Mc kinsey & company berlin builds business


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atrin Suder, Lea Thiel and Julian Kirchherr from McKinsey & Company explain which initiatives cities need to undertake in order to increase funding opportunities for startups.

In the world of startups, the rule of thumb is that American startups raise twice as much capital in each round of financing as European ones.

For many years, European policy-makers believed there was not much one could do about this discrepancy. After all, capital follows ideas, the thinking went. If there was only more gifted entrepreneurs in Berlin, London or Paris, more funding would be available.

But does this conventional wisdom really hold true? This was one of the questions we attempted to answer in the past seven months.

To do so, a team of consultants conducted an in-depth case study on Berlin's startup ecosystem (jointly published by McKinsey & Company and the Senate of Berlin this October) which included more than 100 structured interviews with entrepreneurs, venture capitalists, corporations, policy-makers and academics from all around the world. We attempted to understand what really constitutes a vibrant startup ecosystem – and what role capital availability plays in such a system. This new study constitutes a follow-up of "Berlin 2020- Fostering Competitiveness and Innovation", our 2010 report on Berlin outlining strategic approaches to regional development for Germany's capital.

The key capital policy insights in our new study:

Capital is a startup ecosystem's most decisive asset. No young company will be scaled if only insufficient funding is available. Thus, capital availability highly correlates with a city's reputation as a startup hub.

Interestingly, there may be a lack of funding in a city despite many great business ideas, though. The root causes, also evidenced by the interviews we conducted:

First, the risk aversion of venture capitalists (VCs) is highly variable. Indeed, many studies and surveys profile investors in countries such as Austria, Denmark and Italy as "hesitators" sticking to business models with a proof of concepts, whereas American VCs with a "lower aversion to risk" are much more likely to invest in dicey business ideas.

Second, the horizon and awareness of VCs is limited. Indeed, VCs –limited in their resources – tend to only track the deal flow in cities already known as startup hubs; they may not investigate startup activities in emerging hubs because they do not expect any promising companies here.

VCs complained for many years that legal hurdles in Europe would also impede VC investments. However, a range of studies and investigations evidence that this alleged root cause does not hold true. First, investors truly interested in a startup are likely to overcome legal disadvantages. In addition, Europe continuously harmonizes its VC legislation and makes it more business-friendly. The latest European VC legislation was only implemented this July.


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Mc kinsey & company berlin builds business

