The German start-up scene: Copycats, but getting smarter

I’ve been in Germany since Sunday for the Berlin Web 2.0 Expo, where I participated in a workshop to help European start-ups improve their pitches.

I’ll talk about some of the best start-ups at the event — Doodle, Plista, Wuala, Stupeflix, Sofatutor and YouCalc — in a bit. But first here are some impressions of the start-up ecosystem here.

Back in 1998, when I was last actively reporting about Germany’s business scene for the Wall Street Journal, the German technology start-up sector was moribund. Some regions like Munich sought to jump-start a venture capital industry with government subsidies, but that effort didn’t go anywhere. The joke at the time was that British entrepreneurs ended up with more of those subsidies — swooping in and taking them from the slower moving Germans. The tragedy, of course, is that Germany had tremendous basic science research and some of the best engineering in the world but lacked the ability to connect engineers with company builders. In other words, it lacked venture capital.

A decade later, a smattering of VC firms has emerged, mostly led by large German media companies. One of those leaders is Holtzbrinck, which established a venture fund in 1998. It has almost 60 investments, backing 15 deals this year. It invested in StudiVZ, the Facebook clone and then bought it for $112 million — all within two years. Deals like that have generated enthusiasm among entrepreneurs. StudiVZ, Gate5, and a handful of other deals — including Bol, and Parship, both of which sold for undisclosed amounts, but which are reportedly worth more than $100 million each on Holtzbrinck’s books — have shown entrepreneurs what a little financing and hard work can do. Berlin, in particular, is bustling with activity.

Still, the funding environment is depressingly anemic by U.S. standards. You can count the players on two hands. There’s media company Burda’s spin-off, Acton Capital. Bertelsmann Digital Media Investments makes investments like Fox does in the U.S., mainly with intent to own and integrate into Bertelsmann’s business operations. Axel Springer makes investments from its corporate development arm. And then there’s a handful of other venture firms, such as Wellington (it has a 250m euro fund) and EarlyBird in Munich (125m euro fund), and then a few others currently struggling to raise new funds, such as TVM and Target Partners, both in Munich, and Newhaus Partners in Hamburg.

Entrepreneurs grouse about the lack of capital all the time. It keeps Germans more conservative than they could be: Rarely are German entrepreneurs working on a grand, cutting-edge idea. More often than not, they fall into the copycat rut. Mention this to them, and they nod in agreement. They know it. They’re even copying from the French, with German designer brand company Brands4Friends copying Vente-Privee, for example.

The Samwer brothers are the most notorious copycats — aside from Facebook, they also cloned Twitter. There are plenty of other copycats, too. Mehrdad Piroozram is another angel making no bones about the strategy. He says he’s invested in just about every widget company in Germany. The theory is, if you bet a little money on every company in a sector, you’re bound to do well because at least one of them will be a hit. Isn’t he worried about Slide, RockYou or some other large, more advanced U.S. widget company entering the German market? No, there’s always a market for local players, because they’re able to snag local partnership deals for distribution. And as Rainer Maerkle, a partner at Holtzbrinck Ventures, puts it, the copycats reflect the inability of U.S. companies to adapt to local markets.

So for now, Germany is relegated to small. IPOs are rare, because copycats aren’t usually long-term, sustainable companies. There was Xing, a sort of LinkedIn. But few others. StudieVZ, for example, has stalled. Several young Germans told me they’d switched to Facebook over the past few months.

Other sectors don’t look much better. The Germans missed out on the biotech IPO gravy-train that the U.S has enjoyed over the past decade. “The lack of technology transfer, it’s killing us,” said Maerkle about Germany’s start-up problem. Germany is doing a little better in clean technologies, especially in solar and biomass. But even there, it has seen relatively few IPOs. QCells and SFC stand out.

In spite of that, I see the same massive potential here as I did a decade ago. If only the right teams were put together to exploit Germany’s scientific base, there could be some huge hits. And while the copycat element looms large because it’s so blatant, if you look closer, you’ll see the Germans are making quite a bit of progress. Remember, copying is also how U.S companies develop. Facebook was sued for copying an early player in social networking. Rockyou was essentially a clone of YouTube’s idea for Flash media, only applied to photos. It’s natural, then, that Germany is still in copying mode.

And Germans are beginning to innovate in other areas. Xing, for example, can be credited for adapting LinkedIn’s model and taking it in new directions. The company is reeling off new features with good usability. One lets you see who’s searching your profile, and in a much slicker way than LinkedIn. LinkedIn sometimes feels downright clunky compared to Xing. Other companies are making similar strides, Sevenload, Spreadshirt, Amiando, Dawanda and Qype among them. Similarly, just as the U.S. needed employees from Fairchild, Apple, Sun, PayPal and Google to go on to invest in new companies, Germany is seeing that now, too. The Samwer brother sold their company to eBay, and they’re now generating new companies. Folks from StudiVZ’s success are doing the same. A lot of hope in Germany’s start-up scene rests on these guys.

