Born to Try in Berlin: Venture Capitalism in Germany’s Rising Tech Capital

By Sarah Ouyang

Faith comes in many forms. For startup businesses planning for long-term growth and in need of sustenance, some cold, hard cash is preferred above all else.

And that’s where venture capitalists swoop in like reverse vultures who, instead of gorging on carcasses, breathe life into struggling newborns. Entrepreneurs might worship these firms for their financial benevolence, but venture capitalists are not exactly altruistic saints — thorough and adroit in calculating potential gains, they take into consideration factors such as the network and experience of the founders.

For 2010’s Berlin, this type of scrutiny became the basis of its economy, replacing the more defining business atmospheres of other European cities: chic culture in Paris, for example, or music in London. Three factors directed the V.C.-friendly spotlight shining on Berlin and pulled the city out of its financial mire in the years surrounding 2008. In fact, the global recession itself paved the way for venture capital in Berlin: the crisis left the city poor in capital and rich in opportunity. Office space was rent-free and plentiful for startups who entered the scene early in the game, since the only real competition they faced was the public sector.

Another contribution to the city’s venture capital originated from local hipsters. Influential artists, among them David Bowie and Iggy Pop, flocked to Berlin for cheap, trendy respite. This boosted its reputation in the eyes of entrepreneurs and venture capitalists alike. Finally, Germany had become a rival to America in “melting pot” status (perhaps either a cause or effect of the rise in hip culture), a development in which engineers from all over the continent were happy to partake.

Such economic and cultural shifts have designated 59% of German national V.C. investments to Berlin, rendering it a hub of possibility for tech companies. In 2019, a data report revealed startling numbers showcasing the progress that Berlin has made: startups manifesting 80,000 jobs; startups receiving 3.7 billion euros in funds; startups placing the city in 2nd place for European tech investment. The second place prize can also be attributed to the number of unicorns, or private startups valued at over 1 billion USD, created within a certain period of time.

It is essential to understand how this change has occurred in Berlin. Barely more than a decade ago, Berlin was turning itself inside out in search of industries that could set it apart from the rest of the bleak crowd, envying Paris and London for their glittering cultural je ne sais quoi. The desperate scramble for economic progress led to some “knock-offs” of American e-commerce. One such “shallow tech” company, Rocket Internet, left behind a legacy of unoriginality and misfortune that lasted until Berlin decided to concentrate its efforts on tech startups rather than “consumer clones.”

Foreign startups also peak the interest of Berlin’s venture capitalists, who see profits made from companies in faraway lands as an “external validation” of sorts. The richness of the city’s risk capital has diversified the focuses of its V.C. firms, expanding beyond simple, safe ventures to projects that might have universal benefits — a definite step forward in the morality of venture capital. For instance, June Fund partner David Rosskamp proudly describes an increase in funding towards “the agricultural world… [in response to] a large need, and an equally large economic opportunity in digitizing these flows, in providing transparent access to agricultural supplies and in empowering millions of small-scale farmers. So June has invested in agricultural trading networks from Europe to Africa.” Berlin has thus been near-flourishing in V.C. pursuits and tech advancements.

And then the coronavirus hit.

With the current pandemic exacerbating an economic crisis of our own, the United States is, as General Washington was according to Lin-Manuel Miranda, “in dire need of assistance.” More than anything else, the country needs an understanding of the situation in order to further analyze the best paths to recovery. Whether by following role models or avoiding worst-case scenarios, watching trends in other countries appears to be greatly important for a successful return to normalcy.

The problem is, experts are not quite certain whether Berlin is the former or the latter. Speaking from a rather humanitarian perspective, Germany is a clear example to follow for its relatively low percentage of COVID-19 fatalities, courtesy of Chancellor Merkel’s precise and effective handling of the virus.

On a fundamentally economic level, however, virus effects in Germany leave observers skeptical. Investment level decreases have been drastic, especially when compared with the fairly more fortunate European cities such as Dublin and Amsterdam. The vast range of different level changes is astonishing: while Zurich has seen a 98% increase in investment levels since the previous year, Madrid’s levels have dropped 69%. Berlin is on the devastating side, with a 51% drop in investment. NGP Capital partner Bo Ilsoe attributes this to Germany being “more conservative and more prudent in reigning back spending” while the pandemic unleashes its claws on German businesses. Others, however, present optimistic outlooks: Berlin is less expensive to operate in compared to other tech hubs, including San Francisco, so many V.C. firms are not too worried for the long term.

The impacts of the coronavirus on society have also reshaped the process of venture capitalism. Firms have begun encouraging clients to “focus on extending the runway both by increasing capital efficiency as well as taking on additional funding.” Different industries have been impacted differently as well. With the communications industry consolidating into an “oligopolistic market structure” featuring Zoom and Google Meet as its two lead stars, Berlin V.C. firms are wary about prospects for startups in the technology sector.
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In any case, the city’s progress of the past decade cannot be ignored. There remains still a considerable amount of hope for startups in the German capital city. And where there is hope, there is venture capitalism. Or is it the other way around?