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Fernsehturm television tower in Berlin, Germany.

Matthew Dixon/Getty Images/iStockphoto

After Lucas von Cranach founded a soccer community app in the city of Bochum, Germany, in 2008, he grew to realize that a move to Berlin was the best way forward for his company, motain GmbH.

"We needed to change the mindset of our company, and bring in international staff, and it is easy to persuade people from around the world to move to Berlin, which is a very young and trendy city, and an inexpensive place to live," says 35-year-old Mr. von Cranach, who made the move in 2010.

"Today, motain employs 45 staff with fifteen nationalities, including from the U.K., Brazil, Australia, Italy, France, Poland, Romania and Macedonia, and for senior positions above a certain salary level, a work permit can be processed in a couple of months," he says.

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The motain office is in Mitte, the former district of East Berlin where the digital startups are mostly clustered. The nearest U-Bahn station, Rosenthaler Platz, was one of the so called ghost stations that were left unused for 20 years after the Wall divided the city in 1961. After the wall came down, young people moved into Mitte to take advantage of low apartment rents, and this creative community, combined with cheap office space, led to Mitte emerging as the epicentre of the digital startup scene. Central planning and economic stagnation have given way to venture capital and entrepreneurship.

Small- and medium-sized businesses (the Mittelstand) form a strong backbone of Germany's economy. The country ranked 6th in competitiveness by the World Economic Forum's 2012-2013 report, and 3rd in its capacity for innovation.

Despite the global success of iconic German brand names such as Siemens, Adidas and Volkswagen, Germany's corporate sector has a relatively low level of dominance by large corporations compared to other countries, and the government is keen to promote new winners.

"These are the next generation of hidden champions, the foundations of Germany's and Europe's future success," says Juergen Friedrich, CEO of Germany Trade & Invest, the economic development agency of the Federal Republic.

Mr. von Cranach's motain has recently been enjoying a surge in global interest in the app, which goes under the name iLiga in German speaking countries and THE Football App in other markets, and in April announced an investment of about $13-million from Earlybird Venture Capital.

Earlybird itself moved its entire Hamburg team to Berlin in 2011, in order to be at the centre of things. It also has offices in Munich and Milan.

"Entrepreneurs these days don't necessarily need to be close to big corporates or universities," says Earlybird partner Ciaran O'Leary. "They are seeking inspiring urban environments, where they can attract and retain the best talent."

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The Earlybird cash will help grow THE Football App, an aggregator of global soccer, or football, content and a platform that combines videos, fixture lists, score updates, stats and news with a planned social network, gaming (for example Fantasy Football Manager game) and betting. The company is already looking for the next funding round to fulfill its global ambitions in this booming market.

Most companies get started with angel investors, who might put up anywhere between $100,000 and $500,000 to back an idea. Once up and running, firms look for bigger funding from German, or increasingly pan-European, venture capital firms.

But, particularly over the past six months, the cluster in Mitte has started to gain global attention, including from U.S. venture capital funds. The Berlin scene is sometimes referred to as Silicon Allee, though people who actually live locally would be unlikely to use this name. They prefer to refer to it simply as the Berlin Startup Scene.

Other German cities have their digital clusters, but Berlin has become increasingly dominant. Having everyone in one place, meeting up and exchanging ideas is critical. In fact, just being located in Berlin is not viewed as sufficient – it is better to be located in Mitte.

A few minutes walk from motain are the offices of SoundCloud, where the global musician community can post their songs and remixes. SoundCloud will be moving to The Factory, an incubator being developed in Mitte, and which is set to open later this year.

Also near motain is EyeEM, a photo sharing app, which was incorporated in March, 2011, and has received an undisclosed amount of seed funding from Passion Capital plus pan-European venture capital fund Wellington Partners.

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EyeEM has been gaining ground against rival Instagram, particularly since the latter caused controversy by changing the terms and conditions of picture usage following its acquisition by Facebook.

Another startup, Zoobe, is an animated messaging service, with the app allowing messages to be delivered on a more personalized level, via a 3-D video avatar or voice message instead of a standard messaging format.

"Berlin is a young, vibrant city where you feel that you have a chance to do something – and the space to get started," says Lenard Krawinkel, CEO of Zoobe, whose employees include nationals of Bulgaria, Spain, Lithuania, Turkey, Morocco, Switzerland, France, Russia, and India.

"The Berlin Internet start-up scene is still in its early stages, and we don't have a lot of venture capital firms based in the city, but there is certainly an awareness that something is happening here, and the venture capital people fly in regularly from London or the United States to take a look," says Mr. Krawinkel.

"I come from a film background, and just like you need local film producers for a film scene, startups rely on local angel investors," he adds. "They can put up anywhere between 50,000 and 500,000 euros to get a project started. Zoobe is now looking at the next stage, which will be either crowdfunding or venture capital."

Also in Berlin is the powerful Rocket Internet group, which has a highly profitable track record of looking at what is successful in other countries and rapidly launching its own ventures tailored to the German market. Rocket has made more money than most others so far, but has contributed to Berlin's reputation as copying rather than innovating – an image the newer companies want to change.

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Michael Siebold, partner at law firm Arnecke Siebold and chairman of the German Canadian Association (DKG), as well as the German Canadian Business Club in Frankfurt, is seeing growing interest in Berlin startups from abroad.

"The Berlin scene is growing fast, and we are getting more signals that, in particular, U.K. companies feel a need to get involved," says Mr. Siebold. "German venture capital usually puts up the initial funding, but international venture capital often takes the next round."

Canadian firms are closely monitoring opportunities. The annual Forum@Kanada Haus event by the German Canadian Association, held on May 16 at the Canadian Embassy in Berlin, looked at opportunities associated with high tech innovation in both Germany and Canada, and the view of Canadian venture capital on Berlin startups was a special area of focus.

The startups are also getting government attention. In late May, Federal Minister of Economics and Technology Philipp Roesler visited Silicon Valley, accompanied by a group of German businesses, including motain.

Attracting U.S. venture capital is viewed by the German government as important to strengthening the SME sector – the Mittelstand – which is where the fastest growing companies are typically located, and which have huge R&D budgets (nearly twice as much as large companies, on average).

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