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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Last year I decided to found my own tech start-up.  MBA alumns with whom I connected advised me to recruit a technical cofounder early on in the process. At that time, I had some general knowledge about coding and software development. I had completed some basic assignments in C++ and Java.  “Hello World” was the most advanced coding exercise I had undertaken. Clearly, I was not an expert. Since my business was the usual technical start-up that required the creation of a phone application, I had two choices: develop the app myself or look for a technical cofounder. Like most non-technical cofounders, I opted for the latter. This is where my story begins, just two months into my MBA career.

The idea I was looking to develop was one I had envisioned long before starting school.  I had discussed the idea with a number of experienced entrepreneurs and friends. The overwhelming response was very encouraging and I was determined to spend as much time as I could to develop this idea. In fact, I was almost convinced that my business will be so successful that I would drop out of school

So how did I look for a technical cofounder? What strategies did I adopt? What are the key lessons I learned from my experience?

I wasn’t interested in outsourcing my work as my idea was tech heavy and required ongoing technical work. I also wanted a flexible option and a technical person with whom I could partner to meet advisors and potential investors.

First, I posted on a number of online websites that specialized in connecting cofounders. Browsing through these websites, I discovered that the majority of the people who posted were also looking for technical cofounders. Not surprisingly, I haven’t received a single response from anyone after almost a year.

Second, I proactively searched on linked in for potential technical cofounders. I was more successful as I was able to talk to two people who had prior coding experience. One of them was really interested in the idea and we eventually met in person.  We worked on the idea for almost a month and then he suddenly disappeared. The last message I received from him was about an emergency situation and I never heard from him again.

After that experience, I decided to visit the “headquarters” of technical cofounders: computer Science departments at local colleges!  I created fliers to post, and visited 4 major schools in Boston. On one of my visits, I met a faculty member who was not at all impressed with my pitch or my fliers. He told me that he sees 5-6 people like me every week looking to hire technical cofounders. It’s been a year now and no one really called.

This experience has taught me a number of lessons:

Lesson Number 1 – Be Humble

You may have heard this phrase many times but it’s not as easy in practice as it sounds. Sure you have an MBA degree from a prestigious school backed up by 4-5 years of experience. You may have negotiated the most complicated business deals, developed the most interesting sales pitches or created the most sophisticated financial models, but none of these qualifications help create a web application. During my quest to find a technical cofounder, I was genuinely humbled by watching 19 years old Computer Science students compiling open source data and creating some state of the art technologies in less than 24 hours at “Hackathons”.

Lesson Number 2 – Meet everyone in person

It’s nearly impossible to find technical cofounders online. You may find random people who have some technical experience but you won’t find the right people who are passionate about programming. You certainly won’t find the real passionate coders looking for a job on a random “find technical cofounders” website. I believe the best places to meet avid programmers are hackathons, CS classes and local coding events.

Lesson Number 3 – Build relationships

Finding and selecting a technical cofounder is not something that happens overnight, it’s a lengthy process. Even if you are eager to recruit someone, patience is paramount. I believe that it is critical to build a relationship with the person. Learn more about his or her experience, past accomplishments and current interests.  Try not to  mention your business idea on your first session and avoid sounding too eager to hire a cofounder.  Also, don’t overemphasize your MBA degree. It probably won’t make a difference to a young programmer.

Lesson Number 4 – Build a prototype

Create the design of your app/website/software.  You can create a static website using many tools available online and very easy to use. There are a range of design programs that you can use to create your MVP (Balsamiq, Bubble, and Appseed all convertyour sketches into app prototypes). This is a great way to show commitment beyond just pitching an idea that only exists in your mind.

Lesson Number 5 – Learn to speak the language:

Similar to when you travel to a new country, you should know at least some basic phrases to be able to communicate. Try to learn the basics of coding and characteristics of each language. It is important to spend some time researching general programming tools, differences between front and back end, APIs and when/how to use APIs. In fact, you can go online and search for potential APIs available that may be helpful for your business. You won’t be a coder in a couple of months but you will certainly be able to impress a technical person and make him more interested in your business.

It’s been a year since I started my journey. The business is going well. I have recently partnered with a CS student from University of Michigan whom I met at a recent Hackathon event. We just started work on creating the back end of our website. In my spare time, I am learning Rails and some other programming languages. Every week, I spend at least 2-3 hours reading about new languages, APIs, integrations etc.

Although, I am still at the beginning of my journey, I feel like I have learned a lot and I am certainly more confident about my technical capabilities.


