Make or Break Years and the Urban Entrepreneurship Hypothesis

Recently a lot of talk has come up about 2013 being a make or break year for the Berlin tech community. I think both sides of the notion are slightly short-sighted, so I thought best not to comment on it and let it pass.

As it seems to be hanging around, and I feel partially responsible for waving the Berlin flag in international press outfits and therefore directly contributing to the “pressure”, I felt I owe everyone an opinion in this.

So here it goes. In short: tech ecosystems don’t make or break in a year, Berlin’s tech community is way too young of an ecosystem for it to be a “make” year and there are way too many folks building and growing great companies for it to be “break” year.

Like in any ecosystem there will be key milestones of course – failures and successes – there will be good years and bad years and we’ll have to learn to embrace and learn from both. I don’t know what 2013 will be, but frankly I don’t care so much about it. I have a preference for a great year.

What I do care about is the i) trajectory we’re on and doing everything to steepen it and ii) folks having the right attitude: Its not entirely reasonable to expect a flurry of multi billion businesses 2-3 years after Berlin becoming a relevant international startup hub (has been relevant for Germany-focused companies longer), its equally not entirely reasonable to assume the handful of great businesses already built, if exited this year, would lead to the tech ecosystem moving in to perpetual motion. For the record: I am not against great exits this year.

But let’s step back to where this all started. Everywhere in the world where a few startups gather politicians and press are quick to call out “the next Silicon Valley”. Same happened to Berlin. Berlin is not going to be the next Silicon Valley. Neither is London, New York, Stockholm or Tel Aviv. Silicon Valley is going to be the next Silicon Valley, with its unique set of ingredients difficult to (exactly) replicate elsewhere.

That doesn’t mean you can’t build highly relevant – maybe one day even more relevant – tech communities elsewhere. It probably matters more that you are relevant than the most relevant. I think each community needs a unique DNA, a few things its particularly good at. I’ve collected some thoughts on Berlin in this presentation that I don’t want to repeat here.

But there’s a bigger trend going on I am for the lack of better words going to call the “Urban Entrepreneurship Hypothesis”:

  • The internet has liberated entrepreneurship in every way, also geographically. You can build and scale / distribute products and services from anywhere. E.g. Berlin: Soundcloud, 6Wunderkinder, ResearchGate, Wooga, Zalando etc are all global or very international companies, there are many more.

  • Capital is increasingly mobile. We’re invested in a Berlin based seed stage company called Moped; we (Berlin based fund) led the round and our friends from Betaworks (NY), Lerer (NY) and SV Angel (Valley) joined in. Versus.io just raised from Dave McClure and a German semi-state fund (what a combo!). This has become standard, everywhere you look the source of capital matches the global profile of these companies. This is happening as early as seed and later stage companies are finding it even easier to attract capital from around the world. And then there’s AngelList, crowdfunding, etc. If you’re on to something raising capital from some good funds from around the world is becoming less of a problem, its becoming less and less relevant where you are based

  • Key to building a tech company and a community of many tech companies however remains the ability to attract and retain top international talent

  • International, talented folks have a strong preference for inspiring, english-speaking urban environments with a high quality of life

Therefore: inspiring, English speaking urban environments that offer a high quality of life are going to become increasingly relevant entrepreneurial hubs . San Francisco, New York, London, Berlin, …. For those of you who have not been to Berlin: good luck ordering that hand brewed coffee in German. English, Swedish and Hebrew are more likely to work.

The shift to urban centres is a long term mega trend and we’re in the middle of it here in Berlin. Long term.

But back to make or break. How long does it take to build a sustainable tech community? The internet has certainly shortened cycles, but let’s just look how Berlin stacks-up in terms of maturity to other communities. The years indicate since when these hubs have been producing internationally relevant, disruptive companies:

  • Boston: 40 years +

  • Silicon Valley: 40 years

  • Tel Aviv: 20 years

  • New York: 15 years

  • London: 10 years

  • Berlin: 2-4 years

Berlin is on the right trajectory but is not going to be a miracle ecosystem, it will take time. Even on a European basis Berlin’s ‘hot’ companies are on average very young (here are some frequently listed that are a bit more advanced, but not exited yet):

  • SoundCloud: 3.5 years

  • Wooga: 3 years

  • Research Gate: 4 years

  • 6Wunderkinder: 2.5 years

  • Zalando: 4 years

The list goes on but 2-4 years is the bracket nearly all companies fall into. Let’s look at other “top” (sorry I’ve missed a ton for sure) European startups from elsewhere (same criteria – advanced but not exited yet):

  • Just Eat: 12 years

  • MindCady: 9 years

  • Wonga: 5.5 years

  • iZettle: 3 years

  • Spotify: 7 years

  • Rovio: 10 years,

  • Super Cell:  2.5 years

  • Criteo: 7 years

  • Vente-Privee: 12 years

  • Hailo: 3 years

  • Klarna: 7 years

  • King.com : 9.5 years

 

You get the picture – with few exceptions significantly older on average. Even within shortened internet driven cycles it takes time to build really big companies. It will take a long time in Berlin too.

Having said that, let’s not pretend there haven’t been any exits. Zalando’s secondary priced at $3bn, rumours have it some folks at SoundCloud were able to sell some shares at a significant triple digit million value, Brands4Friends sold for $200m, CityDeal for $1bn, DailyDeal for $100m. All this in our first 2-4 years of getting started.