Most of the companies I saw at Berlin Web 2.0 this week have something copycat about them. But here are a few of the companies from the pitch session that caught my eye because they follow this positive trend of going beyond copycat and adding something new:

Doodle — This company, actually from Switzerland, offers an intriguingly simple way to set up a meeting time between several people. On a Web page, you select the dates you’re available. Doodle then provides a link for your page’s URL, which you can then send to the people you want to meet. Those people click on the link and are allowed to select the times they’re available. Doodle thus pinpoints the best available time to meet. It’s super easy, and it’s viral in Switzerland. Several people here at the conference said they’ve already used it. This simplicity (no downloads; not even registration) gives it an edge against other online meeting companies out there, such as TimeBridge, Jiffle, Tungle, Presdo and Hourtown. Tungle also lets you create meetings without registering, but when I tried it, it wasn’t very intuitive. Doodle says it has had two million users, but wasn’t specific on how active they were. It offers a pro version for a price, with more advanced features.

Plista — This is a recommendation service that tracks what you like across sites and then recommends you other things based on your tastes. It’s still in closed testing but should launch publicly soon. It works by tracking the history of the choices you make online while reading or clicking, and delivers up items of interest from peole who show similar tastes. It’s a kind of more targeted StumbleUpon. CNET did a review recently. An example might be where Plista recommends books on Amazon based on movies you’ve rated on IMDB. Similarly, if I were to integrate Plista in VentureBeat, users visiting the site would be able to see articles or sites recommended for each item they read at VenureBeat. However, the company faces some serious challenges. It requires a download to track your habits. Anything that requires work from users has an uphill fight. Moreover, a host of other recommendation engines have experienced difficulties gaining traction and making money. It’s difficult to know how Plista will overcome these challenges. Still, I’ll be taking more of a look at this company. If it can provide results, say by making VentureBeat’s content more interesting to users so that they come back for more, that’s powerful.

Wuala — This is an online social storage product that lets you easily and securely backup and access your files from anywhere and share them with friends. So far, so good. This company apparently has momentum, because I bumped into a Sun representative who said he was flying the company’s founders out to visit Sun chief executive Jonathan Schwartz, in part because the company was buying so many servers. It won the award for best pitch here (announced at the Pitch party we had last night). There are lots of storage competitors, but Wuala says it can share files more quickly, cheaply and efficiently (no bandwidth caps) because it is based on peer-to-peer technology, that is, harnessing computing resources from the computers of its users. This is what it says gives it an edge over players like Box.net. However, the P2P technology poses security concerns and got an early negative review for this and because it crashed during usage. Wuala says it has dealt with that by encrypting your files on your computer (it gives you a password to access them), and that it lets you control who has access to the various folders of your files. Users start with 1GB of storage but can get as much as they want, either by using their own disk space or by buying additional storage for 10GB for $25 per year. You drag and drop your folders to upload them to Wuala. It can be used directly from within the browser, too, and thus works seamlessly online and offline with your desktop. Click on a video file, and it starts streaming within your browser. It was developed by Caleido, a Zurich, Switz., company that has been developing the product for four years based on research at ETH Zurich (Swiss Federal Institute of Technology). It recently launched publicly. It boasts 60,000 users. It has nine employees, is self-funded, and is now looking for up to $5 million in capital.

Stupeflix — A site similar to Animoto, that lets you build videos out of images by analyzing the content of an image to judge the best way to merge in into the video. The transcoding takes only about 10 to 15 seconds. It will launch in November.

Sofatutor — Online tutoring. It lets students get tutoring for university and other courses online cheaper than they’d have to pay for normal tutors. The average student pays about 150 euros (about $200) a month for private tutoring, the company says, whereas with Sofatutor they pay 10 euros (or $13.5) a month. There are other tutoring companies, such as Tutor.com, or TutorVista, which helps screen Indian tutors for cheap lessons. However Sofatutor relies on video, and solicits video from users. It uses in-house editors to make sure the videos are up to par and gives the video makers a cut of the revenue. There are other online instructional video sites too, such as 5Min, ExpertVillage, DIYNetworks and VideoJug, but Sofatutor distinguishes itself by keeping to a high standard, and also by using a subscription fee model (as opposed to advertising). Its target market is 6.5 million 15-year-old plus students. There’s a demo here.

Youcalc — Finally, there’s Youcalc, a “smart” widget company that I’m about to publish more on separately because it seems the most original, even if it didn’t take first prize at the event.