Brexit: The Impact Two Years Later

Two years on from Brexit and CNN London’s research reveals that the British people are growing weary of the apparent failure to negotiate a positive deal. The European Services Forum (ESF) wrote to the Brexit chief negotiators asking them to “take all necessary actions to minimise business disruption”.  Yet despite this, startups and tech firms appear to be thriving. In fact, Britain has hit record numbers of startups since 2016.

According to research by Exertis, new businesses created in the tech sector rose by nearly 60% in 2017.  A record £3 billion was invested into British tech startups last year; more than anywhere else in Europe. But the delays in securing a Brexit deal threatens to call a halt to this funding – the EU’s commitment to supporting UK small businesses ends in 2020 – and potentially affect the creation of tech startups in the future.

The key issues affecting a Brexit deal can be summed up in the following points:

  • The future relationship with the EU
  • Investors
  • Capital flow
  • Passporting
  • Labour
  • Immigration
  • Trade

However, despite these issues, people are still as motivated as ever to launch a startup since Mrs. May triggered Article 50 in 2017.

 

Startup Britain

In 2011 the Startup Britain initiative took to the road and has helped to create 657,590 new businesses. So far in 2018 another 424,230 have been launched, and a record 660,00 were created in 2017. Startup Britain has provided hundreds of hours of mentoring services and access to investment. They have worked with national and international companies, as well as organisations in the USA, providing potential funding and investment avenues to new start-ups. Here is further information on investment and funding streams that may be available to your business at Startup Britain.

Research undertaken by information provider CheckCompany has revealed that since the Brexit vote, 583,000 new companies have been launched in England and Wales alone. They believe the study confirms the vote has had no great impact on the numbers of startups.  But Brexit is still 8 months away so how much of a negative or positive impact it may have is still a little uncertain.

 

Figure 1: Brexit has had little impact on UK startups

 

Post-Brexit Snapshot

Despite the negative predictions, the UK economy grew at the same rate last year as in 2016 at around 1.8 per cent. This year has seen slightly slower growth, according to ONS figures. Whilst there isn’t a specific growth figure for tech startups, the finance and services industry saw output growth of 2.1 per cent from the ONS GDP preliminary estimate.

There is still, however, a general feeling of malaise pervading the economy over the Brexit process.

This fall in confidence includes consumers and businesses. The graph from Trading Economies highlights the severity of the fall in consumer confidence but it should be noted that a report released in April 2018 shows the lowest level of PMI for the last one and a half years. The volatility of the post-Brexit referendum PMI can be seen in this graph. We still don’t know how the economy will react once the UK has officially left the EU.

 

To the Future

The future relationship between the UK and EU is yet to be defined. Alistair Heath, the editor of The Sunday Telegraph, has a positive view of the UK’s future, based on startups and entrepreneurship:

 

“When I see how entrepreneurial the UK has become, I can only see a golden future for us were we to leave the EU and embrace a more global future.”

 

Others take a more pragmatic approach to the situation. Taavet Hinrikus is the London-based CEO and co-founder of the cross-border money service Transferwise, and formerly from Estonia, states:

 

The two main benefits of being part of the EU are access to talent because of the free movement of labour and the fact that you can ‘passport’ regulation; so if you’re regulated in the UK, you’re regulated across the EU.  We don’t know what’s going to happen with either of those.”

 

But even in the face of Brexit negativity, Silicon Valley’s strong relationships with UK tech firms looks set to result in added growth capital, potentially turning the UK into a global small business success story despite Brexit.

 

“Here is a huge value for a British company to secure a West Coast investor,” said serial entrepreneur and investor Sherry Coutu. “From building internal leadership capacity and processes, to attracting the right talent and winning contracts at home and overseas, investors can provide invaluable support and access to a wider ecosystem.”

 

In fact, the number of deals has also gone up markedly from 21 in 2011 to 74 in 2017. There’s little doubt the statistics clearly support the success enjoyed by UK firms in Silicon Valley.

 

Current Implications

The UK is set to leave the EU in March 2019 at which point the transition phase, or as the UK government calls it, the implementation phase, will begin. This will last until 31 December 2020, when the final arrangements agreed between the two sides will kick in.

 

The future relationship

Depending upon the structure and level of integration in the post-Brexit UK-EU relationship, London outside the single market could lose some of the appeal it has built. The self-reinforcing halo effect of an attractive regulatory and legal system, single market access and a time zone midway between Asia and the USA will be no more.

 

Investors

Investors and founders of new tech startups (one in five tech startups are immigrants) are reconsidering the attractiveness of basing their business in the UK. However, existing startups, which are still relatively new, may not have either the capital, know-how or ability to uproot and move to another European city, such as Berlin, Dublin or Amsterdam.

 

Capital flow

The UK’s tech startups have benefited from the single markets, freedom of capital, labour, goods and services. Leaving the EU, Britain will almost certainly leave this single market. Outside the single market, these freedoms will be scrapped. With banks such as Deutsche Bank announcing the reduction of staff in the UK, the EU countries have now started vying with each other for UK startups.

