As the largest economy in EU, accounting for 21.5% of the region’s GDP, Germany holds great commercial potential for big and small businesses alike. Meanwhile, the UK and particularly London remains the destination of choice for startups.
Some take it for granted that Berlin, currently considered the second biggest startup hub, will become the leading European city for tech post-Brexit. With a vibrant innovation scene and $ 1.2 billion raised by Berlin-based tech firms in 2018, this prediction seems reasonable. Yet, the two capitals present different opportunities and downfalls.
At Early Metrics, through our startup ratings and local presence in London and Berlin, we have had the chance to analyse these markets and compare the specificities of the British startup scene to the German one. Here are some key observations.
- Diversity of the market
Germany’s attractiveness mainly lies in the depth of its market with the presence of large corporations but also of mid-sized companies keen to support innovation and work with startups. Similarly to SMEs in the UK, the Mittelstand can be considered the driving force of the economy, accounting for 35% of total turnover in Germany and providing 60% of all jobs. These mid-sized businesses are particularly receptive to new processes and a large part of them have already adopted the practice of open innovation. In this context, they collaborate closely with startups as well as with competitiveness clusters.
Germany’s innovation ecosystem is slightly less mature and dense than the UK’s. When it comes to the sectors, its most innovative players as of today are in the transport space , the energy sector and in the Industry 4.0 (IIoT). In fact, E.On and Siemens Mobility have reached out to Early Metrics to assess and leverage the technology developed by startups in the fields of energy and transport respectively. Fintech is also an important field of growth, as exemplified by the rise of the country’s latest unicorn N26 – a challenger bank similar to the UK’s Monzo and Starling.
- Openness to the world
The density and diversity of the German economic tissue is definitely a selling point for startups, but what about its openness to the world? Berlin is the main hub for innovative startups, primarily due to the concentration of venture capital and private equity funds in the city. The city is generally seen as welcoming to immigrants and the government’s pro-EU stance is an effective magnet for skilled workers from across Europe.
However, the German economy is much less centralized than that of the UK and large corporations are clustered by sector in different regions across the country. For instance, Frankfurt remains the main centre for finance, the big retailers and the media are mainly located in Hamburg, and insurance players are primarily concentrated in Munich. There also stronger regional innovation hubs than in the UK. This presents particular challenges and leads startups to adopt a different growth strategy than in the UK, concentrating on penetrating the local market first, often with a regional presence, before venturing in other markets. This tendency is also reflected by Early Metrics’ startup ratings which show that on average German entrepreneurs have lower international ambitions than British ones.
Hence, Germany can’t be seen as a stepping stone to international expansion in the same way that London can. Indeed, through its ties with the CommonWealth and its cultural closeness to the USA, London offers more routes to connect with international players, attract overseas investors and enter new markets. In contrast, businesses who move to Germany are mainly interested in the German market itself, not in expanding elsewhere.
- Quality of the talent pool
It’s also due to its openness to the world that London has acquired an attractive pool of international talent. Despite not offering as many avenues for international expansion, Berlin still has a cosmopolitan, creative and skilled workforce mainly thanks to its pro-EU attitude and solid economy.
Another one of Berlin’s key attractive features, in comparison to rival capitals, is certainly the cost of life and real estate as average property prices are about half that of London. With startups always looking to keep their running costs lean, this puts Berlin in a very good light not only for recruitment but for business in general. Nevertheless, there are rising concerns among Berliners that they might lose this advantage, as evidenced by the recent demonstrations against rental price increases.
In conclusion, we believe both Berlin and London are fertile environments for innovation but for different reasons. Berlin presents many perks for budding businesses with low cost of life and potential for collaborations with a wide range of actors, from large industrial groups to family-owned mid-sized companies. However, London is set to maintain a greater appeal for startups that want to scale across the Atlantic or attract Asian investors. Whether Brexit will affect talent flow to the British capital in favour of the German one will be a determinant factor in Berlin’s place as a major European startup hub. On the other hand, the succession to Chancellor Angela Merkel, the slowdown of the manufacturing sector and recent slump in overall economic growth are all factors that could tarnish the future of the German ecosystem.
By Antoine Baschiera, CEO and co-founder at Early Metrics