London v. Berlin: Which startup ecosystem will lead Europe?
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Berlin is catching up to London's status as the capital of European tech startups, but which will be the capital long-term? (London: CC-BY-SA 3.0 David Iliff via Wikimedia Commons; Berlin: CC BY 2.0 Robert Debowski via Wikimedia Commons)

Germany and the U.K. dominated the European exit scene in 2015, with the Israelis, French and Spanish close behind (London: CC-BY-SA 3.0 David Iliff via Wikimedia Commons; Berlin: CC BY 2.0 Robert Debowski via Wikimedia Commons)

Data shows London has the clear lead, but movements on the ground and stats show that change might be coming

Comparing two cities’ startup scenes is difficult. A number of companies use various methods and combinations of metrics to produce an answer as to which city or region or country is beating out the other. All of them, admittedly, do a fantastic job trying to assess certain metrics, but inherently miss out on other potentially influential factors.

Still, assessing which of two cities should be deemed the best of a certain region can actually be a major deal for companies looking to set up headquarters or subsidiaries in new markets. Two of the fastest emerging capitals for the global startup economy are London and Berlin. They are getting attention for different reasons, but arguably they are competing to be the tech capital of Western (or all of?) Europe.

Between 2013 and the first three financial quarters of 2014, London outpaced Berlin 187-145 for VC investments in startups (German), though that obscures (or preludes) gains for the German city. Both cities recently made headlines with outreach to the Israeli startup ecosystem — a country whose number of startups per capita far exceeds any other in the world. They were both ranked in the Top 10 of Compass’ annual Global Startup Ecosystem Ranking (London 6th, Berlin 9th). Each city has a public-private partnership organization: Tech City UK and Berlin Partner. Of the 332 European tech acquisitions in 2014 overall, Germans acquired 40 of those companies and Britons 33.

While the UK is starting to get its hands back on to the local industry after establishing virtual dominance over European startups, suggesting that it could restrict Tier 1 entrepreneur visas for startups in the next few months, Germany is loosening its grip by offering help to Israeli startups in Berlin (and perhaps more countries soon) and preparing new tax incentives for early-stage startup investments.

Some of the numbers used to compare the cities are relevant to the UK and Germany as a whole, but these cities are not just the political capitals of their countries. Here is a rundown of the major numbers that a startup might consider if they’re looking for a home base to grow in the European market.

Breaking down the numbers between both startup hubs

 LondonBerlin
Number of startups3,200-4,500 according to Compass1,800-3,000 according to Compass
Number of incubators and accelerators36 (12 incubators and 24 accelerators according to Telefonica UK)14 (6 incubators and 8 accelerators according to BerlinStartups)
Number of co-working spaces7053 (http://berlinstartupmap.com/)
Patent applications22,929 patents in 201465,958 in 2014
Average seed round$700,000-750,000$500,000-550,000
Average Series A$7.0-7.5 million$5.5-6.0 million
Average tech salary$77,508 per year$63,000 per year
Tax benefitsReduces corporate tax to 10% for profits off certain IP, 50% off first £100,000 of seed funding to British taxpayers and 30% on private and VC trust investments.Tax exemptions on seed funding to companies with INVEST startup grants. Further tax reduction on capital gains for angels and start-ups are in the works through new legislation.
Government investments4,500 euro "welcome packages" to new startups and companies relocating to Berlin.
VC invested€1.1 billion in Q1-Q2 2015€1.4 billion in Q1-Q2 2015

London: the big smoke is red hot

A41 Road along Oxford Street in London (Public Domain image by Ysangkok via Wikimedia Commons)

A41 Road along Oxford Street in London (Public Domain image by Ysangkok via Wikimedia Commons)

In Q1-Q3 2015, London tech companies raised $1.6 billion in venture capital (10 times what it was in 2010) out of a total $2.2 billion for the entire UK. The city scored $1.47 billion (£94m) worth of venture capital in the first half of 2015 alone, far higher than 2014 when it took the entire year to crack the $1 billion mark. The UK overall is severely beating Berlin in terms of scaleups: 399 to 208.

UK tax benefits are also strong. There is an R&D tax credit for companies with fewer than 500 employees worth 225% what it was in previous years. The Patent Box Scheme lowers the corporation tax on profits to 10% on development of IP, the Seed Enterprise Investment Scheme (SEIS) provides 50% income tax relief for UK taxpayers on the first £100,000 of seed funding to a company, and the Enterprise Investment Scheme (EIS) offers 30% income tax relief for private investors and venture capital trusts alike.

The Rise of the Corporate Accelerator, hosted by Wayra UK. Photo Credit: Wayra UK / YouTube

The Rise of the Corporate Accelerator, hosted by Wayra UK. Photo Credit: Wayra UK / YouTube

They have at least 36 established incubators and accelerators in London and 70 co-working spaces. There are over 250,000 tech workers in Inner London alone who on average are paid more than $77,000/year with around three years of experience. With between six and ten years experience, that jumps to $99,674/year (£65,014). Other relevant salary averages are $89,231 (£58,176) for senior data scientists and $81,572 (£53,184) for mid-level UX/UI designers.

The UK ranks 8th in the number of patents applied — 22,929 patents in 2014 — a 2.1% increase year on year according to the UK’s Patent Office. 2014 follow-up patents with the European Patent Office (EPO) total 6,823.

Berlin: the grey city seeing green

Photo Credit: Avda at Creative Commons

Photo Credit: Avda at Creative Commons

The German capital has received a lot more attention after Germany dominated venture capital investments in 2014 and early 2015. German tech companies nationwide raised $1.15 billion in Q1 2015 alone in 58 deals, with $1.6 billion for the entire first half of 2015 according to CB InsightsDLA Piper cites that more than half of the Q1 deals were in Berlin itself: The city comprises 40% of all VC investments and 55% of investment values since the beginning of 2012 through Q2 2015, with more than $3 billion in 316 deals according to CB Insights.

“Berlin’s trigger was back-to-back large exits. People took notice. While the growth cycle is similar for all startup ecosystems, for London and NY as huge business centers, it’s easier to grow,” CFO Jean-Francois Gauthier of Compass told Geektime. “But Berlin has a low cost of living, lots of artists and creative-type moved in, then startups moved into a great fun place to be. They suddenly started attracting the best people.”

Berlin coworking space (CC BY 2.0 Heisenberg Media via Flickr)

Berlin coworking space (CC BY 2.0 Heisenberg Media via Flickr)

Some of the biggest companies are Delivery Hero, FoodpandaSoundcloud, Wooga, ResearchGate, and HelloFresh.

Those numbers have continued to rise, but they are hampered by the fact that most of that money is going into later stage companies, which the Ministry of Finance announced in September would change dramatically. Tax exemptions on venture capital would begin in 2016 to companies which receive the government’s so-called INVEST grants for early stage companies, according to the German Ministry of Finance.

City Initiatives for Technology, Innovation and Entrepreneurship (CITIE) claims that the city offers various kinds of financial packages for startups worth €4,500 through its public-private tech promoting organization, Berlin Partner for Business and Technology. “Berlin provides extensive soft landing support for businesses seeking to start out, operate and expand in the city, allowing them to test out the city for a few months at minimal cost,” CITIE’s report reads.
German nationwide innovation in real terms is evident by the number of patents residents filed over the last two years: 63,173 in 2013 rising to 65,958 in 2014 according to the DPMA. This makes it 5th in the world for patents per capita, according to Bloomberg‘s 2015 country innovation index, placing it ahead of the UK’s 7th.

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