Last week I took a short trip with Orna Berry to Germany. We went to check out the local Internet Scene. The logic was simple – As our portfolio companies (and companies we evaluate) expand their target markets beyond the United States, its important to establish a network and an understanding in new markets. Germany was our “pilot trip”, and we will now try to do similar trips to other countries.

The trip was rather short. We spent a day in Munich and a day in Berlin. We met a couple of investors (Action, Doughty Hanson), 2-3 media companies (Axel Springer, Holtzbrinck), few Angel Investors and 4-5 startup companies. The focus was Internet and Internet only, so our conclusions are probably relevant to this sector and don’t apply to areas like semiconductors and communications. As we met people, we constantly compared what we saw to Israel.

Overall, there were 3 main takeaways from the trip:

Berlin is becoming a center of Internet startups – Since Berlin is rather cheap, and yet a true metro, the number of young people and Euro immigrants is rather large. As such, more and more companies are being started there, and based on that, entrepreneurs are even moving to Berlin to start their companies. A great example was Soundcloud. Amazing company founded by 2 great entrepreneurs from Sweden. When they started they made a decision to settle in Berlin for their business. Could Tel-Aviv become such a center like that? Probably not. We have our political problems (How unfortunate), and we are also not as cheap (See below).

In some ways, the attraction of Berlin resembles Silicon Valley, but not really. Why? Seems like it’s a great place for starting a company, but the full Eco-system still needs building.

The majority of the business models are still “copy cat” – The entrepreneurship in Germany is very different than Israel. If we are all about “innovation” and using that to break into new markets, many of the startups that we met in Germany are a German version of a successful US business. Think of the “Etsy of Germany”, the “Yelp of Germany” and the “Bounty Jobs of Germany”. To be fair, not all were copy cats, and some started from a copy and evolved into a slightly different version, with much more innovation.

Clearly, this is not the right model for Israel. We can’t leverage our local market, and although it makes sense to have an Israeli Yelp, Netflix, etc. these ideas cannot be VC backed. However, is there a potential for Israeli copycats to the European markets? We have seen a few in the past, and maybe that will be an interesting new path for Israeli startups.

Israel is expensive – Many of the startups that we met have reached nice scale and business success with less than $500K investment. Very few Israeli companies have done the same. The overall compensation in Germany is lower than in Israel. This may be great for the individual employees, but is a huge issue for our industry. We need to learn how to create more with less money. Otherwise, we won’t be able to compete in global markets. We have met a few “micro funds” in Germany, starting companies with less than $50K. Could that work in Israel today? No. Should it? Yes.

Overall – great trip. Thanks to Stefan Tirtey from Doughty Hanson and Inon Elroy from the Israeli Embassy for organizing this trip for us. Hopefully, we will be visiting other countries in the next 12 months.