The freaks are coming

ROCKET INTERNET has just moved into a splendid, red building in central Berlin, around the corner from Checkpoint Charlie. The lease runs for the next 15 years, a signal of intent from a firm that brags of becoming the biggest online conglomerate outside America and China. Inside, everything is new. Alexander Kudlich, the managing director, jokes he should remove his shoes before stepping on a just-laid, thick, grey carpet in the boardroom.

The timing is awkward. Just as staff entered the building, in early September, Rocket warned about its financial performance this year. It had losses of €617m (just under $700m) in the first six months; the full details came in earnings announced this week. Few are surprised that Rocket, which went public in 2014, had to lower the values of some of its creations. Kinnevik, an investment firm with shares in Rocket that had some of the same holdings, had already done so.

Mr Kudlich claims “we are more bullish than five years ago”. But Rocket is finding life tougher than before its IPO. Its shares are down by almost half in the past year, leaving it valued at some €3 billion.

The most creative digital types have long scorned Rocket as a factory for copycat startups. Nonetheless, it used to do three things very well. It built up e-commerce companies quickly, often within days, mimicking other (usually American) startups. It pumped its own versions full of capital and they often became market leaders, typically in emerging markets. Second, it raised that capital effectively: tapping stuffy (and mostly German) investors who twigged that they should have a digital strategy but who found tech entrepreneurs baffling. Lastly, Rocket was skilled at recruiting brainy-but-conservative business-school graduates, who were taught to execute plans and made to toil frantically hard.

But being a company builder got much harder once startups such as Uber and Airbnb showed they could quickly internationalise themselves. One prominent investor in Berlin’s technology scene says that founders should throw a parade for Oliver Samwer, Rocket’s chief executive, for jumpstarting the city’s tech ecosystem, but still calls the firm’s copy-cat approach “an abomination”. The era of Rocket-style incubation is over: “nobody does it now”.

Rocket itself seems to accept as much. It plans to refocus itself as a later-stage investment firm, more like a private-equity outfit. That reflects how the wider Berlin scene is evolving. Startups are no longer content to copy others; they want to build empires that rival some of the biggest names in tech. “We need a Tesla or a Google to change the ecosystem,” says another founder of tech firms, arguing that Berlin is well-placed to match traditional German engineering strengths with more creative technology types. In other words, he says, “we need more freaks.”

They may be coming. Christophe Maire, a veteran of the Berlin scene, says it is flourishing, with firms scaling up in fintech, digital health, artificial intelligence, mobility, food technology, cyber-security and more. “We see formidable, original companies emerging.”

Some, such as SoundCloud, a music-streaming service, are struggling to find a business model in the face of more established outfits, such as Spotify. But newer firms are rising. One is Relayr, which was founded in 2013 and has ambitions to become a platform for the “internet of things”. It works with firms such as Bosch to develop sensors that set up machinery (such as lifts, kitchen appliances or elaborate espresso machines) to send data to and receive instructions from owners.

Another is ResearchGate, a social network for scientists founded in 2008 that has completed three rounds of funding, including a $35m investment from Bill Gates and a few other investors in 2013. It has over 10m members. Its founder, Ijad Madisch, claims to lead, with some justification, the “coolest startup in Germany” because it has succeeded in creating a place for researchers from all around the world to collaborate. They share vast amounts of data and experiments—including failed ones. Neither Relayr nor ResearchGate resemble Rocket-style copies, and many more firms should be able similarly to draw on Germany’s strength in industrial products and in scientific research.

Meanwhile, Berlin startups’ success in attracting finance is continuing (see chart). More venture-capital funds are setting up, as well as additional accelerators and “business clubs” for startups. One of them, The Factory, in a renovated brewery, is putting entrepreneurs in the same building as people from SoundCloud, but also from big old firms such as Deutsche Bank or Siemens. The hope is that Germany’s stock of financial and engineering knowledge can be brought fruitfully together with people who have bright ideas. Hardly rocket science, but it might take off.