Obama was in Berlin yesterday and gave what sounded like a watered down version of his second inauguration speech. It was hard to listen to the same old same old from him. But in light of his visit, I want to talk about Berlin and the bustling free enterprise taking place in that city. Much like Silicon Valley 20 years ago, Berlin is quickly becoming the destination for innovative entrepreneurs.

The Berlin Cluster - It’s The Real Thing

Berlin Wall in 1990
image source: commons.wikimedia.org

What if you were to challenge private equity managers and venture capitalists to identify the next ground floor opportunity? Which city do you think they’d pick as the one with the most promise?

From speaking with my VC friends in Toronto, San Francisco and Vancouver, the one common place where they believe ‘things are happening’ is Berlin. And startup capital is flocking to the east German city.

Before I substantiate why this city is on the cusp of entrepreneurial greatness, let’s just get everybody up to speed on what’s been going on in Berlin. Back in 1989, the repressive Berlin wall was torn down and two halves of a city, not to mention two halves of a country, were united. This overnight reunification resulted in the very definition of social and economic contrast. But that disparity resulted in some interesting consequences. Being the lesser of two halves, East Berlin had less to offer and with less, comes cheap (and a strong desire to improve).

Fast forward two decades and the demographics in Berlin have morphed into a very young, energetic and chic crowd that is accustomed to bootstrapping itself up and keeping its nose to the grindstone. In that kind of culture, entrepreneurs are born.

Hundreds of young and energetic Berliners were all looking for cheap rent to get started on their next big idea at the turn of the century, and East Berlin had what they needed.

Doing it on Their Own

There are a number of tech incubators, including ones in England and Russia, that are being coddled and funded with the taxpayer’s money. And government officials decide which ones get the green light and which ones don’t. There may be some that bear fruit, but the success ratio is poor and it doesn’t represent a free market.

Berlin (and on a larger scale, Germany), on the other hand, is taking a more free market approach than Russia and England; and no surprise, it is quickly becoming the next center of technological innovation.

To be a successful entrepreneur you have to go through the ringer. Not to mix politics with business, but the Conservatives have it right. If you let entrepreneurs struggle it out, the cream will rise to the top. This is what’s happening in Berlin. It is ‘Natural Selection’ applied to the tech business.

Kreuzberg

Soviet Union flag

It’s easy to iconisize the Berlin Wall. That wall was not only the physical tool of division, it was the boundary between repressive communism and progressive capitalism. From 1961 to 1990, almost 30 years, Kreuzberg (the new hub for tech startups) and other regions of Berlin faced unprecedented hardship as the Potsdam Agreement had carved out their lot in life as it relegated this part of Post World War II Germany into the hands of the Soviet Union.

Kreuzberg was one of the poorest enclaves to emerge after the fall of the Wall. But as this area struggled its way through post communism, it was simultaneously emerging as a hotbed of cultural activity. This development was purely organic, in that there was no effort to make it into a cultural center by government or commercial sectors. The natural forces of economics and human desire were pit against each other and, as the old saying goes, necessity is the mother of all invention. In Berlin, the necessity to elevate gave rise to some of the most promising tech companies, and more importantly it chiseled out a highly competitive and innovative culture among the entrepreneurs.

Survival of the Innovative

Tech Centers and government funded incubators around the world have constantly attempted to emulate the success of Silicon Valley. However, their very involvement, in my opinion, puts these ‘Tech Centers’ at a disadvantage and risk. After all, in order to be in a government funded incubator you must be hand picked. And what does the government know about an innovative technology idea in its infancy?

You see, Silicon Valley, the world hub for tech startups, was not a government program and there was no helping hand and subsidies and earmarked loans. Instead, it was the tenacity and the culture of the area that had more to do with it than subsidies and technology clusters. I only bring this up to reiterate my initial point that Berlin has some striking fundamental similarities to Silicon Valley. Its growth has been largely organic and out of necessity. The energy found in its people, armed with the desire to succeed and innovate, is remarkable.

Critical Mass

The Kreuzberg technology cluster has a high concentration of tech-savvy individuals and forward thinking technology companies. As a testament to their innovative and open-minds, even Bitcoin, the world’s first crypto currency, has managed to escape the harness of the Internet and enter the realm of the living. Bitcoin is accepted in many retail outlets and bars in Kreuzberg. It looks probable that this may be the first city in the world where a currency invented on the Internet becomes mainstream.

Berlin’s fame, which is fast exceeding Government funded Tech City in London, has not been meticulously planned or arduously promoted or assisted by any government agency. Its rise has been purely on the back of a bootstrapping culture.

This bootstrapping culture has now begun to reach critical mass and this is attracting world-class talent. Berlin’s organically-grown innovative culture has attracted focused minds from all over. The city is now highly cosmopolitan in that there is a diverse pool of talent that speak an array of languages. This international talent will prove to be the next phase in the further expansion of the hub, going from startup companies to full fledged developmental companies.

As talent gravitates to this city, so too are seed funding firms. Several big name venture capitalists have recognized the relevance and potential of Berlin’s emerging economy. Companies like SoundCloud and ResearchGate are just the tip of the iceberg. There are numerous companies in Berlin focusing on different facets of the connected economy. These are the masters of the new paradigm. What Silicon valley did for hardware and search, Berlin seems to be doing for mobile and cloud.

Venture Capital

This new entrepreneurial ecosystem in Berlin will organically attract a significant share of the next generation’s ideas and drive the way technology is conceptualized, designed and commercialized. Tomorrow’s disruptive technology will not come from areas we are now familiar with. They will come in a form that we haven’t imagined yet. The business of new ideas that are converted into mobile and cloud formats are what Berlin’s entrepreneurs are all about. And if there is one thing VC firms like more than money, it’s disruptive technologies.

Financing The Growth

Private Equity firms like Benchmark, the same people who identified eBay, have already invested in Berlin. No doubt, the recent high profile investment by Bill Gates in to a Berlin tech company will shed more light on this emerging city as well.

How does this all play out?

The global demand for technology-related products is higher now than it has ever been. The potential revenue numbers in the technology sector are staggering. The sheer volume of success stories coming out of Berlin is enough to create critical mass that will self-propel its growth to levels not seen since the mid 90’s and Silicon Valley.

Berlin is becoming a tech startup mecca on the verge of greatness.

Berlin’s past is far behind it now. Technology and an international pool of idea-masters have transformed this city into a hub of innovation.

Berlin’s entrepreneurs think differently than most. The culture of the city is multiplying the amount of creative thinkers everyday.

There is a whole new tech-universe waiting to be charted. To get to it, you have to go through Berlin.

Stay hungry,

Aaron