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MELISSA BLOCK, HOST: Well, that's enough cold water for now. Let's hear about some companies that are heating up. And for that, today, we'll go to Europe. London, Paris and Berlin are increasingly competing with Silicon Valley on the global stage and attracting investors. NPR's Eric Westervelt reports on the tech startup scene in Berlin.

ERIC WESTERVELT, BYLINE: Sometimes it seems like the entrepreneurial spirit of young Berliners is confined to slacker hipsters selling used clothes to each other. But appearances can be deceiving. Venture capitalist Ciaran O'Leary, a partner in the investment firm Earlybird, was grabbing a morning drink recently in Berlin's Mitte District when the barista asked if he'd like crunched numbers with his espresso.

CIARAN O'LEARY: The guy making my coffee said, hey, you know, aren't you a VC? And I said, Yes, I am, actually. I was like, why? And he said, yeah, I've got this business plan for you I'd like to show you. So the coffee guy handed me his business plan.

WESTERVELT: O'Leary sees the incident as another affirmation of his decision to move Earlybird's headquarters to Berlin about a year ago.

O'LEARY: It's this crazy green field. It's chaotic. There's a lot of creative people. And if you give creative people green fields, they build amazing things.

WESTERVELT: O'Leary's office is near St. Oberholz, a cafe that's integral to the startup scene here. It's packed daily. Inside, most everyone is working intently on lap tops. Mini-meetings are underway at many of the tables. You do wonder who's really working on a startup plan and who's merely a startup enthusiast, blogging about how cool that would be. Investor Ciaran O'Leary says the reality is starting to live up to the Berlin startup hype.

O'LEARY: What's happening is this kind of, you know, this self-fulfilling prophecy. All around the world, everybody says, you know, this is one of the best places in the world to build a company, so then that actually happens.

WESTERVELT: Earlybird has invested some $40 million in more than two dozen Berlin startups, and they've just raised a new $200 million fund. O'Leary says they'll probably spend about half of that in Berlin. The audio-sharing Web service SoundCloud, which moved to Berlin from Stockholm several years ago, is thriving here. Other winning Berlin startups include Wooga, Europe's largest developer of online social games, and the mobile advertising firm Madvertiz.

ALEX COGGIN: I love bringing designers in because I think it always paints a really good picture of who we are.

WESTERVELT: Twenty-seven-year-old Alex Coggin shows me an old bank vault with safe-deposit boxes half dangling from its big steel frame. A defunct bright red panic button hangs on the wall nearby. The vault is now the conference room for startup Monoqi. Founded here barely six months ago, Monoqi is an online shopping site that sells products by highly distinctive international designers.

(SOUNDBITE OF MUSIC)

WESTERVELT: Down the hall, Web designers crank their favorite work tunes in a former mortgage office. Coggin, Monoqi's head of creative design, says he thinks talented tech-savvy young people are drawn to Berlin over London and Paris because of the city's still relatively cheap rents and living costs and the hyped yet somehow still iconoclastic art and party scene.

COGGIN: Being Berlin-based does a lot of the legwork for us. If we're scouting brands in the States, or even in Japan, and we say that we're Berlin-based, that helps a lot, because people know that this is the place where trends are being set, and this the place where things are happening.

WESTERVELT: Yet entrepreneurs caution that the city still lags behind London, whose East End last year saw a 40 percent rise in startups. Another challenge is money. Venture capital for startups in the U.S. fell 18 percent in the first quarter of this year according to figures from Down Jones. But in Europe, funding dropped 41 percent compared to the same period last year.

As venture capital partner O'Leary of Earlybird puts its, there should be 10 of us in Germany and three of us in Berlin, and there's just us.

O'LEARY: We are still miles away from something like the Valley. And if you ask me, Berlin will have its own strengths, and it needs to work on its own entrepreneurial hub. It will never be the Valley because the Valley has all these things that Berlin will never have.

WESTERVELT: That doesn't mean it's a worse place to build a great company, he says. It just means it's a very different place. And for now, until more local startups succeed, cash out and reinvest in the scene, different, vibrant and fun will likely remain Berlin's best startup selling points. Eric Westervelt, NPR News, Berlin.