According to Local.de, a new startup is founded in Berlin every 20 minutes.[i] Berlin startups are set to independently produce 100,000 jobs by 2020. The city is home to some of today’s startup giants, including Rocket Internet and Zalando, valued at $4 billion and $5.4 billion respectively.[ii] Why the success and exponential growth? Berlin offers a highly beneficial mix of location, living costs, labor, investment sources and community support to attract ambitious entrepreneurs.

First – location, location, location! Berlin is at the very heart of Europe and is the capital of the EU’s economic powerhouse. Germany’s sustained growth has enticed a high amount of skilled workers, considerable investment and has allowed for the development of top technology university programs. It is a short flight or train ride away from most major cities. Incredibly, despite its appeal, Berlin’s living costs have remained among the lowest of any capital in Europe. According to Numbeo.com, you would need around 2,940€ ($3,722) in Berlin to maintain the same standard of life that you can have with $5,400 in Boston (assuming you rent in both cities). The expectation of startup salaries for recent graduates can be as low as 800-1000€ per month! This is approximately equal to an annual salary of $13,600.

How can this be possible? In a nutshell, the lack of a working break between Bachelor’s and Master’s degrees means that the majority of late 20-year olds to early 30-year olds have little to no working experience. Since public universities in Germany are virtually free, graduates don’t have much debt and are open to low salaries for the first years of their careers. Additionally, the Euro Crisis that broke in 2011 sent waves of young workers from Spain, Italy, Portugal and elsewhere that can legally work anywhere in the EU. The abundance of young professionals seeking an entry-level position undoubtedly puts downward pressure on wages.

These factors all play to the advantage of the eager entrepreneur. Applications are numerous and payment expectations are low. Candidates are highly educated and speak multiple languages. Rents are also significantly cheaper than other cities (Numero claims that Berlin rent is 56% less than Boston’s).

In terms of capital, Berlin attracted 173€ million in VC funding last year.[iii] Angel investors, private equity firms, family offices and private wealth management funds hover over the Berlin scene looking for potential to invest in.

Finally, the high-concentration of startups offers great support to entrepreneurs. The community can be a source of cross-pollination of talent and connections to investors. There is a constant line-up of conferences, idea competitions and networking events for founders to meet partners and garner best practices.

However, not everything about Berlin is ideal. Its typical investor profile, mentioned above, means that investments are more risk adverse and come with more conditions. Large sums common in San Francisco and Boston are harder, if not impossible, to find. Because of investors’ relative inexperience with online businesses, they often want to be much more involved in the startup’s decision-making – which can be a help or a hindrance.

Furthermore, although the size of the labor pool is attractive, the inexperience of the workforce results in high training costs and turnover. Graduates need to learn the job’s tasks, but also the basics of office conduct and work ethic. In addition, German labor laws are much stricter than those of the U.S. If not careful with the writing of contracts and the documentation of employee performance evaluations, labor can start to represent a fixed cost.

Finally, Berlin is not a business city at its core. It is a musical, art and political hub – a city known for its laidback culture and edgy attitude. It can be difficult to find business savvy recruits and build a productive working environment.

The US startup scene is slowing starting to take notice of Berlin. Just this past June, Google invested $1.3 million in “The Factory” – an incubator for tech startups. Four IPOs are expected to take place this year. While it has its own set of challenges, Berlin eagerly welcomes entrepreneurs and should be considered a real alternative to the increasingly expensive tech hubs found in the US and elsewhere.


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When I arrived at HBS more than a year ago, I had only vaguely heard of Yelp. By now, I’m a fan, using Yelp to find restaurants, check the quality of dry-cleaners and even to evaluate tourist tours for visiting friends. So while working in London this summer, I almost instinctively went to Yelp.co.uk. However, what I found out is that Yelp’s clout on the Old Continent is not yet as strong as in the US. Instead, I discovered some local competitors of which one stood out: Qype.

With Yelp aggressively expanding in Europe these days (already five new country openings in 2012), I started wondering: is Yelp wasting its money trying to grow organically or should Qype head for the exit? After some thinking, I came to realize: Yelp should try to buy Qype, rather than waste time growing organically.

