“Wow, Berlin, awesome. I’m considering moving there too” is one of the most frequent responses I get when I mention that my startup 1aim is headquartered in Berlin. “Such a great place to create a company.”
People just love Berlin. Especially in post-Brexit Europe, it seems to be many people’s favourite city for tech. Some even say it could overtake London as the primary European tech hub.
I don’t think so.
A great place to live (for employees)
Berlin has many positives. Everyone speaks English and there is no need to learn German. It has lots of green parks. It is highly diverse, it has an unparalleled nightlife and the German healthcare system is pretty great too. Compared to other capitals, it is still relatively cheap.
There is much to like — especially if you’re an employee. But things change when you look at it from a founders’ perspective.
A limited investor pool
There are investors in Berlin, but probably fewer than you think. Only one of the top 10 European Series A investors is Berlin-based. Also, most Berlin investors are early-stage focused. Once you go beyond seed stage, there is almost no local money left to fund you. In 2019 €5.9bn was invested into German startups, which is still only about half of the €11.1bn invested in the UK.
“As a Berlin-based founder, you can’t just hang out with a potential investor for lunch every other day.”
As a founder, you should meet with investors often, regardless of whether or not you’re fundraising at the moment. But as a Berlin-based founder, you can’t just hang out with a potential investor for lunch every other day. Instead, you have to travel to build these relationships.
Spending about 50% of your time on travelling, purely for fundraising and relationship building, is not at all uncommon among Berlin-based founders. I spent more than a third of my time travelling with 1aim. We received two acquisition offers (from the US) during that time frame — but it had many downsides: disconnecting with some key team members, too little involvement in hiring decisions and increased difficulty in managing my own teams.
A limited hiring pool for senior talent
As for Berlin startups, there’s a lot of early-stage momentum, but few late-stage success stories. Your available talent pool is affected by that.
As a growing startup, you have to hire experienced people. Let’s say you want to hire an HR manager for your growing team of 40 people. Ideally, you would want to hire someone who grew another startup from 40 to 100 people. But with few late-stage startups, such employees are rare.
“Experienced employees are rare.”
Even if you consider hiring from a large enterprise instead, your talent pool is limited. There are only a few large enterprises with a presence in Berlin. It is not considered a major German business hub, even according to Lufthansa. After all, not a single company in the DAX 30 stock index is headquartered in Berlin.
At 1aim, we spent months — and a lot of money on headhunters — looking for a vice president of sales, and were able to find just two suitable candidates.
Hiring junior talent is, admittedly, much easier. You can just hire from abroad. Many young professionals want to come to Berlin for lifestyle reasons — but convincing experienced talent to move to Berlin is much more difficult.
German bureaucracy is a pain in the ass
It may sound like a cliché, but German bureaucracy is as bad as its reputation. The German equivalent to an Inc. or an Ltd. company is called GmbH, an abbreviation for “company with limited liability”. GmbH law was introduced in 1892 and it has changed ever so slightly since then.
Just some of the problems resulting from that: When you want to change any legal document involving your GmbH, you have to visit a notary in-person. To file your annual report you need a signature from every shareholder. Any shareholder can block decisions, so a single angel investor can become a massive problem. Pooling agreements have no merit in front of a court. In addition, the GmbH has only one share class and all shares have equal voting power.
Even worse than that, a GmbH does not allow the creation of a proper Employee Stock Option programme. Virtual shares can be issued, but these are not as popular among employees. Besides, even virtual options can be subject to taxation depending on the viewpoint of the local tax office — a nightmare for employee participation. Founders are lobbying for change — but it hasn’t happened yet.
Naturally, you can just use a US or UK entity to conduct business in Germany. But even for hiring, you still need a German subsidiary, which means you’re still stuck with most of the downsides of German GmbH law.
Where should you go?
Building a large and successful startup in Berlin is not impossible. Companies like GetYourGuide, ResearchGate and Auto1 have shown that it is possible. I’m sure that the Berlin ecosystem will grow. But for now, it’s not there yet.
Instead of pretending that it already is, I’m in favour of seeing the situation in a realistic light. As a founder, you have enough problems on your plate. So if you are not bound to Berlin as a location for a specific reason, you are still better off in more mature ecosystems like London, New York or the Bay Area.
Torben Friehe cofounded 1aim, a German proptech startup, which was sold to hardware company FSB in 2019.