On a rainy day in March 2011, Ciarán O’Leary and two colleagues crammed into a Berlin taxi and raced for the station to catch a train back to Hamburg. While snaking through the city streets, it hit him: Leaving Berlin was a bad idea. “We looked at each other and knew in that moment that we’d be crazy not to move here,” says O’Leary, a partner at the German venture capital firm Earlybird. “There was just so much happening—founders everywhere, in every bar, cafe, every corner.”

Two weeks later, Earlybird rented office space in a former dance studio in central Berlin and opened up shop. By late March of this year the VC firm had raised $100 million of what will eventually be a $200 million fund for investing in European Internet startups, primarily in German-speaking regions. The new fund signals that at least some of Germany’s traditionally risk-averse financiers realize their capital city has become a global tech hub, one which foreign money discovered years ago. According to data from Thomson Reuters (TRI), 103 Internet startups received global venture capital funding in Germany in 2011, more than in any country besides China and the U.S. Although the numbers are not broken down by city, Berlin is where most German startups congregate. “It’s one of my next stops, and I’m not the only one going,” says Yoni Cheifetz of Menlo Park (Calif.)-based Lightspeed Venture Partners. “Berlin is not overcrowded like the Valley, but it will be pretty competitive.” Alex Ljung, co-founder of Berlin audio-sharing startup SoundCloud, puts it this way: “If I were a VC, I’d be terrified not to be in Berlin.”

The city experienced a short startup boom in the late 1990s and early 2000s along with the rest of the world, but that quickly faded, as German investors lost money on ill-conceived companies. Among the only Berlin Internet startups to survive were clone versions of American companies, many of them launched by the Samwer brothers—Marc, Oliver, and Alexander—who’ve made more than $1 billion over the past decade by copying EBay (EBAY), Zappos (AMZN), Groupon (GRPN), Pinterest, and now Amazon.com (AMZN).

“Five or six years ago, you felt like you were kind of alone, fighting windmills,” says Christophe Maire, a Swiss entrepreneur and one of the city’s major angel investors. Things began changing as several Berlin startups scored funding from international sources. In 2010, SoundCloud, among the scene’s biggest success stories so far, received funding that included a $10 million infusion from New York’s Union Square Ventures and Switzerland’s Index Ventures. The service now boasts over 12 million members. Other hits include Wooga, Europe’s largest developer of online social games, which last May announced a $24 million investment led by a Massachusetts VC firm. In November, Atomico, the London-based VC firm of Skype co-founder Niklas Zennström, invested $4.2 million in 6Wunderkinder, a maker of productivity apps.

Encouraged by all the interest—and the money—many Berliners have gotten startup fever. The Berlin Chamber of Commerce reports that 1,300 Internet startups have been founded in the city since 2008, 500 of them last year alone.

Germany’s capital is home to the Chaos Computer Club, one of the world’s biggest hacker groups. (Kim Dotcom was a member until he got banned for stealing other people’s ideas, according to Associated Press reports.) In recent years these hackers, along with tech-savvy expats and engineers from Berlin’s universities and clone companies, have combined their know-how with the softer skills of designers, artists, and musicians who have long flocked to Berlin. “Berlin’s attitude is very punk, and that’s really important for startups, because they’re basically saying, ‘OK, I’m going to do things my own way,’ ” says Ljung, who was a sound designer before founding SoundCloud, and is still an active electronic musician. Says O’Leary: “All Berlin knows is change and disruption, and there’s nobody defining what the city should be or what an entrepreneur should be.”

It also helps that Berlin has started to move past its focus on challenging, esoteric art and design. Ljung says that when he arrived from Sweden in 2007, the websites and apps out of Berlin were “very aggressive and difficult,” featuring tiny fonts and black backgrounds. Although he notes the aesthetic is still edgy, “now there’s more focus on being global and on the user experience.”

Because Berlin is such a long way from the Silicon Valley bubble, its startups tend to be more individualistic. O’Leary encourages entrepreneurs to build their apps on independent platforms, as opposed to Facebook, because he says people are increasingly unwilling to cut through the clutter on the sprawling social network. He also pushes startups to make products with a narrow focus. He cites Amen, a service hyped by Ashton Kutcher which encourages people to rate opinions and products, and Readmill, which lets people take and share notes on e-books to create a communal reading experience.

Many Berlin startups focus on products for urbanites, such as Gidsy, an online marketplace for real-life experiences like street art tours led by local graffiti artists. Others specialize in business-to-business products. 6Wunderkinder, for example, creates apps like Wunderlist, which lets employees share to-do lists. O’Leary says Berlin’s innovative frenzy is a significant shift for Germans, who tend to be risk-averse. “Obviously after the Second World War, [Germans] didn’t have a great risk appetite—they wanted to focus on rebuilding and being safe,” he says. “I think just now a generation is surfacing that isn’t bothered by the post-World War II mind-set and is instead focused on changing the world.”

Still, Germany’s own interest in Berlin’s tech scene lags that of foreigners. Roughly 80 percent of Earlybird’s $100 million fund comes from international sources, an imbalance that O’Leary says is a result of the country’s distrust for venture capital (which in German has the discouraging name Risikokapital) following the dot-com bust a decade ago. Since then the number of German VC firms dwindled from hundreds to just a few. “International investors have been quicker to realize, OK, if there are only a handful of VCs left for such a big economy, this is a huge opportunity.”

The bottom line: More than 500 tech startups were founded in Berlin in 2011, attracting significant venture capital from abroad.

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