Paris & Berlin – The tale of two cities (Part 2: The Startup Ecosystem)

May 24, 2012
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In last week’s post I compared Paris and Berlin from a macro-economic and historical perspective. This time I want to share my analysis on the start-up ecosystem. My conclusion upfront: Paris has a very active start-up community, but Berlin wins the battle. See why below:

Paris is the world’s capital!

Paris is the world’s most visited destination – but only for tourists. Paris is not attracting foreign people to start their business. Or to quote Marc Simoncini, one of France’s most successful web-entrepreneurs: “Seen from abroad, France is the last country an entrepreneur wants to go“. And this is despite the fact that the country does a lot for entrepreneurs; take the status as auto-entrepreneur or as JEI (Jeune Entreprise Innovante[fr]) as examples, or look at the possibilities to have a tax credit for your R&D spending (Crédit Impôt Recherche), subventions by OSEO (a public institution) amongst many more options to get help in France. But the perception remains that France is an expensive country, where labor laws are complicated and tax rates discouraging. And to be honest: all that is true. France has this love-hate relationship with entrepreneurs: first there are incentives trying to seduce you, then once you start getting traction, French laws and regulations squeeze you. For non-French citizens this must seem very odd, and Paris as start-up capital clearly suffers from that image.

“Let’s get it started” is not the problem

In Paris and Berlin you have programs such as Seedcamp, The Founder Institute, you see co-working spaces popping up here and there, Start-up weekends, Ignite and various other competitions like HackFWD or Start in Paris taking place. In addition, accelerators & incubators cover the two cities, like Le Camping or l’Accélerateur in Paris or Make-a-startup amongst several others in Berlin. Each one of those initiatives offers a great way for entrepreneurs to get started.

But the real problem is not to get started. The problem is: what comes after you have started and have to step-up to the next level after “incubation”. In the figurative sense, the most important question is: in which environment do you grow up, spend your childhood, adolescence, become adult, then create your family and finally give back to the community. It’s that environment that I call the ecosystem. It’s a community of different actors composed of entrepreneurs, finance, media and the corporate world and representing different generations. Knowledge sharing is what makes communities progress and become smarter.

I know entrepreneurs in Paris and Berlin, and without a doubt, there is an incredible energy and passion in both cities. I don’t buy the argument that European entrepreneurs lack ambition. Germany and France are almost equal-sized markets, entrepreneurs are suffering from the fragmentation of the markets and thus the fact that going from your home market, to your neighbors’ markets and then to the US (aka global) is a long process. There are more traps to fall into, and getting traction is slow and thus disruption more complex. This is where a strong ecosystem can help the entrepreneur deploy his resources at the right time in the right market.

Stefan Jørgensen, Danish entrepreneur who lives in Berlin explains it very well in the video which is part of this GigaOm post. When I met with Stefan two weeks ago he left no doubt about global ambitions. He has chosen to “grow up” in Berlin, like many others, because that’s where he currently finds the best ecosystem in Europe. It beats Paris and any other place for one simple reason: it is open and connected.

Non French VCs don’t invest in France

Let’s look at Paris first: About one year ago a VC from Germany, former investor in my company, asked me why they can’t find the right project to invest in Paris. The explanation we came up with was that because of French tax laws the valuations in France could be higher than in other countries. I don’t believe that it explains the situation entirely. Funding decisions don’t always follow rational criteria such as valuations. Is it the quality of the teams? I don’t believe that Paris has lower quality teams than Berlin. France has proven to have great engineers and visionary managers. Also, Parisian start-ups get funded as soon as they expand and go beyond France; take Blablacar and Accel, or Vestiaire Collective and Balderton, just to name two recent examples. But still the non-French VC investment level in France is very low, and as far as I know, no foreign VC has established an office or some sort of presence in France. On the opposite more and more non-German VCs set up offices in Berlin.

