Dealing with a Political Change: Assessing London’s Post-Brexit Competitiveness

This is a synopsis of my article for the Coller Institute of Venture at Tel Aviv University. (Full PDF requires free registration)

With Brexit looming, the uncertainty about London’s economic future is at its peak. The government’s Tech City policy initiative, launched in 2010 by then prime minister David Cameron, contributed to a transformation of London. It marked the inception of the UK Capital as a major venture hub, attracting founders from all over Europe and catapulting London into becoming a leading Fintech cluster. But what happens next? Can London survive without being part of the single European Union market and without the free flow of talent?

To offer some answers to these important questions, the article examines the durability of key components of London’s Venture Fabric: availability of talent, access to capital across stages, and the density of network required to help start-ups scale. Insights are derived from primary data collected through a survey of 104 London-based entrepreneurs, investors and members of the startup ecosystem, asking how Brexit affects staffing, funding, and the vibrancy of London’s venture network as of the fourth quarter of 2016. Findings were triangulated by interviewing leading members of the startup ecosystem in October 2016.

Below are the top level results of my findings based on survey responses.

Brexit will most certainly have an impact on the startup ecosystem

Which aspects of Brexit most affect the startup ecosystem in the UK?

1. Access to talent;

• “For a start-up, the team is very important. Sometimes we need the best in a particular field, sometimes we need affordable team members. Very rarely all these people happen to live in the same place. I moved from Madrid to London to start my tech business. If the U.K. weren’t part of the E.U., I would have never considered it. I would have chosen California or Germany, both of which are great start-up ecosystems and part of a great community (U.S./E.U.) from which you can find your team members.”
• “Risk of access to talent diminishing, risk of not being somewhere talent wants to live.”

2. Uncertainty;

• “Uncertainty leads to missed opportunities, decisions being made and so forth that have immediate effects. So, even though we have no idea what will happen, things are happening already in that vacuum.”
• “Uncertainty — we were to set up a U.K.- based HQ, but decided not to and go straight to Delaware, due to Brexit. In medical devices, regulations and market access are key and the E.U. is segregated enough.”

3. Access to capital. (both for VCs and startups)

• “Quite a few of my funds’ LPs operate out of London. After the vote, they are either moving operations or holding off on new deployments.”

4. Sector specific concerns, such as “passporting” for fintech companies (according to the Financial Conduct Authority [FCA], if a U.K.- authorized rm wants to provide financial advice, set up a base, or run permitted activities in a European Economic Area [EEA] state, it needs to apply for a “passport.”):

• “Uncertainty on E.U. passporting of financial services, costs to access the European market, access to Eastern European coding talent. This can be stomached by large corporates; start-ups have no idea how it will impact their fundraising and could face running out of money earlier than expected.”
• “Particularly in Fintech, the market uncertainty has affected start-ups the most. They don’t have the financial stability of incumbents to work through turbulent conditions and there has been a lack of funding due to these uncertainties in markets these start-ups are entering.”

In conclusion

The tech sector was largely in favour of remaining in the E.U., and the news about Brexit was received almost in disbelief. Now, with Government plans to trigger Brexit next week (March 29th), it’s more important than ever that entrepreneurs and investors alike collaborate with government to create the right regulatory environment to secure the UK’s status in tech and entrepreneurship post-Brexit.

With this in mind, I made several policy recommendations:

1. Secure access to international talent, with a focus on technical talent. The entrepreneur visa that is currently in place is not flexible enough to cover software engineers, designers, and QA testers, roles that are in high demand and can’t be fully filled with U.K.-only talent.
2. Empower start-ups to conduct international business — losing access to the single E.U. market poses challenges to all transactional start-ups, particularly in Fintech. Settling “passporting” is essential.
3. Ensure access to capital across stages
   — Brexit is slowing the direct rate of investments, but more importantly it could really dry up a major source of LP capital into the funds. The government must act to ensure there is enough venture capital to support the growth of the tech industry.

Looking ahead, the tech community should come together to address the underlying social/political issues that triggered Brexit to begin (namely inequality) so Tech can be part of the solution, not just the problem.

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Feedback welcome.

The full PDF article requires free registration via this link bit.ly/2n7hvRE