  1. 1. McKinsey Berlin Berlin builds businesses: Five initiatives for Europe’s start-up hub ZPB455_Berlin gründet_131001HMB_englisch.indd 1 04.10.2013 13:05:30
  2. 2. 2 Summary Global competition among cities to attract entrepreneurs and new businesses is constantly growing. For this reason, Berlin needs to act now. As the “Berlin builds businesses” study demonstrates, the German capital has the chance to become Europe’s start-up hub – assuming it makes a concerted effort to do so. Five initiatives can strengthen the local start-up scene for the long term in several innovative focus clusters: digital tech, biotech/med tech, and urban tech. Berlin could gain an additional 100,000 jobs by 2020 as a result. To make this happen, the number of new businesses in these clusters must increase, the average dissolution rate for new businesses must fall, and start-up growth must accelerate. The strategy to accomplish this can be summarized as “focus, bundle, grow” – concentrating on a coordinated city agenda makes it possible to bundle resources and effectively foster growth. In 2010, McKinsey’s “Berlin 2020” project investigated the city’s growth potential. One of the key insights to emerge was that Berlin needs more start-ups. In “Berlin builds businesses,” McKinsey explores this topic more closely. The project’s goal is to develop concrete recommendations for intensifying start-up momentum, especially in innovative industries. McKinsey completed this pro bono effort on its own initiative, working closely with the Berlin Senate. The study summarizes the views that members of Berlin’s start-up scene shared in more than 100 interviews. We structured the interview findings and enhanced them with quantitative analyses to provide a basis for deriving our recommendations. On the road to the top, Berlin can learn from the experiences of other globally significant hot spots for new businesses. The study shows that five factors – talent, infrastructure, capital, networks, and public image – largely determine a city’s success as a start-up hub. In recent years, cities such as New York, London, and Tel Aviv have instituted broad programs to strengthen their start-up scenes by focusing on these five factors. Berlin needs to take similar steps to provide long-term support for its own innovative clusters: digital tech, biotech/med tech, and urban tech. The city already has strengths in each factor; for example, its positive image and low costs for businesses both fall on the plus side. At the same time, work is needed on four of the factors: Talent. The city’s attractiveness is an important advantage and many top talents move to Berlin. However, the interest of more students and graduates in starting businesses – especially in tech-nical fields – needs to be in creased. Furthermore, Berlin attracts fewer foreign entrepreneurs and skilled workers than other start-up hubs. Infrastructure. Berlin benefits from being a low-cost business location. Despite this advantage, start-ups in their growth phase face a lack of large, centrally located space available for rent on flexible terms. The city’s many universities and research institutions could also do more to encourage the ZPB455_Berlin gründet_131001HMB_englisch.indd 2 start-up scene. In addition, better coordination among individual start-up programs is possible. Capital. The availability of capital is crucial for strengthening the start-up ecosystem in Berlin. But structural shortages are a problem, particularly in terms of follow-on financing (i.e., rounds A/B). While interest among international investors is growing, it has not yet translated into sufficient action. Networks. The success of a start-up hub also depends on networking among the scene’s stakeholders. In Berlin, start-ups within individual clusters form strong networks, but they often lack connections to established companies and some aspects of the government. The five initiatives recommended in “Berlin builds businesses” focus on digital tech, biotech/med tech, and urban tech. Shared goals of these initiatives are to develop existing strengths, overcome present weaknesses, and concentrate and bundle the activities that are already in place. To create the necessary momentum, all five should be pursued together in a united effort. A new business boom for Berlin – getting professors and students excited about new businesses. Improved incentive systems for employees of research institutes and univer- 04.10.2013 13:05:31
  3. 3. 3 sities as well as stable long-term financing for start-up centers should improve conditions for start-ups. A “Berlin start-up curriculum” would ensure that universities’ startup-related activities are better bundled and new events could streng-then the start-up mindset. One-stop start-up agency – creating a welcoming culture. A multilingual start-up service agency should provide “one-stop shopping” for foreign entrepreneurs, helping them cut a path through the German bureaucratic jungle as quickly as possible. In the meantime, a comprehensive portal would provide a clearer view of all relevant services available from government offices and institutions. Berlin start-up campus – building shared infrastructure. A campus for digital tech start-ups should be created in the center of Berlin and established companies should also take up house there. Using the same infrastructure encourages exchange and cooperation. The former Tempelhof airport could be an attractive location. The campus could also house a coaching center tailored for companies in their growth phase, as well as a coordination office to provide better links to Berlin’s start-up centers. ideally establish a delivery unit of about 10 employees to align interest groups on the program’s goals and strategy, push implementation forward, and continuously measure Berlin’s success in encouraging start-ups. Berlin is in an excellent position to become Europe’s startup hub. With this study, McKinsey hopes to lay the path for achieving this goal. We look forward to further discussing these ideas with all those who have a stake in the startup scene and to working together to find and implement solutions. Berlin, October 2013 Berlin start-up fund – more capital for growing businesses. A new EUR 100 million start-up fund would support young companies needing capital infusions of EUR 3 million or more. Investors would be primarily sought among corporations and SMEs. To attract more international capital to Berlin, a dedicated taskforce could approach and support foreign venture capital funds. The Berlin start-up network – forging links between established companies and the start-up scene. A new taskforce, “Berlin business dialog,” would approach established companies to convince them to support start-up activities. Their involvement can take a number of forms: from locating a start-up campus in order to foster intensive exchange with new businesses to developing a cross-company accelerator. Making the five initiatives happen will not be easy: putting the “focus, bundle, grow” strategy into action will require fundamental changes. Some existing activities will no longer be necessary, established structures will be shaken up, and relevant interest groups will need steady communication to convince them of the benefits for everyone. For these reasons, Berlin needs an effective, agile, and generally accepted approach to implementing these initiatives. Following the model of London and New York, the city should ZPB455_Berlin gründet_131001HMB_englisch.indd 3 04.10.2013 13:05:31
  4. 4. 4 McKinsey Berlin October 2013 Designed by Visual Media Europe Copyright © McKinsey & Company, Inc. ZPB455_Berlin gründet_131001HMB_englisch.indd 4 04.10.2013 13:05:31