The fact is, VCs don’t even bother because Paris has a closed ecosystem. It almost seems that it doesn’t want people from the outside to participate. In my view, this is a huge image and perception problem that Paris has to deal with. Most start-ups don’t get visibility outside of France and thus the start-up community abroad doesn’t know about business-opportunities in Paris. France has high profile evangelists outside of the country, but they don’t operate in a coordinated way to promote Paris. Yes, there are serial entrepreneurs like Loic Le Meur in Silicon Valley, who does a lot for France. No doubt about it. When Loic organizes LeWeb conference in Paris the world’s web-spotlight is turned towards Paris, right? But the vast majority of speakers are from the US and the audience is over 50% international. Unfortunately after the conference is over everything goes back to where is was before. It reminds me of Versailles, the city where I live: 12 million tourists come every year to visit the castle, but nobody stays here overnight. Isn’t that crazy?

Other high-profile personalities include Marc Simoncini, Jacques-Antoine Granjon and of course Xavier Niel. Given their enormous success in France they would deserve to be better known internationally, but seriously, who knows JAG, as he is called, outside France. Then there is Fabrice Grinda who also has an impressive track record as entrepreneur and angel, but his focus operating out of North America is emerging markets, not France. There are more examples of successful entrepreneurs, like the Rosenblum brothers who founded Pixmania, Oleg Tscheltzhoff who founded Fotolia, Pierre Chappaz who built and sold Kelkoo just to name a few, but there is nothing that brings them together and makes Paris shine as the start-up capital that it would deserve to be, especially compared to Berlin. Paris’ ecosystem is closed and doesn’t get people to move to Paris to enrich it.

Berlin has the open and connected ecosystem

Berlin on the other hand does a much better job in marketing their ecosystem. At Next Conference there was hardly any speaker from the US. The entertainment value of the conference was certainly not comparable with LeWeb’s show in Paris but the speaker line-up was still very good at Next. It gave the opportunity to German start-ups, of which many were Berlin-based, to have air-time at a pretty decent conference and speak about their real experience and share relevant information. Given that the conference only had its second edition this year you can expect an even stronger impact in future editions. I believe that this event over time will have a higher sustainable value for the Berlin ecosystem than LeWeb has for Paris’ start-ups.

The conference itself doesn’t make an ecosystem, but it demonstrates coherence amongst the actors to share their experience and shows openness. I spoke to some European VCs from the UK or Germany who came to Berlin because they already have investments in the city or because they were trying to spot talented teams. The Next Conference happened during the Berlin Web Week, which is a very clever move to group events in the same week to provide as many reasons as possible for the ecosystem to get together in Berlin. (yes, there are many parallel events during LeWeb in Paris … but see my earlier comments)

Earlybird, a Munich-based VC launched a $100M Berlin fund recently and relocated its secondary office from Hamburg to Berlin to be closer to the ecosystem. Listen to EarlyBird’s Max Claussen interview. And they are not the only ones to turn their attention to the German Capital. Every major European VC, if not present physically in Berlin, travels to the city minimum once a month, if not once a week for some.

I also met with French VCs who were attracted to the Next Conference (note: they could justify the absence from France because May 8 is bank holiday). One even said that “last time when he came to Berlin, there was a wall!”. OK, so that was probably over 25 years ago. It’s stunning how poorly connected two of the main ecosystems in Europe are, and Berlin just steals the show.

I can only think of few exceptions that are worth mentioning: Partech is the only French VC with a regular presence in Berlin and investments in Germany and then of course the hyperactive Kima Ventures, who is considered French but operates out of Israel. Thanks to its enormous network Kima seems to be part of almost every promising early stage deal in Europe right now. Other French VCs are either accidentally in Berlin or got lost in translation.

Like everywhere there are different generations of entrepreneurs. But is appears that the Germans have a greater sense of community: The 2000 – 2005 generation that turned VC or incubator, the 2006 – 2010 generation that is on the journey to become the next global success and the 2011+ generation that is still in its infancy. They all benefit from each other and even when they are spread to other places internationally, they converge to Berlin during this Berlin Web Week. I would not go as far as pretending that it is perfectly orchestrated, but it all seems much more natural than the knowledge sharing that takes place in Paris amongst all those generations.

