO. But companies like Soundcloud are helping change the city’s reputation from one that copies to one that innovates.
“I have been very impressed with the level of business sophistication, technical talent and general business competence among the start-up entrepreneurial and early-stage investor teams I have met in Germany and Europe on recent visits,” says Blumberg. “We are seeking and finding innovative entrepreneurs with scalable, world-class solutions for business and consumer markets.”
The low cost of operations in Berlin is one draw for budding entrepreneurs. “Costs are still reasonable in Berlin for Internet start-ups,” says Olivier Sichel, a partner at Sofinnova Partners in Paris. “We’re seeing entrepreneurs from other parts of Europe move to Berlin to base their start-ups there, like Flattr and Soundcloud.”
Access to a talented, multinational, multi-lingual work force for rapidly-growing sectors including social media, e-commerce, mobile and local applications and SaaS offerings is another reason for increasing interest in Berlin.
There is a pool of graduates and interns to tap from the region’s four universities, seven polytechs, and four art schools, as well as the large number of computing and software research institutes in the area, according to DT Labs. The Fraunhofer Institute alone has 10 research sites in the Berlin area. “The talent goes to Berlin and the venture capital follows the talent,” says Lukasz Gadowski, founder of Team Europe.
The technically-trained talent is attracted to a culturally vibrant city and a life with affordable rent. “In Berlin you have plenty of available apartments, reasonably-priced office space, and access to the best and most educated people, many from Eastern Europe,” says Munk, managing director of venturecapital.de, the venture arm of CF Partners.
Also contributing to the pool is the growing number of buyouts and M&A deals, some of which forced out founders. Entrepreneurial manager-types are showing a willingness to leave established medium-sized tech companies. “There are enough experienced people to fuel the HR-hunger of the companies and enough experienced ex-employees, who want to try it themselves,” says Gadowski.
For example, the founder of online games start-up Wooga, which is now the third-largest social gaming developer on Facebook, with 34 million active users monthly, parachuted out of Jamster (Jamba), while sociomantic labs, a performance advertising start-up, was founded by a team that jettisoned out of Zanox, a €370 million-a-year ecommerce affiliate marketing company that was acquired back in 2007. And veterans from Rocket Internet are reportedly leaving the incubator to explore new opportunities. These seasoned entrepreneurs bring with them their know-how and bright ideas.
“Berlin’s Internet start-up scene is beyond the tipping point in terms of critical mass,” says Gadowski. As the rock band R.E.M. told Rolling Stone magazine, "Berlin is a pulsing, exciting city… an excellent place to set up camp and make a great record." Or, increasingly, a great Internet start-up.