As the beat of electronic music plays in the background a collection of hip twenty-somethings sit absorbed behind the screens of their MacBooks.

St Oberholz is a cafe in Berlin's Mitte district that has the lively buzz of a place where young people meet and talk about adventures in Europe's party capital. But the café has also become the meeting place of choice for Berlin's nascent technology start-up scene.

"There are parallels with what has happened in Silicon Valley and what is now happening here (in Berlin)," Paul Jozefak, a senior venture capitalist at Neuhaus Partners, told Deutsche Welle.

"In the Valley there was a place called Buck's where all these deals were done, whereas here you have St Oberholz cafe. Talented people will come to Berlin because of the lifestyle and the scene."

It's difficult to find a laptop-free cafe in some parts of the German capital

'Two start up clusters in Europe'

In the summer of 2007, sound designer Alex Ljung and DJ Eric Wahlforss walked through the doors of St Oberholz on a trip to Berlin. The two Swedes were so impressed with the German capital that they left their base in Stockholm and started running SoundCloud, an online social network that enables users to share audio files, from inside the cafe.

SoundCloud now has more than 5 million users, including many of the worlds leading music producers and labels. Its rapid success is perhaps the most noticeable sign that Berlin – and St Oberholz – have emerged on the global technology scene.

"There are two start-up clusters in Europe. One is East London, the other is Berlin," Jozefak explained.

He added that in the past a start-up hub was based upon having core Internet technological hardware in place. But now it is more a place where people can be creative with the technology that already exists - such as iPhones, Android devices and tablets - enabling people to interact with businesses, friends and family in new ways.

"Clusters are the best thing for entrepreneurship. You want people running into each other, going for a beer after work."

The St Oberholz cafe is a favorite meet place for Berlin's web entrepreneurs

London – 'hype'

Berlin and East London both have vibrant start-up ecosystems where young entrepreneurs work and socialize together. However, while East London is an established global start-up center, Berlin has more of the feel of a place that is only just starting to evolve.

The living costs in the German capital are also far cheaper than London. For example, the very cheapest one-bedroom apartments in the outer fringes of East London cost about £650 (740 euros) per month, according to UK-based property website Rightmove. A cheap one-bedroom apartment in Berlin Mitte costs just 450 euro a month to rent.

"There is a lot of hype about London but it is extremely expensive," said Ijad Madisch, chief executive officer and co-founder of Research Gate, a network for academics which has more than a million users.

"Berlin has the same quality of international talent and I see the art and creative scene here complimenting the start-up scene as it attracts people who think about ideas."

Research Gate relocated all its staff to Berlin in September 2010, having originally been launched in Boston. The company has attracted major technology investors, including Palo Alto-based Accel Partners and Benchmark Capital.

Alex Ljung manages SoundCloud from Berlin

Meanwhile, German media company Axel Springer recently acquired a majority stake in Berlin-based promotional search website kaufDA for about 28 million euros ($40 million). Wooga, a Berlin-based social games start-up, also recently attracted 20 euros million of funding.

SoundCloud has attracted funding worth 12.5 million euros. A Hamburg-based venture capitalist told Deutsche Welle that the file sharing platform could command a price of 200-500 million euros, should Ljung and Wahlforss decide to sell the business.

No longer just 'copycat' start ups

"It is important to attract a lot of international start-ups here. It used to be copycats that came from Berlin. Now there are examples of companies with really new ideas that are founded here," said Volker Breuer, managing director at Payango, Germany's biggest payment card provider, which is financed by two unnamed investors – so-called 'business angels'.

"The next big step will be for US-based entrepreneurs to start looking to Berlin to launch their start-ups here."

However, Tim Ferriss, a US-based angel investor with stakes in social networks Facebook and Twitter, says that Berlin does not currently have the density of start-ups and investors it needs make it a global start-up force.

"There is a threshold before which it is hard to have the sort of infrastructure handy to develop really ground-breaking start-ups," Ferriss told Deutsche Welle.

"You can have loan coaters who come out of nowhere and create awesome products. That does happen," he said. "But I think to really become a start-up hub that produces start-ups that become famous there needs to be a lot more of them. Berlin is still a lot less active than London."

Young entrepeneurs like Berlin's thriving cultural scene and cheap cost of living

American founder to set up in Berlin

Nevertheless, as Berlin builds on its reputation as the cultural center of Germany, it will continue to be an attractive base for talented computer programmers from across the globe.

"In the next one to two years we will see an American founder start a company in Berlin and get financed. Something that is noticeable, that appears in the press, that will be venture-backed and in the technology space in Berlin," said Jozefak of Neuhaus Partners.

The affordable office and apartment rents, together with a nascent network of start-ups should ensure the technology cluster in Mitteleuropa grows in significance.

Indeed, perhaps it will be the start-up scene in Berlin – a city still blighted by an unemployment rate of more than 10 percent – which spearheads the development of its economy.

Author: Joe Morgan

Editor: Sam Edmonds