Berlin is hip, Globally

No doubt that Berlin gets a lot of hype right now and the start-ups benefit from some Berlin-credit, even beyond the typical web-community. Ashton Kutcher has invested in a fews start-ups in Berlin, which besides the gossip it generates also enforces the image of Berlin as the hip place in the USA. Thus, one comes to the other and motives the local community to surf this wave.

In France we have essentially French blogs or press to talk about start-up news. You all know Frenchweb, Journaldunet, Presse Citron and some others. The RudeBaguette is the exception, in English for a good reason, trying to address the audience outside of the country. Berlin has a number of blogs that are focused on the local start-up scene: in German language you have Deutsche Startups and Gründerszene, in English you have Venture Village or Silicon Allee and even in French you have a blog called Berlin Maniacs. Speaking about openness and spreading the news, that is the way to go.

Paris used to have “le sentier” as center of start-ups during the early 2000, but now because of high rents and rare spaces entrepreneurs are spread all over the city. Berlin still has this closeness. Many start-ups are located close by and can visit each other very easily with, in its center, the well-known cafe St. Oberholz, offering free Wifi and power-plugs on both levels of the cafe. It’s so easy to get around in Berlin that some people even organize “Start-up tours” through the city on Friday at 6PM. For quick meet-ups, sharing of insights or to meet the bloggers who will distribute your announcements to a larger audience, this is perfect. Paris has La Cantine, but it doesn’t quite work in the same way.

Berlin has its Rocket

Finally, you can’t talk about Berlin’s ecosystem and not mention Rocket Internet, the infamous “incubator” created by the Samwer brothers. There are other “real incubators” that would be worth mentioning, and I’ll keep this for the third part of the tale; here I focus on Rocket.

Not one day goes by when there is not big news breaking about Russian, Swedish or American billionaires investing into their fund, the copycat-farm launching a new clone or any of the Rocket haters bashing on the military style and reckless corporate culture of the Rocket founder trio. The news flow generated by this incubator and their teams remains without comparison in Europe. They are playing in a different league and can stand any comparison to the most prominent programs in the US. Rocket is unique in many ways and like it or not, it’s a key element of the ecosystem.

The people who work for the Rocket companies aren’t start-up founders in the common definition. They are either just staff or they are managers. In some way Rocket has applied the principles of large investment banks or consulting firms to a new sector. They created a very dynamic environment where people work under high pressure, can earn performance based incentives and climb up the hierarchy even with just little professional experience … or leave the company. It’s the up-or-out principle known from McKinsey, Bain or Goldman Sachs.

People are employed with decent salaries, but they aren’t co-founders nor shareholders, they work hard and are measured and managed by numbers and benchmarked every day, as I was told by managers who work for Rocket companies. They have industrialized the process with central back-office functions providing support across the projects and allowing the managers to focus on running the shop. Instead of having entrepreneurs, they have MBA graduates managing the business, hiring, firing and achieving targets. To understand how numbers-driven the Rocket philosophy is, watch the video from its former Rocket CEO, and now ‘Project A’ founder Florian Heinemann.

This model is fundamentally different from traditional incubators, yet it has been essential for the development of the Berlin start-up ecosystem. How did it matter since it’s not about entrepreneurs? It has generated many jobs inside Berlin in this sector, educated people to excel in execution, generated knowledge and built confidence that it is possible to run an international, even global company from Berlin. It’s been said that Rocket is building sites in places like Nigeria and some other exotic countries. No need to be American to be global.

If you have read the post all up to here, then you can guess my conclusion: Paris has a lot of talent, but is too French to be considered relevant on an international scene. Let’s forget the Genome report that places Paris #11, well ahead of Berlin. Paris suffers from a communication and image deficit. In the latin style, there is and will continue to be a lot of creativity and inventions, some will emerge and then move abroad to start global expansion. For me it’s only a matter of time until a French start-up prefers to go to Berlin instead of London or New York to set up its international operation. Berlin is attracting  more talent and capital, and it creates jobs and a pleasant lifestyle. It doesn’t have exit-doors for start-ups yet (neither does Paris!), but maybe it’s also a matter of time until these doors open up, because they have very good connections to international markets.

Stay tuned for the third and last part of the tale: what are the trends ….