Once ‘poor but sexy’ Berlin bounces back as start-up hub

When a former mayor of Berlin described the city in 2003 as “poor but sexy”, he was at least half right. Decades of division had left the German capital with high unemployment, a moribund housing market, budget shortfalls and an anaemic business sector.

Today, the picture could not be more different. Berlin’s housing market has recovered. The budget is in surplus, allowing the city’s government to plough funding into schools and infrastructure. The private sector is rich in ideas, jobs and growth capital. Berlin has re-emerged as a business hub.

This is reflected in this year’s FT 1000 list of the fastest growing businesses in Europe, 24 of which are based in the German capital — up from 20 last year. Only London, Paris and Milan have a greater share of FT 1000 companies.

Berlin attracted €3bn in start-up funding last year, according to data from consultancy EY — more than any other European city apart from London. It makes up almost 60 per cent of funding for new German companies.

Ironically, one of the causes of the capital’s upswing lies in the fact that it was — at least in commercial terms — a backwater for so long: entrepreneurs found a city with low rents, ample office space and a large pool of talented graduates. The capital became a good place to work because it was a good place to live.

That, in any case, was the conclusion drawn by Alexander and Natacha Neumann, who launched food company Erdbär in Berlin nine years ago. Both were working in the marketing departments of multinational companies before they had the idea of launching a line of healthy, organic children’s snacks branded Freche Freunde, meaning “naughty friends”.

The decision to start out in Berlin reflected above all the couple’s personal preference: “We looked at a few cities in Germany but were drawn to Berlin because of the international and creative environment,” says Mr Neumann. “In terms of the logistics and proximity to customers it did not make much sense. But we never regretted it.”

Erdbär ranks 402nd on the FT 1000 list, having grown its annual sales from €5.2m in 2014 to €26.4m in 2017. It has 84 employees, most based at the company’s headquarters in the Prenzlauer Berg district. One advantage of Berlin, says Mr Neumann, is the proximity of like-minded founders: “The start-up network here is fantastic — you can take away learnings very quickly.”

We were drawn to Berlin because of the international and creative environment

Another Berlin-based FT 1000 company is Autodoc, an ecommerce platform for car parts. Founded in 2008, its revenues surged from €37m in 2014 to €254m in 2017. Co-founder Alexej Erdle says the company was the result of a simple insight: “One of our partners was asked to pay €60 for a car lightbulb. But we knew that you could sell that same part for just €5 and still make a profit. That was the original idea behind Autodoc.”

Berlin was an obvious home. Autodoc’s founders lived there and it had a large pool of potential staff. Finding qualified workers has become harder but Mr Erdle’s optimism is undimmed. “Our goal is to raise revenues to more than €1bn. That is ambitious but realistic.”

Berlin-based FT 1000 companies with a higher profile include HelloFresh, the meal-kit start-up which topped the list in 2017, and food business Delivery Hero. Both floated on the stock market in 2017, and have respective market values of about €1.5bn and €6.7bn.

Along with Zalando, the online fashion retailer, Hello Fresh and Delivery Hero enjoyed backing from Rocket Internet, the technology investor that plays an outsized role in the city’s start-up scene.

Analysts say Berlin’s early focus on ecommerce has given way to a much broader field. “Berlin continues to be a bastion for the ecommerce and fintech sectors. But you now see a lot of activity also in areas such as artificial intelligence and blockchain technology,” says Peter Lennartz, a Berlin-based partner at EY. “Around half of all AI start-ups in Germany are based here.”

Whether Berlin is sexy or not remains a question of taste. But one thing is clear to local experts like Mr Lennartz: “We are no longer poor.”