"The one single thing more difficult to find in Berlin than an apartment is a programmer," said Avitosh Sawhney, 36, who moved his tech startup Ynertia to the German capital from Paris in 2020 but found it did not offer the plentiful space, funding and workers that had once made the city so attractive.

The government has taken note, and is drawing up legislation to ensure the country and its capital stay attractive for entrepreneurs to help drive the economy of Europe's industrial powerhouse.

But Finance Minister Christian Lindner's proposals, which include tax allowances for shareholders in a bid to entice more startups, face headwinds from members of the ruling coalition. The Greens say the plans help the rich at the expense of those less well off.

Greens lawmaker Katharina Beck told Reuters that Lindner "cannot ask others to save and then propose millions in tax cuts himself if he wants to draw up a serious budget for a sustainable Germany."

The German capital took off as a hub for startups after the fall of the Berlin Wall in 1989, when it offered lots of cheap living and office space, as well as a buzzing social scene that welcomed newcomers.

Berlin still has its attractions. A survey of would-be entrepreneurs by Startup Heatmap Europe showed 37% wanted to set up a business in Berlin, giving it the No. 1 popularity rank, although London is still top in overall rankings when taking into account everything from funding to talent availability.

London generated $2 billion in venture capital funding in the first quarter of 2023, compared to Berlin's $800 million, a DEEP Ecosystems analysis of Dealroom data showed.

TOUGHER TIMES

In 2022, 501 startups were founded in Berlin, a fifth of Germany's total.

But the city is now a tougher place for those trying to kick off a new business. Room rents rose faster last year than any other European city, hitting 800 euros ($880) in the first quarter of 2023 up from 600 euros a year earlier, Housing Anywhere data showed.

With the average price of a one-bedroom apartment now 1,700 euros, it is just 11 euros below Paris.

Higher rents drive away workers and raise wage costs for startups, in a nation already facing an acute labour shortage.

"Today in Berlin, renting office space and salary costs place large financial burdens on companies, which makes it harder to continue to grow their technology," said Maximilian Tayenthal, who was a co-founder of N26, a digital bank that took off in Berlin a decade ago.

A Manpower survey showed 86% of German companies reported trouble filling vacancies, the highest share among European countries and above the average of 77%. About a fifth of openings at startups were vacant and more than half were struggling to fill posts, German Startups Association said.

German banks, like other European institutions, have become more cautious in what the European Central Bank has described as the fastest net tightening of credit since 2011. In Germany, it has been accompanied by the sharpest contraction in venture capital funding in Europe in the past 12 months, down 42%.

FUNDING CRUNCH

"There is new caution and restraint on the part of venture capital investors, even if their current funds are still fundamentally well filled," German Startups Association Managing Director Christoph Stresing said.

The funding crunch is hitting Germany's push to encourage the growth of new renewables businesses, given manufacturing startups are particularly capital intensive.

"As you scale very fast, you find yourself quickly in a situation in which the next climate tech facility you want to build has a value that's bigger than your own company's worth," said Tobias Lechtenfeld, spokesperson for the Tech for Net Zero Alliance, a network of climate tech startups and investors.

Chancellor Olaf Scholz's government aims to offer incentives to improve access to credit and talent with the Future of Financing Act. It will include proposals to simplify listing and post-listing requirements for startups and to digitalise capital markets. It also wants to increase the tax allowance for employee share ownership to 5,000 euros from 1,440 euros.

Startups particularly welcome the share ownership move, according to a Bitkom survey, as it would help attract talent when they are not able to offer high salaries.

The new legislation's key points were presented in April by the finance and justice ministries, both led by the pro-market Free Democratic Party (FDP). Other ministries led by other parties in the coalition are discussing them with the aim of having a first draft ready in summer and implementing the law in 2024.

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