Sifting through the noise to really understand what impact Brexit and all the uncertainty that it brings is having on the UK’s startup scene, it’s possible to see a picture emerging. It is one that should cause serious concern for anyone with an interest in keeping the UK at the centre of Europe’s technology sector.
In The Sun Also Rises by Ernest Hemingway, the American Bill Gorton says to Scottish Mike Campbell: “How did you go bankrupt?”
“Two ways,” Mike replies. “Gradually, then suddenly.”
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This seems very appropriate, given there are a number of factors that, combined, could now usher in the beginning of a collapse of the thriving ecosystem of high-tech startups which has been one of the few rays of hope in a moribund UK economy over the past 10 years. What happens in the days, weeks and months to come will determine whether that collapse accelerates.
End of free movement
It is estimated that approximately 20% of staff in London-based startups are from the EU, something the core EU principle of free movement of labour has undoubtedly encouraged. The UK government should want to continue to encourage highly skilled workers to come to the UK, and recent pronouncements by ministers confirm this.
However, other government commitments to reduce immigration levels to under 100,000 a year alongside lobbying from other sectors that rely heavily on migrant labour such as agriculture, healthcare and teaching, could see startups struggle to find the right skills. There is also a perception issue among young EU workers: that the UK is not such a friendly place to live and work. While reports of this are largely anecdotal, perception matters.
Decline in early-stage funding
UK investment-tracking company Beauhurst monitors venture capital and public funding of startups, and records that overall funding fell from £8.27 billion ($15.42 billion) in 2017 to £7 billion in 2018. This is not necessarily a cause for concern in itself as 2017 had been an exceptional year. But there has also been a 15% fall in seed-stage funding, and this is more worrying.
Seed funding for very early-stage companies forms the beginning of the overall investment pipeline, and declines will create shockwaves that will ripple through the UK innovation landscape for years to come. As Beauhurst acknowledged, a significant and sustained drop in seed funding could be the canary in the coal mine for the longer term health of the UK tech scene.
Fall in EU research funding
EU funding for academic research at UK universities is an important source of income. Between 2007 and 2013, the EU contributed €8.8 billion ($14 billion) to UK academic research and the current Horizon 2020 programme has awarded almost €5 billion so far. To what extent UK universities are able to access EU finds in the future will depend on what, if any, deal is struck.
A no-deal scenario would certainly have a serious negative impact on a range of important research programmes and projects in the UK. Universities are a vital source of expertise for startups, particularly in high-growth areas such as artificial intelligence, data modelling and machine learning. Like seed funders, they form a vital first stage in the pipeline of innovation.
Incentives from EU cities
While the overall impact of Brexit on the economy looks likely to be a negative one, it is an opportunity for other EU member states. Financial incentives offered by capitals such as Paris, Berlin, Amsterdam and Lisbon are proving attractive for businesses considering locations to start a company, or for those looking to relocate from London. We have yet to see large numbers of companies move abroad, but a recent survey of 100 early stage London-based startups said they have considered relocating their operations.
Ultimately, whether they act on these concerns will depend on whether a Brexit deal is reached or not, and how that plays out in the legal realm. In a sector that is heavily dependent on the collection, manipulation and commercialisation of data, much of it personal, the extent to which the UK adheres to the European GDPR data protection regime will be an important factor. A need to conform to EU data protection rules in order to access European markets could make relocating to an EU member state a much more attractive proposition.
So as with most things Brexit there is still a large degree of uncertainty to how high-tech startups will react to the changes that are coming. But if Hemingway was right in his view of bankruptcy then a point may occur when the UK suddenly loses its appeal as a European hub for innovation, and all the job and wealth creation that goes with it.