Yelp (78 million average monthly visitors) is on a global level more than three times as large as Qype (25 million average monthly visitors). In Europe however, Qype claims the top dog status with having almost 5 times as many reviews and 6 times as many mobile app downloads in Europe than Yelp. [1] Qype has entered most of its European markets in 2006-2009; while Yelp has been mostly expanding since 2010. [2] [3]

As below graph indicates, Yelp is trying to copy its US success model in Europe, by investing in Community Managers who contact local businesses and thereby aim to drive exponential growth in user reviews.

This will be a challenging task in Europe however.  I believe that the online user review business is a winner-takes-all model, driven by strong cross-side network effects between local businesses and users and high multi-homing costs for local businesses to advertise on multiple user review platforms. Currently, in most European markets, Qype is the dominant player which seems to be best positioned to take everything.

Let’s look at which levers Yelp can pull to expand organically.

A first possible approach is to pick European markets where Qype is not yet active or very strong. Traditionally, Yelp has lagged Qype in entering the largest European markets (e.g. Germany, France, Spain, Italy). As a result, it had to go head-to-head against Qype as incumbent player in those markets. In 2012 however, Yelp has entered the four Scandinavian (Sweden, Norway, Denmark, Finland) and Belgian markets, where Qype was not yet officially present. This strategy could give Yelp the leading position in those markets, but won’t move the needle on the overall front as the mentioned countries only represent ~5% of the European population. Yelp, cash-rich after a successful IPO in early 2012, could also try to outspend Qype in a generally growing market. Yelp indicated plans to spend USD 15 million on international expansion. [4] This amount has to be shared however across Asia, Latin America and Europe. As a result, Qype will likely be able to keep up on spending, even though it has collected a much smaller amount of total funding (USD 22.5 million) since its founding in 2005 than Yelp did. [1]

Another approach is to offer a differentiated offering or focus on a niche of users. For example, Yelp currently cooperates with OpenTable to complement its reviews with restaurant reservations. [5] Qype could easily copy this offering however, for example by tying up with Livebookings, Europe’s largest restaurant booking platform and OpenTable’s key competitor in Europe. [6]. Yelp could also leverage its Yelp Deals (Groupon-like coupon service) offering, but recent results seem to indicate Yelp Deals is not taking off as planned and Qype has a similar QypeDeals offering already. [7]

None of these approaches seem seems particularly convincing. Instead, Yelp could leverage the one certainty of VC-backed ventures: investors want to see cash returning at some point. As Qype is venture-backed since 2005 and has had its latest VC-round in 2010, an exit to a strategic buyer could be one of the best options at this point. Yelp could also look at one of its American peers to get inspiration: eBay tried to grow bottom-up in the late ‘90s in Europe but only became the key player in the online auction marketplace arena after acquiring pan-European iBazar in 2001. [8] Last but not least, Yelp might have to hurry up, as Qype might be more willing to sell itself to almighty Google than Yelp was willing to do so in 2009. [9]

[1] http://techcrunch.com/2012/05/11/qype-the-yelp-of-europe-reaches-860000-places-reviewed-and-expands-its-daily-deals-service/

[2] http://www.sec.gov/Archives/edgar/data/1345016/000119312511315562/d245328ds1.htm

[3] http://techcrunch.com/2012/10/04/anything-qype-can-do-we-can-do-four-years-later-yelp-enters-poland/

[4] http://online.wsj.com/article/SB10001424052970203611404577044412496187308.html

[5] http://bits.blogs.nytimes.com/2010/06/03/yelp-and-opentable-join-forces/

[6] http://techcrunch.com/2012/05/13/europes-opentable-livebookings-eats-up-another-24m-from-balderton-wellington-ekstranda/

[7] http://money.cnn.com/2012/03/02/technology/yelp_ipo/index.htm

[8] http://www.macnewsworld.com/story/7676.html

[9] http://techcrunch.com/2009/12/20/yelp-walks-away-from-google-deal-and-half-a-billion-dollars/


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