These exits and the handful of companies slowly but surely inching into the really-valuable territory are our first shots, not our last shots at building great companies.

Lets have another look in a few years time.


29 Comments on “Make or Break Years and the Urban Entrepreneurship Hypothesis”

  1. Hannes says:

    very cool article, man. and i like the slides :)

  2. Lukas says:

    really cool slides, fully agree!

  3. Very much agree: A “make or break year” is stuff for pundits, not for realists.

    However, I do agree that the coming year will be a tough one, and it will mainly show that building an ecosystem takes a long time, is hard, and not always fun. In the past year(s), the same companies get mentioned again and again when it comes to the “real innovators” from Berlin. The most important thing for the community is to focus on adding to those names, building internationally relevant companies that show unique strength of their Berlin heritage.

    The foundation is now laid in Berlin: a handful of internationally successful and relevant companies with international investors. From what I’ve heard in the last few weeks, there are more (amazing) companies joining these ranks, and we need to make sure that we include them in our praises when we talk about Berlin. Another sign is the arrival of more US tech firms (from platform companies like FB and Twitter being more active, and Google helping with the Factory), the long overdue recognition from political leaders, the faster (but still comparably slow) adoption of technology in the broader population, and finally (yes, really) some relevant events with an international appeal.

    This will take years to take hold and there are few if any shortcuts. One welcome “pull” would be a friendlier local exit environment, or more active US acquirers. If the Berlin version of the pyramid of ‘founders – angels – VCs – exit’ is built both from the ground up and top down, it will be much faster. Look at London and the lobbying around a friendlier AIM listing environment for ideas.

    I really appreciate you and others taking the lead and building out the ecosystem, making sure stuff happens, and funding the great entrepreneurs in Berlin and beyond. It’s easy to sit on the sidelines and comment, but it’s much harder to get on the field and play.

    This is something a nation of 82 million head coaches still has to appreciate.

    • berlinvc says:

      As a yet immature ecosystem we sure gave a lot of folks a lot of attention that are very early in what they are building. And most early companies end up failing and this year we’ll see that happening. So I agree. What we need do then: give these folks some more money and ask them to fail faster next time. That’s all ;) In terms of local exit markets. Yes that would help, although exit markets are becoming more international. Companies like Axel Springer are beginning to “get it”, yet they are the exception. My hope for Europe is that we can play to each other strengths – i.e. Berlin companies listing in London.

  4. Travis says:

    Thanks Ciaran. Great rational summary. I’d be curious what you thought of this from a more micro entrepreneur’s side of things. In my recent conversations I’ve been hearing “make or break” from founders (whether or not they’re just drinking the Kool Aid is up to debate). I agree with Phillip that this will be a hard year for Berlin’s small tech companies and no one takes a break harder than the founders themselves. Perhaps some advice for founders when there is a negative chill to the air, how to make it through.

    • berlinvc says:

      Thanks Travis. Indeed we’re seeing a wave of seed companies that potentially the crowd (note: not the entrepreneurs) have hyped too early, needing to transition to larger Series A companies this year and not all will make it. In fact, that would be perfectly normal. Most of these companies have raised below $1m-$2m so this is a great phase to fail & move on if it just isn’t working out. So what we need to do is to encourage everyone to make tough decision and then be supportive when folks want to move on. Of course there are cases where you are on to something but it just takes a lot longer and you need to figure things out and nobody wants to pay the bill for it – well, I guess some folks will slim down a lot (back to core founder team, literally max 2-3 people) or work towards a pivot. Often when time & money is short and a sense of urgency kicks in (easier for founders than for employees – trying to create that without being too negative is key) miracles happen. My only advice would be not to drag your heels too much and accept that you may disappoint some people – that’s life.

  5. [...] at all, says Ciaran O’Leary, a VC at Earlybird who blogs under the name ‘BerlinVC‘ and who invested in 6wunderkinder. We should all chillax about the Berlin scene and stop [...]

  6. [...] Perhaps I’m a bit too excited about this recent article in The Economist, which details how many years it takes a ‘median breadwinner’ to earn $1M in various countries, but I was stoked to see France place at #8, behind most of Northern Europe, the USA, Canada & Japan. Here on the Rude Baguette, we spend a fair amount of time debunking myths about creating companies in France, and the evidence keeps stacking up in France’s favor for company creation: we’re the #3 innovator in the World, our tax & labor ecosystem is undergoing a cultural change, our Entrepreneurs are actually fighting for the ecosystem here, and France continues to top the list of European tech companies that are the most advanced, like on Earlybird’s Ciaran O’Leary in this recent blog post. [...]

  7. [...] Make or Break Years and the Urban Entrepreneurship Hypothesis « berlinvc [...]

  8. [...] O’Leary is an Earlybird partner based in Berlin and an authority on Berlin’s investment community. “Berlin is not going to be the next Silicon Valley. Silicon Valley is going to be the next [...]

  9. [...] should master (but also managing the consequences of it).  Some of these early companies may fail this year. That’s also cool. The guaranteed Schadenfreude that will come less [...]

  10. [...] a big believer you can build great companies and a tech community (nearly) everywhere. In fact it’s not a belief thing – there’s plenty of hard evidence for that across Europe [...]

  11. […] was hanging out (the google way) with Fred Wilson and we quickly got going on what is driving the entrepreneurial shift to urban inspiring environments (SF, NY, London, Berlin). We talked about a few obvious elements tech communities should have, […]

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