Continental Drift

Brexit – and now?

Brexit poses a big opportunity for European cities wanting to attract startups. If Berlin wants to profit from Britain’s brain drain, it must stay cheap, livable and open.

When Britons voted to leave the European Union, they unwittingly handed an advantage to the cities on the continent. Brexit – a horror scenario for the entire European economic zone – would nevertheless create endless opportunities for startup locations like Paris, Berlin, Amsterdam and Stockholm. Even if the British government is not in official talks with the EU about the country’s departure, one thing is clear – ever since the vote, the startup capital of London has been facing tougher competition from other cities in Europe for talent, ideas and innovations.

As Europe’s most important financial center, many of London’s advantages will remain even if the UK does leave the EU. There are good reasons why the British capital provides the current headquarters for some 275,000 startups. If anything, London, with its business-friendly tax laws, will be able to offer even bigger tax breaks in the future.

A tempting time for Berlin

The country’s new prime minister, Theresa May, is well aware of the importance of innovative new companies. A few weeks ago she underscored this fact at a meeting at 10 Downing Street, where she addressed representatives of small and medium-sized enterprises: “From dynamic startups to established family firms, our small and medium-sized businesses are the backbone of our country.” She added that the UK would never be fully cut off from the European market.
But at the moment, with the conditions for the UK’s departure not yet negotiated and the consequences unpredictable, it is a dangerous time for London and a tempting one for Berlin. The battle to be seen as the most fertile ground for startups is underway. Fearing legal uncertainties, more and more investors may simply keep their money out of Britain, or invest it in cities that have a more predictable political and economic climate. When investors hesitate, startup companies get nervous. New companies in particular rely on cash and trust from investors in order to grow quickly in a competitive environment.

Attracting smart people

London may also be facing an uphill battle to attract the smartest minds and best ideas. The government has yet to answer the question of how tightly it will restrict immigration in the future. But at the very least it seems that freedom of movement for workers from the EU will come to an end in the foreseeable future. More than half of those working at startups in London come from outside the UK. Many interpret Brexit as the UK saying “You are not wanted here!” Smart people are thinking of packing their bags.

British startups are welcome

Straight after the vote, many London startups made the call to Berlin to ask about the pros and cons of a move to the city on the Spree. Berlin Senator of Economics Cornelia Yzer reported that more than 100 companies had made enquiries by late July. “There was a real flood of them at the start,” says Stefan Franzke, manager of Berlin Partner GmbH. Franzke’s public-private partnership comprises the Berlin Senate and more than 270 enterprises while offering support for companies of all sizes and shapes, but especially for startups.

Other cities such as Paris are also looking for a slice of the pie. Valérie Pécresse, the councilor of the Île-de-France capital region, sent out 4,000 letters to British companies as soon as the referendum result was announced. Her words were blunt: “The battle of the cities has begun.”

In Berlin it seems that the early euphoria has faded. Stefan Franzke claims that interest has waned. And he never called it a battle to begin with. “The startup scene is far too internationally connected and interdependent for people in it to want to hurt one another,” he says. But there are eight companies making concrete plans to move to Berlin, he adds. According to Franzke, many are in fintech, or finance technology, specializing in transaction technologies to ensure the swift and secure flow of money around the world. Banking apps are just one of many fintech fields. BrickVest, a British-German property investment startup, has officially announced that its headquarters are moving to Berlin. But the online platform will continue to be run from its London office.

Enormously valuable

For the moment, Berlin as a business location appears to have been weakened rather than strengthened. According to the Ernst & Young startup barometer, the German capital is ranked not number one, as it had been in the past, but only number four, with investment volumes of €520 million. London is back on top with investments of €1.3 billion, followed by Stockholm, which attracted a cool billion, and Paris, at €673 million.

Yet this is just one snapshot of Europe’s financial development. One-off deals bringing a big investment to a single company – as was the case with Spotify in Stockholm – can make it seem that the location overall is enormously valuable. Yet the number of financing rounds must also be considered, for they show how many startup projects the investments are distributed across.

In 2015 Berlin was well ahead of London in terms of these financing rounds. Investors put money into Berlin startups on 205 occasions, compared to 132 for London startups. In the first half of 2016, however, Berlin was no longer number one; with 117 financing rounds – including an estimated €62 million of investment in the Soundcloud music platform – it came in at number three. Paris topped the list with 178 rounds of financing, followed by London with 157.

What has to happen for Berlin to get back on top? After all, the German capital is home to more than 6,000 startups, including around 100 fintech companies.

Don’t think too small

Chris Bartz, is a venture partner at FinLeap, one of Europe’s key fintech firms, and chairman of the FinTechs, Insurance & Banking Innovations working group at the digital industry association, Bitkom. “Here in Germany we mustn’t think too small when it comes to financial technologies,” he says.

He compares Germany’s current digital economy with how it looked around the year 2000. Back then, no one managed to establish a German Apple, Facebook or Google. “My first smartphone was a Siemens. No one talks about Siemens in that context any more,” Bartz says.

He does not want to see a repeat performance. “There’s a good chance right now that we will end up empty-handed once again, and it’s up to us to change the situation.” He points out that digitalization has led to an enormous shift in the value-creation chain. Bartz believes we need more political will so that we are not too content with what appears to work well enough. “We have to stop being so complacent and instead realign ourselves according to the current state of the technology,” he says.

Bartz talks about the discouraging effect German laws can have. For instance, there are rules stating that two parties in a contract must be face to face when the contract is signed. This can often be exceedingly impractical when it comes to digital processes, he says. Bartz sees it as Germany’s task to push forward further unification of the European market. “Brexit will hurt everyone in the long run, even if startup cities benefit in the beginning,” Bartz says, because it is ultimately essential to have uniform rules and a long reach, without borders or barriers.

But he believes Berlin is on the right path. “A city’s feel-good factor is more than just a fringe benefit,” says Bartz. The framework has to be right not just for the entrepreneurs, but also for employees and their families. With its international outlook, welcoming culture, openness, freedom, well-trained IT technicians and affordable cost of living, Berlin has got it all. According to Bartz, entrepreneurs ask themselves two primary questions: “Where can I get the people I need?” and “Where do I myself want to go?”

Text by Bastian Brauns | Originally published in Berlin Times 2nd edition 2016