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Now’s Your Chance, Take It: The International Opportunity For Early-Stage US Start-Ups

It is a regrettable fact that despite the large number of innovative start-ups packing their bags and flocking to Silicon Valley from all over the world, movement in the opposite direction is significantly slower and more risk-averse.  By the time internet successes find the bandwidth and resources to look abroad, clones abound, valuations have skyrocketed and the original companies are held for ransom, as a few of my fellow Online Economy bloggers have pointed out here and here.

When it comes to the question of whether to shore up your domestic foothold or to expand internationally, the answer is yes… do both.  Building an international presence has become more and more valuable as the world has gotten smaller through the presence of and society’s growing engagement with the internet.  Populations today are mobile, knowledge is fluid, and global brands have weight.

International expansion provides revenue growth and cost efficiency opportunities, as well-built technology platforms can be scaled and initial learnings applied.  While cultural differences certainly exist and expansion of any kind is by no means easy, there is a reason why Apple products are valued the world over and the list of top mobile apps is more similar across geographies than dissimilar.  If what you’ve got is good, customers will want it, no matter where they live.

International growth can also be defensive.  When markets go south in one country, customer diversification provides stability to weather the storm.  Presence in a market can prevent copycats from outmaneuvering you, both internationally and in the original domestic market.  And at the end of the day, probably the most compelling reason of all, going international first prevents you from having to suffer the ignominy of paying some copycat tons of money for stealing your idea.

Good or bad, internet clones are a fact of life.  Little legal recourse is available to those whose ideas have been robbed; litigation is costly, time consuming, distracting, and unless the copycat is 100% identical, there is little chance of winning.  In 2009, Facebook sued StudiVZ, its German clone, for intellectual property theft and went nowhere; the judge had no sympathy even for alleged source code stealing.

And while some may argue that the acquisition of copycats is an excellent avenue for international growth (most fervently put forward by the copycats themselves), organic growth almost always trumps.  There are, of course, very valid reasons for growth by acquisitions – synergies or product line expansion, for example.  However, I have seen firsthand the executional challenges inherent in acquisition integration, and it can be very costly – merging technology platforms, redundancies, lack of cultural fit, knowledge gaps.  More often than not, the challenges overwhelm the benefits.  In the best cases, synergies are less than expected, in the worst cases, the acquisitions are blundered to the point that the target company is no longer in existence.  Just look to the graveyard of acquisitions US companies have made while trying to enter China… eBay, Amazon, Groupon have all tried to no avail.

The solution, instead, is to outpace and out-innovate competitors, who are self-proclaimed “executors” and not visionaries.  Speed is essential, particularly for online businesses grounded in network effects, where winner-take-all or winner-take-most dynamics rule the market.  The first mover gets the first crack at mobilization and there’s no room left afterwards.  According to Alexander Kudlich, Managing Director of the infamous Rocket Internet cloning factory, the runway is only three and a half weeks – the time it takes Rocket to identify an opportunity, build the platform in German headquarters and simultaneously hire a team on the ground.

This, then, is a call to both start-ups and their venture investors: when the threat of clones looms, it’s not the time to pull out, but rather the time to put more in – capital, human resources, you name it.  Make international expansion a priority.  After all, there is no better form of validation of a business model than others trying to profit off the idea.  And while you’re thinking big, why not take over the world?

Sources/further reading:

  1. http://blogs.wsj.com/tech-europe/2012/05/14/rocket-internet-leads-the-clone-war/
  2. http://techcrunch.com/2009/06/16/facebook-loses-lawsuit-against-german-clone-studivz/

 


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David and Goliath

As part of FIELD 3 last year, several student groups created “subscription commerce” businesses similar to that of Birchbox. My group was among these and one of the initial questions posed to us about our business idea was: why aren’t any of the

big e-commerce players (e.g., Amazon) doing this already? And, if they’re not doing this already, why can’t other subscription based companies (e.g., Birchbox, Citrus Lane) quickly and easily replicate it?

Valid question. And so, I decided to explore this concept for myself and for any online start-up looking to compete against established e-commerce sites.

There seem to be 3 embedded questions here:

1) Can incumbents respond to your offering?

On this front, I think it would be naïve to assume anything other than ‘yes.’ Of course, large, established incumbents have the ability to respond to any threats they perceive to their business. Established players like Amazon and eBay have the financial resources, customer / supply relationships, economies of scale and technical / operational capabilities to proactively challenge new market entrants.

However, that does not necessarily mean that they will respond, or that they will respond effectively. Nor does it mean that they will be able to replicate your unique value proposition.