 

Passporting

One less discussed implication of Brexit is the passport regulation. If you are regulated in the UK you (currently) can transfer those regulations across the EU through the passports of services. This is possible due to common standards and regulations. Theresa May, however, has now confirmed she wants to rule passporting out, but would like a new deal that would still allow UK companies to sell services across the EU. Even so, this could still lock businesses out of certain markets or heavily restrict what they can do.

 

Labour

Other implications of leaving the single market will be a reduction in the available talent pool. Currently, London’s startup community freely accesses talent from 28 European nations due to the free movement of labour. Payments company, Currencycloud, has already started to trigger their Brexit contingency plans, establishing offices or applying for regulatory licenses outside the UK, because of “concerns about hiring staff and accessing clients after Britain leaves the EU.

“For businesses, this issue is as important as our future trade deals with the EU,” CBI director-general Carolyn Fairbairn said in a speech to CBI members in the East of England. “Put simply, skills shortages threaten to slow down growth. Training British workers isn’t enough on its own. Nor is just hiring from overseas. Businesses need both.

 

“From tech startups to care homes firms don’t know which staff they will be able to employ. And this is deterring investment today.”

 

So What Can Be Done To Mitigate Brexit Risks?

  • Build a robust talent pool
  • Access startup funding
  • Look at the single market and regulatory environment

 

A Robust Talent Pool

It makes sense to undertake a people audit and analyse the results in order to formulate strategic planning for your business. Its vital organisations have strong resourcing plans to both highlight and retain talent. Highlighting clear career paths for employees could maximise their strengths.

 

Access To Startup Funding

One of the biggest worries involves the European Investment Bank as a key player in the European startup field. You have to be an EU member state to be a shareholder of course.  Whether UK startups will be able to access specialist funding streams will depend on whether post-Brexit UK is able to participate in these programs or replicate them. The immediate effect has been a drop of 40 per cent in UK startup investment in Q2 2016. This continues a back-to-back quarterly decline.

Hussein Kanji, a founding partner at Hoxton Ventures says: “The question of whether funding continues to flow into the UK is the “biggest unobvious risk” for the country’s tech scene.”

 

Replicating investment vehicles

British Business Bankwas launched in 2014 with the aim of operating in a similar way to the EIF on a national level. The bank invests in startups and scaling up small businesses, working through 90 different investment funds and vehicles. Programs include start-up loans to growth loans. The bank has already supported 59,000 businesses across the UK. To find out whether your business qualifies for funding, see here.

The British Business Bank 2017 Finance Survey highlighted the fact that the majority of SMEs expect no impact from the UK leaving the EU, and have neither made nor expect to make changes as a result of leaving the EU.

Luke Peake is the founder of Uberated, a review aggregating platform. Post-Brexit referendum he has experienced problems with funding. However, by providing a solid product and plan, he secured angel funding through backing from Sir Terry Leahy.  He said:

 

It proves that important and influential angels, who want to support key innovation in their industry or sector, are still out there and willing to back proven young businesses and entrepreneurs”.

 

Startups unable to access traditional investment or bank loans, can use the government-backed Start Up Loans company which enables entrepreneurs to borrow up to £25,000. Other streams include crowdfunding through sites such as Funding Tree, or regional development funds, such as Enterprise Answers.

Overall demand for corporate lending from small and medium-sized businesses was reported by lenders to be unchanged in Q4 2017. The drop in demand for finance reported by lenders is consistent with declining new loan and overdraft application rates,

 

The single market and regulatory environments

Perhaps the ‘single’ largest Brexit disruption to the startup ecosystem is the potential loss of single market membership. Accessing the single market could still be the strongest lure for tech startups to relocate or open up within the EU, as seen earlier.

Leaving the single market could lead to both tariff and non-tariff barriers, such as divergent regulatory systems being introduced between the EU and UK. Data is the lifeblood of tech startups and the laws governing its collection, movement and retention could diverge (this feeds into the EU’s new data retention laws).

Currently, the UK regulatory environment is bound up in EU law, such as the General Data Protection Regime (2018). Will Britain mirror this legislation or introduce its own regulations? By now it is obvious that following Brexit, everything will change.

At the time of writing there has not as yet been a material change in the UK’s relationship with the EU or single market. It is also unclear what Brexit really means or what the UK’s relationship with the world’s largest trading block will be.

This uncertainty is creating far from ideal conditions for startups which benefit from access to a stable market as well as long-term economic and regulatory stability to attract investment. The outcome of inter-governmental negotiations over the coming months and years will determine the future UK startups will face, and whether businesses will want to remain in the UK or relocate within Europe.

 

At The Time Of Writing

The UK government has agreed a plan to submit to EU negotiators. Major highlights include:

  • The setting up of a “mobility framework” allowing UK and EU citizens to travel to each other’s territories, and apply for study and work.
  • A signed treaty committing the UK to “continued harmonisation” with EU rules – avoiding friction at the UK-EU border, including Northern Ireland.

Carolyn Fairbairn, CBI’s director-general, said: “Businesses will welcome the fact the government has reached an agreement.”

This gives the UK an independent trade policy with the ability to set its own non-EU tariffs and to reach separate trade deals. But this is not a final deal,  just a way forward. As yet, no-one can be sure what will happen in the next 8 months, until a two-way deal is finalised.