Brexit’s Impact on London’s Tech Startup Sector

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Now that the dust has settled on last weeks’ referendum, it’s becoming increasingly apparent that Brexit will actually happen, raising the question of what the implications are for London’s tech startup sector. Some are saying that Berlin, often cited as London’s biggest rival for the title of Europe’s startup capital, stands to benefit from Britain’s withdrawal from the EU.

Others reckon that, to paraphrase Marc Andreessen, free from EU red tape, it’s entirely possible that Brexit will make the UK a more attractive place to build and finance new technology companies. It certainly seems likely that the regulatory burden on businesses in the UK will be reduced considerably, and the absence of the UK’s moderating influence may well mean that businesses within the EU will be subject to more regulation than they would have been if the UK remained.

However, this impact isn’t likely to be felt for at least several years after the UK leaves the EU (which is unlikely to happen before October 2018). For me, the two key factors in the short to medium term are access to talent and London’s status as Europe’s financial capital.

As part of the EU, London has been able to draw on a huge pool of talent from across the continent. Young, tech-savvy talent has been able to move to London without having to worry about visas or immigration restrictions. Dissatisfaction with the level of net migration into the UK (and, in particular, the pressure this has placed on the UK’s public services) was a key factor in the referendum result, so it seems likely that restrictions on immigration will be put in place after the UK leaves the EU. The greatest restrictions are likely to be imposed upon unskilled migrants.

However, the UK government has long recognised the importance of being able to attract skilled talent, as evidenced by its inclusion of “digital technology” amongst the areas of expertise that are eligible for the Tier 1 (Exceptional Talent) visa. Therefore, it seems highly likely that a system will be put in place to maintain London’s attractiveness as a destination for graduates and other suitably skilled talent from the EU. Critically, the current visa scheme does not require that the applicant has a job offer, meaning that successful applicants can work for themselves or start a new company.

If the application process can be simplified, streamlined, and made less expensive (ideally, it should be as simple as applying for an ESTA to visit the US), there’s no reason why London shouldn’t continue to attract talent from across Europe.

London’s success as a financial capital might appear orthogonal to its success as a tech startup hub. Some view the financial sector as a source of competition for tech talent but the truth is more nuanced. A lot of talent is attracted to London because of the financial sector, adding to London’s talent pool. Many tech startups recruit people who have worked for banks or brokerages. It also provides a safety net for tech talent whose startup is unsuccessful. The perceived risk of starting a new company (or taking a role with a startup) is lower if you can be confident of being able to find contract work in the City if it doesn’t work out. This effect is obviously strongest in the fintech sector but I believe it applies across the wider tech sector.

As a financial capital, London is also a nexus for investment capital. Many VC funds are based here, and the UK has spearheaded equity crowdfunding, with a permissive regulatory environment and tax breaks for individuals investing in early stage startups. If London’s financial institutions are forced to move part of their operations to Europe, London’s economy will take a hit (probably similar in scale to – but lancer-lasting than – the post-2008 economic downturn) and there will be less capital available for early-stage companies. Large banks have already begun making contingency plans to relocate jobs and functions to Dublin, Paris or Frankfurt. The key determinant will be the extent to which the UK retains access to the single market for financial services after it leaves the EU and, in particular, whether UK institutions will retain the “passporting” rights that allow them to offer services across the EU from a UK base.

On the one hand, it seems unlikely that the EU will offer such a concession. The French in particular have long been disgruntled that London remained Europe’s financial capital, despite being outside the Eurozone. However, for the UK government, minimising the impact to the City of London will be a top priority, as the employment and tax revenues it generates make an important contribution to both the UK economy and the UK’s public finances.

Screen Shot 2016-06-27 at 08.54.42Fortunately, the UK has a strong hand to play in the negotiations that will follow the activation of Article 50. The UK imports far more from the EU than it exports to the EU. The German and Dutch economies would take a major hit if trade barriers were erected between the UK and the EU. Therefore, it seems likely that the UK government will seek to negotiate a deal that allows UK financial institutions to retain full access to the EU market, in exchange for allowing European exporters to retain access to the UK market. If such a deal is struck, the impact on London’s financial sector will be minimal.

Many other factors that have contributed to London’s success as a tech hub won’t be impacted by Brexit at all. Whether or not we’re in the EU, the UK is still one of the largest economies in the world. London will remain one of the great cities of the world, with the attendant economies of scope. London’s universities will continue to rank among the best in the world, contributing an endless stream of graduates to the city’s talent pool. London will remain a welcoming and cosmopolitan city, and English will remain one of the world’s most widely-spoken languages.

There’s also the prospect that leaving the EU will open up a host of other opportunities for the UK and London. Less red tape seems likely to reduce the cost of doing business here. Freedom from EU constraints will allow the UK to negotiate bi-lateral deals with other, emerging economies. We could even see the UK joining NAFTA to form a North Atlantic Free Trade Association. What we currently perceive as a crisis may well prove to be the source of endless opportunity.

In the short-term, we’ll probably hear more anecdotes about spooked VCs withdrawing investment offers to UK startups but as things settle down over the coming weeks, I expect we’ll return to business as usual. So, to quote Hussein Kanji, keep calm and carry on.

 

Written by jackgavigan

June 28, 2016 at 4:33 pm

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