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Why Berlin is set to surpass London as Europe’s startup capital in five years

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In a previous Real Business article it was revealed that London was selected by private equity or venture capital professionals as “Europe’s most attractive cities for entrepreneurial ambitions“.

Hunter Ruthven explained: “London, on the back of prime minister David Cameron stating in 2010 that he wanted the to ‘make East London one of the great technology centres’, has amassed an enviable crop of venture capital and private equity firms, as well as integrating tax-efficient investment schemes such as EIS and SEIS.”

This belief was shared by Microsoft’s bank industry lead Richard Peers, who said: “The confluence of conditions after the harsh realities of the economic storm are bringing forth some incredibly fresh new startups”. 

By combining this wisdom with the stimulus of investment capital and the affordability of cloud and mobile platforms, he suggested that it creates “the potential for something very good to happen. And it is.”

But although London has advantages over other European capitals, it is beginning to face competition from other cities, namely Berlin.

Of course, it may be unfair to compare the two given that Berlin is much younger than London, especially when it comes to the tech scene. Some Tech City businesses date back to the first internet boom in the late 1990s. But apart from the age gap, the hubs are comparable in size.

Berlin has been one of the most talked about startup hubs for several years, but some have started asking when the city will produce an exit of global significance. Jamba in 2004 (£180m), Brands4Friends (£129m) and Citydeal (£109,) in 2010, and DailyDeal in 2011 (£109m) have been but a few. However, big valuations are hard to come by in Berlin.

This perspective could soon change, with McKinsey research revealing that Berlin startups could be generating some 100,000 jobs by 2020. This is undoubtedly welcome given that Berlin has the highest unemployment rate in Germany.

And a 2013 report by venture capital firms DFJ Esprit and Go4Venture Advisers, based on data from about $1.8bn in venture deals, revealed that while the UK led with 36 per cent of the total investment, in previous years that number has normally been over 40 per cent.

It suggests that Berlin’s startup ecosystem is still in its early stages, biding its time to overthrow rivals such as London.

Both London and Berlin provide a strong urban infrastructure and a creative dynamic market for companies. London may have easier access to venture capital and big media players, but Berlin has a small and lively community, which is still defining itself, with a lot of potential to grow. 

Geektime’s Amit Peri said: “Considering that the government (which is very active both in London and NYC) has been largely absent from the development of Berlin’s ecosystem, pretty much everything that has been happening there so far has been driven by raw, private entrepreneurial power.” 

Read more on various startup hubs:

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This was also highlighted by T Dispatch’s founders moving their company from London to Berlin. The startup, specialising in cloud-based taxi dispatching and booking software, explained that the startup hub was “even more lively than London”.

According to a Lamudi study, London’s official population is almost four times bigger than Berlin’s. Its strength lies in: commerce, education, research, tourism and not to forget it is host to one of the world’s leading financial centres.

The chances of finding a potential investor therefore is much higher and is the biggest advantage of starting up in London. For many investors, however, the location of their investment is not necessarily a deal breaker.

You can easily fly from London to Berlin within an hour – the same time it takes you to get from one end of the UK capital to the other on the underground. What every entrepreneur worries about are costs. London does not only outpace Berlin in population, but also in living costs. According to data from Numbeo, you can maintain the same standard of life in Berlin (£2,177.74) for half the price compared to London (£4,200.00), assuming that you rent in both cities. The consumer prices in Berlin are 30 per cent less, and the rental costs are almost 70 per cent less than London.

“While London offers a good foundation in terms of capital and tech support for startups to grow, it mainly lacks quality of life. Berlin, on the hand, offers both. It has a lively start-up scene, a cosmopolitan character with people from all over the world, but at the same time is an affordable place to live and start a business,” said Paul Hermann, co-founder at Lamudi.

In five months time, Lamundi claims that Berlin will overtake London.

Maximilian Claussen, a tech investor at Earlybird agreed that there’s definitely more capital available in London: “Berlin’s tech scene is smaller compared to London. What the city is still missing is one or two household venture capital firms on the ground. But what I like about Berlin is that it’s not very formal and the cost of living isn’t very high. If you look at the people who start their business here, you’ll see people coming from every part of the world,” he said. 

“The degree of people coming from the engineering and product side is getting better and better all the time, making it easier to recruit and set up a team.”

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