Berlin outranks London in start-up investment

A new study confirms Berlin is the start-up capital of Europe but for those responsible for the sector's success it is no time to rest. EURACTIV's partner Tagesspiegel reports.

Interest rates are at historic lows and the markets are going haywire. Conditions could hardly be better for entrepreneurs in search of investors, according to a recent analysis conducted by the consulting firm Ernst & Young.

With €1.9 billion in contributions, private sponsors and investment funds have invested more in start-ups within the first 6 months of 2015, than in the entire previous year (€1.6 billion). The amount is almost four times that in 2013.

More than one billion to Berlin

According to the study, €1.4 billion in funding went just to start-ups in Berlin. As a result, the German capital took first place among European competitors – clearly ahead of London.

In the British capital, which is considered a key financial centre worldwide and also boasts a strong start-up-friendly environment, investors pumped nearly €1.1 billion into young businesses within the first half of the year.

"We have always said we want to take the top spot from London and we have done it," Berlin's Senator for Economics, Cornelia Yzer told Tagesspiegel. "The latest numbers confirm our course, nurturing and cultivating the start-up scene in the interest of the city's economic momentum."

For the study, the consulting firm surveyed founders from 181 German start-ups and examined investments with risk capital throughout Europe.

Apart from Germany, researchers indicated the start-up scene is experiencing an upswing all over the continent. €6.5 billion in venture capital has already been invested in the first half of this year, compared to a total of €7.6 billion in 2014.

High risk tolerance among investors

Risk tolerance among national and international investors is higher than it has been in years, said Peter Lennartz, a partner at the consulting firm.

"With the current level of market volatility and the persistent low-interest phase, young, dynamic businesses serve as an appealing alternative for investors."

The fact that the Berlin start-up scene is getting ready to beat London for the second time in a row on investment levels – Berlin already pushed ahead of London last year (Berlin: €882 million, London: €833 million) – is indicative of growing confidence, experts say.

"More and more young businesses are demonstrating that they can help shape the future, especially with the radical changes related to digitalisation. This develops trust among investors," Lennartz indicated.

Last year, two of Berlin's internet-based companies, Zalando and Rocket Internet, attracted international attention when they went public.

Consultants warn against too much euphoria

But like authors in similar studies, the business consultants at Ernst & Young advise against excessive euphoria. Financing is still the biggest challenge for local start-ups.

There is no "real venture capital structure that can be put into action in very early phases of business development," said Lennartz.

"I see this as a warning sign that the conditions for venture capital urgently need improvement," said Senator Yzer. She has introduced an initiative to this effect in the Bundesrat, Germany's upper house.

But to leave London behind in the long-term, she said, more attractive basic conditions are needed to win over investors.

More public funding could fill this gap, says Peter Lennartz. Outside capital, from investment funds or from private sponsors, is especially important for start-ups, because it helps them grow faster, he pointed out. In this way they compete with companies from the United Kingdom or the United States.

Not long ago, a bill from the German Finance Ministry on this issue caused an uproar among entrepreneurs and capital donors.

Finance Ministry wants to reduce taxes on investment in start-ups

Up until now, investors who sell free floating shares to corporations at a profit have remained practically exempt from taxes. In return, the seller cannot simply pocket his profits but must invest it in new businesses.

In the future, the bill plans to boost profits themselves with an additional 15% if the seller can prove reinvestment. The ministry's offer: whoever invests in start-ups receives a 30% tax reduction.

However, recent protests from within the Grand Coalition are casting doubt over whether the measure could ever be passed. The bill is planned to be put to a vote in the first half of 2016.