Fast Times In East Berlin: Exploring Europe's New Startup Capital

It is pitch black and freezing and I am in an old, abandoned ice factory in Berlin. The view from the roof is grand - the iconic, Socialist-era TV tower nicely defines Berlin's skyline from across the Spree River. But we are here to see the art, our guide tells us, as we snake up and down staircases and through huge, empty rooms, walls full of graffiti, lit by our phones' flashlight apps.

This is the second to last stop on the "Twilight Berlin Underground Tour." I am here, ostensibly, to see art and potentially meet "people living on the fringes of society," according to the listing. We have already visited an abandoned brewery where street artists used to squat, and an old rail yard area now home to studios. Our last stop is some sort of "hacker's lair."

But really, I am here because of Berlin's exciting and exploding Internet startup scene: Gidsy, one of the better-known startups in town, helped me find and book this tour, and this is how I'm spending my last night in the city.

Berlin, no stranger to change, is having a moment right now - similar to the one that the New York tech scene experienced a few years ago and the Bay Area must have felt starting around 2004. The Berlin Wall has been down for more than 20 years, but the tech renaissance in town is fresh.

"When we arrived, there was a startup scene but it wasn't very interesting to us," says Alexander Ljung, co-founder and CEO of SoundCloud, a sort of "YouTube for audio" and one of Berlin's most successful startups to date. "It was mostly about cloning things into German versions."

"From then to now, it's just been this massive explosion of new startups that think globally and that really want to do innovative products that haven't been done before," says Ljung, 30, who has been in town since 2007 and has helped lead the change. "It's just a much more fun environment for startups now."

Why Berlin? It is famously inexpensive, for one, at least compared to other Western European cities and Silicon Valley. The average salary is about 35% lower than in London, according to a slide deck shown by angel investor Klaus Hommels at the excellent DLD conference in Munich last month. Young people are moving here. Twitter is (maybe) opening an office! The infrastructure is solid. There is plenty of office and residential space, and it's a good deal. People are creative. And they're from all over the place.

"If you look at the founding teams here, there are so many Americans, English people, Italians, whatever," says Ciaran O'Leary, a venture capitalist with Earlybird. (Earlybird is so excited about Berlin that it's moving the firm here, and plans to bet at least half of its next fund on Berlin startups.) The new crop of companies, he says, are "globally relevant on the first day, not just for the German market. That's the biggest shift that we're seeing - that teams are way more ambitious in what they're working on from day one."

And money is following. "Whereas venture capital funds sank €48 million into 64 Berlin-based high-tech companies in 2009, the first three quarters of 2011 saw €136 million invested in 81 businesses," Spiegel's Charles Hawley reported last November, citing statistics compiled by the German Private Equity and Venture Capital Association. Of the capital raised in Germany last year, Berlin received one third of it, Informilo's Valerie Thompson writes.

Like many of the entrepreneurs I met in Berlin, Alexander Ljung isn't actually from Berlin, or even German. He is Swedish, has lived in San Francisco - he is wearing a Giants baseball cap during our meeting - and was back in Europe when the startup bug bit. Five years ago, with his co-founder Eric Wahlforss, Alexander went on a quick tour of the continent, trying to figure out where to start their company: London, Barcelona, Vienna?

"I think we were here for one day, only. We got back to Stockholm in the evening and just immediately decided that we were going to move to Berlin the next week. To be completely honest, it wasn't a strategic, thought-through thing. It was really a spontaneous move. We really liked the vibe in the city here - you could feel that it was this intersection of technology and art. That's very much how Eric and I are as people and what we wanted SoundCloud to be as well. We knew that we were going to be building technology for creative people, and the whole vibe of Berlin as a city resonated with that."

And that's the thing that sticks out most about Berlin to a visitor: The creativity. Especially in East Berlin, where much of the startup scene is based. Practically everywhere you look, there's something interesting or silly going on. A stencil graffiti painting of Facebook founder Mark Zuckerberg, titled "1984." Bold and funny looking posters, plastered everywhere, announcing the week's music performances or special events. Stickers - thousands of stickers - on sign posts, trash cans, everywhere - each a little piece of art, some a little obscene. In most cities, this would all feel like disgusting graffiti. But in Berlin, for whatever reason, it fits.

