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How Berlin has become a centre for European venture capital

 berlin

That seemed unlikely a decade ago. Berlin had no real industrial base. Its early venture-backed successes were often knock-offs of American e-commerce firms. Risk capital was scarce. Berlin had no vast ranks of home-grown techies. In a strange way, these and other deficiencies have been strengths. Berlin has no competing hierarchy for all-important status. Paris has fashion and food. London has famous musicians. In Berlin, the venture capitalists (VCs) and entrepreneurs are the rock stars.

Berlin’s VC scene emerged in the years following the global financial crisis of 2007-09. The city had three things to recommend it. First, it was cheap. Berlin was a poor capital city by the standards of Western Europe. The only competing industry was the government. So housing and office space were plentiful. If you were part of the early wave of startups that settled in the city, you might be offered office space rent-free for several months. Second, it was hip. There were lots of cheap, cool places to eat and to meet others. Part of the allure was Berlin’s history as a bolthole for creative types, such as Bowie and Iggy.

A third factor is that Germany is welcoming to migrants. Berlin has always been a cultural melting pot. High youth unemployment in southern Europe in the wake of the euro area’s debt crisis was a spur to migration. A lot of engineers came from Eastern Europe. The Swedish founders of SoundCloud, a music-streaming site to which independent artists upload their output, based their company in Berlin, despite a vibrant scene in Stockholm. Often the working language is English, but it might be Russian or Portuguese. Plenty of people have poured in from other German cities, too. That reflects a cultural shift. A talented engineer who used to go to work for BMW or Mercedes now thinks about starting a company, says Ciaran O’Leary of BlueYard, a Berlin-based venture-capital firm.

The idea that one capital will dominate Europe is seen as an old hat. Berlin’s VC firms typically invest in startups in other European cities, which are all a short hop away. A lot of the money they deploy comes from outside Europe—from America or Asia. In Berlin, this is mostly seen as a strength, an external validation. Another outdated notion is that Berlin is a location for “shallow tech”, rather than original ideas. That is in part the legacy of Rocket Internet, a Berlin-based “clone factory”, an incubator that aped the business models of America’s online firms. But Berlin had to start somewhere, and there has since been a shift from consumer clones to tech startups that serve businesses.