When Alex Ljung and Eric Wahlfross decided to set up their own online music business, they concluded their native Sweden wasn’t big enough for their global aspirations.

After a brief stint in the high-tech Mecca of San Francisco, the two friends looked at Berlin, Vienna, London and Paris as the base for their enterprise. But after they went home without a clear answer, they haphazardly committed to Berlin two weeks later.

Now part of the German capital’s thriving IT start-up scene, their gut reaction turned out to be a good one. The city’s once small tech community has started to draw in inventive Germans and foreigners alike, creating a network for young entrepreneurs unlike anywhere else in Germany.

“People are much more accepting of crazy behaviour here,” said Ljung, who started the internet music-sharing platform SoundCloud, within four weeks of their arrival in Berlin.

Their idea was to give artists greater control over their music online. In the two years since SoundCloud was established in Berlin, the website has launched with more than 200,000 musicians, artists, bands and record labels using the service.

But SoundCloud isn’t the only high-profile start-up spawned recently by the Berlin IT scene. Felix Schulte and Lukas Wrede are both German, but moved their business from Witten in North Rhine-Westphalia to Berlin when they started taking their current project seriously.

“We want to be the Amazon of education,” said Schulte of his start-up Studdex, a website that allows students to research and apply for foreign study programmes.

The fourth project the childhood friends have started together, Studdex had investors, lawyers and accountants all based in Berlin, so they decided it made sense that they, too, come to the capital.

But the city has other advantages for start-ups beyond tech-savvy attorneys and moneymen.

“Berlin is really cheap. That means rent is cheap and that means employees are cheaper and that we can afford to take smaller salaries ourselves,” Schulte told The Local. “And the nightlife is good too.”

Relocating to Berlin also gave Studdex an internationally recognised base, access to a network of designers and developers, as well as students willing to help stretch the Studdex coffers further as interns.

International and cheap

Being in the German capital also made it easier for Schulte and Wrede to hire the multilingual staff they need in order to deal with dozens of universities around the world. Studdex has added eight full-time employees and another six part-time, something they don’t think they could have done from Witten, southwest from Dortmund.

“It’s much easier to get people to move to Berlin,” said Schulte. “No one ever came to even visit us in Witten.”

Ljung confirmed the cheap cost of living was a huge boon for start-ups, explaining that he first worked on SoundCloud in a borrowed conference room. After two weeks, they relocated their “office” to the St. Oberholz café in the Berlin-Mitte district, well-known for its laptop-and-coffee culture.

Eventually, they managed to get their own office space, but as they still weren’t making money and couch-surfing, they furnished it with scraps of wood found in the courtyard of their current location, above an old post office in eastern Berlin.

Most new businesses have to go through a so-called “boot-strapping” phase where the founders sacrifice everything in order to get their project started. But Berlin makes it easier to fund start-ups.

With the global economic crisis, many tech entrepreneurs have been forced to finance themselves until they have something to sell. A traditional business model says you have to spend money to make it. But a web-based start-up, money only comes once the product is available and showing signs of success. Even as major artists like Moby, Trent Reznor and Beck sign on to their music services, Ljund admits that even now, he only gets a salary “sometimes.”

Bagging investment

But a few Berlin-based start-ups are still getting large investments despite the economic crisis – and many are even thriving In spite of it. Online shopping network KaufDa received a round of financing on August 21 reported to be in the mid-seven figures. Meanwhile Twinity, where users get a virtual-real life experience, just squeezed another €4.5 million from a group of private investors, which included the state of Brandenburg.

Mirko Casper, one of the managing directors at Twinity’s parent company Metaversum, told The Local that living in a poor city such as Berlin sets up people for realistic expectations of success.

“People here were not expecting gold and diamonds earlier and they’re not getting it now,” he said.

Despite still running and steadily expanding for the last three years to employ 65 people and having 150,000 users exploring their virtual Berlin and Singapore sites, Casper still believes Twinity is a start-up.

“I like to think we’re a successful start-up, but we’re still a start-up,” he said.

And with so many successful new tech firms in the city, it’s quickly becoming a magnet for fledgling businesses.

Friedrich and Anne Rojahn came to Berlin after spending time in England and France to start their “small family business” called SuperSwitcher, which allows users to monitor the rates of other electricity companies and switch their power provider with ease. Despite its customer base being in Britain, the Rojahns still decided Berlin was the best place for them to base their self-financed business.

“In a city like Berlin, it seemed to us it would be easy to operate that kind of model,” he said, referring to the city’s cheap rent and a pool of nearly 150,000 students willing to take contracts for less in order to gain experience. From their home office, Rojahn has also become a two-time entrepreneur by launching creative networking site, Faces of Design. Both projects are still very much in the fledgling phases.

A far cry from Silicon Valley

But Berlin has added resources that are helping the websites grow. Last June, Seedcamp held an event in Berlin recognising its start-up community, while tech news blog TechCrunch stopped in the capital for one of its TechCrunch Talks. Like Mind meetings have been held in the St. Oberholz café on a monthly basis since last spring, allowing young entrepreneurs to meet and share ideas.

“Berlin is like a small city in that things and people here are very connected. Nothing or no one is ever more than two steps away it seems,” said SoundCloud’s Ljung. “In the US, if you’re an entrepreneur, you’re a rock star, but here, people just think you’re crazy.”

While Berlin has become more hospitable to the young entrepreneurs that makes up its start-up scene, Germany overall still has far to go to challenge the likes of Silicon Valley.

Studdex co-founder Schulte even tells acquaintances he’s in school in order to not have to tell them he has gone into business for himself.

“No one understands why you would start your own business,” said Schulte.

But Casper from Metaversum is optimistic that attitude is slowly changing.

“For Germany, Berlin is certainly the entrepreneurial centre, but I don’t think it stands out internationally. Hopefully that will come,” he said.