2) Will incumbents respond to your offering?

If we look at the classic offline example of Ryanair, we see that competitors will respond most aggressively if you attack their core business. It seems obvious, but I think it is worth reiterating. Initially, Ryanair serviced a route between Waterford and Gatwick Airports; these were two lesser trafficked airports and thus Ryanair was able to successfully capture this market. Then, Ryanair announced that they would offer a Dublin – London connection, a very lucrative route for both Aer Lingus and British Airways. As expected, both incumbents responded decisively with price cuts. Ryanair tried to respond in kind, but did not have sufficient resources to compete. Soon after, Ryanair filed for bankruptcy.

We also saw this with Blockbuster and Netflix, where Blockbuster was slow to respond initially because they believed that online rentals were a niche market. However, Blockbuster clearly misjudged the market. Though Blockbuster did eventually react, their efforts were not enough…and we know how that played out.

In the cases above, we see that companies are constantly making portfolio decisions about which opportunities to pursue and which opportunities to let go. In approaching new opportunities, there is an element of strategic fit; however, in responding to competitive threats, there is also an element of protectionism. Deciding which opportunities to pursue also involves a bit of game theory: shall we retaliate or shall we accommodate? In most cases, accommodation makes sense outside of a company’s core markets. However, in certain cases, if established players perceive you as a threat to their core market down the road (even if not today), that may also merit an immediate competitive response.

3) If incumbents respond, how can you create a competitive advantage?

Generally speaking, there are two main strategies for maintaining a competitive advantage over time: cost leadership or product differentiation. In this particular case, let’s assume that employing a low cost strategy against Amazon isn’t the most promising avenue to take. Therefore, I will focus on differentiation as a product strategy.

a. Choose a defensible niche.

As we saw with dating websites, it is critical to target a distinct group with specialized needs. JDate, an online Jewish dating community, was able to effectively compete against incumbent Match.com in this way. JDate identified a discrete, but sizable segment and intently focused their efforts on understanding and serving this community.

b. Tailor your product specifically for your target demographic

Identify your target demographic. Understand the needs of your target demographic. Embrace your target demographic.

Then, you can use a combination of product innovation and marketing to design products that are both differentiated and targeted squarely at your selected demographic. For example, we “can learn from Apple and stock a very limited selection of items so they only have ‘the best’ solution for a particular problem.” They deeply understand their customers’ needs and make sure to only provide relevant solutions. Furthermore, “local retailers need to focus on stocking more locally produced items or uniquely distributed ones so they aren’t competing on price directly.” [1] In this way, you can create an atmosphere for your customers that is uniquely crafted to cater to their specific wants and needs.

c. Move beyond the physical product to establish emotional resonance with your customer

Most big e-retailers conduct large volume, arm’s length transactions with their customers; naturally, this creates significant distance between the company and the customer. However, Ron Johnson (CEO, J.C. Penney) recently commented on the importance of moving from this type of transaction mindset to a value-creation mindset: “A store has got to be much more than a place to acquire merchandise. It’s got to help people enrich their lives. If the store just fulfills a specific product need, it’s not creating new types of value for the consumer. It’s transacting. Any website can do that.” [2]

Another way to create emotional resonance is by creating an experience around your product. Warby Parker does this quite well through their Virtual Try-On program. “Shoppers can basically try the frames on photos of different models or upload photos of themselves to virtually wear the glasses. You can save images of the experience to your computer or share them on Facebook.” Moreover, they have blended online and offline experiences: “The Virtual Try-On program works well in tandem with their Home Try-On program that allow shoppers to order five frames to try on at home for five days at the cost of a dollar.” [3]

Yet another option to compete against massive online players could be to add “services that can’t be shipped in a box” [4]. These types of services (e.g., in-person beauty consultations) add value to the brand and simply cannot be replicated online.

At the end of the day, there are a set of situations in which larger competitors are either less likely to respond or less likely to respond effectively to your business, and this creates an opportunity. From there, developing a differentiated product is about making people feel elevated, valued and served when they interact with your brand in a way that they don’t feel elsewhere. And that is what we should set out to do.

 

[1] http://www.quora.com/How-can-small-brick-and-mortar-retailers-compete-with-Amazon

[2] http://hbr.org/2011/12/retail-isnt-broken-stores-are/

[3] http://mashable.com/2012/08/09/innovations-ecommerce/

[4] http://venturebeat.com/2012/06/07/how-retailers-can-fight-the-amazon-goliath/


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