The European Startup Scene Is on the Rise, With London and Berlin in the Lead

Europe has been associated with economic decline for decades. Indeed, many have written off Europe as a continent incapable of innovation, watching it fall behind North America and Asia. However, in terms of GDP, the European Union is still the largest economy in the world. The real GDP of Europe is not only bigger than that of the USA, it is also bigger than that of all the BRIC (Brazil, Russia, India and China) economies combined. And yet when it comes to Europe, what we frequently hear is how poorly managed it is and how close it is to falling apart.

Some of this is certainly true -- despite its comparative economic dominance, Europe has had a serious problem with successful entrepreneurship for decades. Although many of the world's largest corporations are European, only one of them has come out of Europe since 1975: Spain's Inditex. That's one European success story in over 30 years, paradoxically out of Spain. The list of top U.S. corporations, on the other hand, is dominated by companies that didn't exist 30 years ago. Amazon and Google are good examples.

But before you give up on Europe's innovation capabilities, I am here to report some good news: the European startup scene is thriving. As traditional jobs disappear, entrepreneurship is growing fast in many parts of the continent. Amsterdam, Barcelona, Berlin, Copenhagen, Dublin, Hamburg, Helsinki, London, Madrid, Munich, Paris and Stockholm are all becoming startup hotspots. And the two indisputable leaders of these new entrepreneurial cities are London and Berlin.

While both cities are exciting, young and innovative, they are entrepreneurial leaders for different reasons. Berlin has low rental prices, low housing costs, lower salaries, a high quality labor force, great engineers and it's a fun and creative place. It would probably lead Europe's startup scene if it weren't for some key drawbacks when compared to London. Apart from the language barrier (a difficult one for non-natives!), Berlin has two big negatives: poor access to funding and a tax/labor framework that fails to recognize the uniqueness of start ups.

Funding is more complicated in Berlin because Germans have a natural aversion to risk, which in turn makes it hard for their financial system to find a good way to consistently finance failures. As Silicon Valley has shown, you need a financial industry willing to finance many failures until the successes come. Entrepreneurship is also a trial and error business -- this is the job of the famous Sand Hill Road firms like Kleiner Perkins or Sequoia, my partners at Fon. And while the British themselves do not have outstanding VC firms willing to take American-style risks, the largest US VCs have established themselves in London. Even Continental European VCs like Atomico (who also invested in Fon), work out of London because the United Kingdom has the best tax and legal regimes in Europe for startups.

And this regime has recently improved even further with the UK's new tax and labor laws. Now it is easier to give stock options and hire and fire, something that is essential for start ups. After all, startups try talent out as frequently as they try themselves out and need a legal regime that recognizes this. The UK system does while the German system does not. So, even if salaries and rents are higher in London, financing and the ability to "try things out" make London a more favorable place for starting a business.

Overall, I see better prospects for startups in most European cities than before the 2008 financial crisis. But if I had to bet on the winner, I'd choose London as the best place to start a business in Europe, as the conditions for entrepreneurs are similar to those found in U.S. startup hubs like the Silicon Valley or NYC. Having said this, Berlin is a close follow up and if Germany focuses on the changes that are needed for entrepreneurs to thrive there, it could rise to the number one spot in Europe.