That creative and design element has bled fully over to the tech boom, and many of the entrepreneurs I met had been web and graphic designers before they found enough money to build their startup. That helps the scene flourish, partly because creative people are fun. But it also means the startups have nice looking, well-designed websites - a big plus.

Edial Dekker, the 27-year-old CEO of Gidsy, is one of those designers who graduated to "founder" last year, and recently raised his first round of outside financing, with investors including the well-known firm Index Ventures and the American movie star Ashton Kutcher.

I met Dekker one morning at his office, a sunny space that Gidsy is still settling into in Kreuzberg, a historically Jewish and Turkish neighborhood in West Berlin that is rapidly gentrifying. (Even in the three years since I last visited, it feels totally different.) We took the freight elevator upstairs, he made a fresh coffee in a mini-French press, and we settled down into a conference room where Kutcher had visited to talk shop just a few weeks prior.

Dekker - also not a German, from Amsterdam - moved here 2.5 years ago with his brother Floris, who is Gidsy's chief product officer. They wanted to get out of Holland for some adventure and risk, and landed in Berlin. They couch surfed, did design work for clients to pay the bills, and eventually started working on Gidsy, a marketplace for activities and experiences. If you load up Gidsy in New York, you can take a Chinatown dumpling tour. In London, chutney-making lessons. In Amsterdam, a wild oyster workshop. And in Berlin, my "Underground" tour exploring in the frigid cold.

"Basically you come here, you have no friends, you probably have very little money. What's there to do? There's nothing much to do than just work and try to set up a business. Or you could go party... right? [Laughs.] We're way more interested in building something sustainable than partying." (They got Ashton Kutcher to invest, Dekker says, by e-mailing him a username and password to their prototype for Gidsy. "He called us the next day.")

"Things are going very very fast," Dekker says. "It's become very meaningful. People are really here to stay. There's big ideas and people are actually making them happen."

Where the Berlin tech scene gets coffee

St. Oberholz: Relatively spacious and well-known, in Mitte, expect a sea of MacBooks.

The Barn: Tiny, with great coffee and snacks. You could run into Ciaran O'Leary or local blogger/entrepreneur Travis Todd here.

CK cafe at Voo: Hidden off an alley courtyard, this cool boutique has an incredible espresso bar and a few seats and tables. Right around the corner from Gidsy and other Kreuzberg startups.

And then there are the clones: The infamous German companies that look for U.S. Internet startups that are showing promise, and then quickly (and perfectly) copy them for the German or European market. (Check out the newish Pinspire, "inspired" by Pinterest.)

The Rocket Internet brothers, Alexander, Marc, and Oliver Samwer, have been making local dupes of U.S. concepts for more than 10 years, and have gotten rich selling them to their U.S. counterparts when they're ready to go global - such as selling their "CityDeal" Groupon clone to Groupon in 2010. The amazing thing is that it really works. But it has also kept the new crop of startups an arm's length away.

"I think the clone stuff gets too much attention because it just is not a key part of the scene," says O'Leary, the venture capitalist. "You just don't see them. You don't meet them. I have no idea where they live, what they look like."

But they're not harmful, per se. "The thing that the clone factories have going for them," O'Leary says, "is that they educate a lot of people and they create entrepreneurs who then say, 'you know what, I want to do my own stuff now'. But I think their share in media is way higher than their share in the entrepreneurial scene."

Now, a few weeks since my trip to Berlin, what I remember the most is the energy and excitement. The people who were showing up from Amsterdam just for the Twitter-hosted developer meetup I attended. The Groupon-clone employee I met who now really wants to start his own thing. The sea of MacBooks at many of the cafes. The buzzing offices, with the same conversations as you'd hear in New York, San Francisco, or London.

Not everything is perfect here, obviously. It's lacking the maturity of the Valley tech scene, a wide crop of angel investors, and it's still a plane trip away from most biz-dev meetings. But in the cloud-powered, lean-startup era, it's a hotspot worth watching.

Says O'Leary, "If you look at the trajectory Berlin is on, give it one or two more cycles, four or five more years, I think it could be - besides the Valley, I don't think it's going to replace the Valley, I think that's a ridiculous notion - but it could be one of the other really cool places to found a company."