Brexit and Startups: How UK Entrepreneurs View the Next Few Years

Brexit and UK Startups: How Entrepreneurs View the Next Few Years

The shock of Brexit has worn off since last summer, and now business owners are starting to question how the vote will actually affect them personally.

“What will Brexit mean for my exports?”

“What does it mean for my employees?”

“Will the economy under Brexit slow my business, or give it a boost?”

“Is now a bad time to expand into Europe?”

There are millions of factors in play when international relations are on the line, and not all startups will be affected the same way. Here’s what the experts are saying about Brexit and startups, and what you should watch out for.

The Impact of Brexit on The UK Economy on The Pound

Regardless of industry, expansion and size, UK startups will be affected by the Brexit. At the very least, the volatility of the pound will affect consumer spending and buying power.

After the Brexit vote in June, the pound fell to record lows and has struggled to recover ever since. In fact, it was named one of the worst performing currencies of 2016. Most economic experiences believe it’s going to get worse before it gets better, and might even reach parity with the euro sometime in 2017.

However, there is hope. Thomas Colson at Business Insider predicts that the pound will stabilise and start to rebound in the next 12 months. This is mainly due to market overreaction from the news, UK assets and bonds becoming more affordable, and a weak US dollar under president Trump.

If global markets feel too abstract for where your business is right now, then consider the guide that Tejvan Pettinger created on who wins and who loses when the pound is weak. On a high level, the winners include:

• UK exporters

• Foreign tourists

• Foreign investors

Meanwhile, the losers are:

• UK importers

• British travelers abroad

• Foreign workers in the UK

This is certainly broad view, and Pettinger’s guide goes into greater detail, but the results will be felt immediately. A few days after the Brexit vote, the team at Courier said property firms were pausing investments in the UK, while a cosmetics firm sold 300,000 GBP of face cream to its French customers because it became considerably cheaper when the pound fell.

Entrepreneurship Affects Overall Job Growth

One of the main arguments in favor of Brexit was preserving UK jobs. However, multiple studies have shown that migrant entrepreneurs actually contribute to UK job growth overall.

According to the Centre for Entrepreneurs, in their report Migrant Entrepreneurs: Building our Businesses, Creating our Jobs, one in seven UK companies is founded or co-founded by a migrant entrepreneur. These 456,073 migrant entrepreneurs represent 155 nationalities, and are responsible for 1.16 million jobs within the UK. If such future entrepreneurs look elsewhere, thousands of future jobs will be lost.

Even existing tech startups could struggle to retain their employees and hire new ones under Brexit. Ning Li, founder of Made.com, said around 35 percent of his 200 employees in London are from Europe, which means he potentially could lose a large part of his workforce if regulations make it tough for them to stay in the UK.

"It's already notoriously tough to hire good developers and engineers in this country," says Li. "Part of the shortage has been filled by European immigration."

Li isn’t the only one who relies on European employees. The UK has a perceived skills gap when it comes to the tech industry. Zlata Rodionov at The Independent reports that foreign IT and compliance professionals can earn up to 18 percent more than UK graduates. Some employers were even willing to offer 30 percent more to graduates from non-British universities.

While UK-based startups do create jobs for British citizens, they rely on non-UK talent to launch the technical aspects of the business.

Furthermore, a lack of European migrants doesn’t necessarily mean a complete migration halt. The workforce won’t entirely be made up for Brits in the next five years. The team at Startups.co.uk believes Brexit will actually open doors to non-EU countries.

“Brexit will see the UK allow entry to more migrants from outside the EU, such as India, China and America, which is thought to open up access to more skilled workers,” the staff writes. “It’s also been argued that, on the back of Brexit, the UK may introduce a points-based entry system like that of Australia which could result in higher quality candidates coming to the UK.”

While Brexit could be frustrating for (and even crippling to) Li’s business, smaller startups that are still getting on their feet might have a larger talent pool to choose from.

UK Investors are Cautious but Still Giving

Along with the day-to-day operations of startup life, the uncertain future of the UK under Brexit will affect investments. Startups seeking additional funding will face cautious investors, but could still find the funds they need.

Throughout the uncertainty of Brexit, investors still made 2016 a banner year for startup growth in Europe and the UK. According to Clipperton Finance, 12 billion USD was invested in tech startups in Europe and the UK, the same amount as in 2015.

Interestingly, more deals were reached for less than 30 million USD, meaning investors appear to be going after multiple smaller companies instead of one or two massive ones. There were 943 deals between 1 million and 10 million USD, a 50 percent increase from 2015.

In fact, some UK investors are fighting back against the perceived Brexit slump with incubator challenges. FinTech Innovation Lab in London announced in January the launch of its largest accelerator program, where 20 startups (out of 300 applicants) will participate in a 12-week program while receiving mentorship from 28 financial institutions.

“The transformation requirements that the financial services industry must undertake to remain relevant arguably pose a bigger challenge than the immediate geo-political uncertainty casting a shadow over the industry,” program director Tom Graham said in a press release. According to Graham, moving forward to improve the UK and its financial districts is the best way to counter political limitations on trade and immigration.

Startups looking for additional funding or support may have a harder time when pitching bigger or riskier investments, but there are still plenty of options for growth in the UK.

Other Countries are Poaching Potential Startups

While UK investors are cautious, EU investors are excited. Investors from countries such as Germany and Ireland are taking advantage of Brexit to promote their own economic stability, according to Rebecca Fannin at Forbes.

“[There is] little doubt that London will need to do more to shore up its position with startups and venture capitalists pondering where to invest and set up shop,” she writes.

When it comes to immigration and international trade, one country’s trash is another’s treasure. James Cook at Business Insider reports that French digital minister Axelle Lemaire has been travelling across the world promoting “La French Tech” alternative and encouraging entrepreneurs to establish themselves in France instead of the UK.

People appear to be listening. Investments in French tech startups were up 71 percent in 2016. In Q3, funding for French startups almost matched UK funding (729 million GBP vs 781 million GBP) and doubled the amount invested in Germany.
However, as France picks up entrepreneurs who are nervous about starting up in the UK, the UK has a chance to pick up entrepreneurs who are nervous about starting up in the United States. In the case of both France and the UK, their competition’s political landscape is their biggest opportunity.

James Titcomb at The Telegraph reported that President Trump’s executive order halting arrivals from seven largely Muslim countries could benefit the UK’s tech industry. US-based companies might consider expanding abroad to get the talent they need instead of trying to fight immigration restrictions, and UK companies might reconsider a move to Silicon Valley. Even if this order changes, the unwelcoming American political climate could slow its startup scene over the next few years.

In fact, this uncertain period before Brexit takes legal effect might be an opportune time for businesses across the US, the UK and the EU to consider expanding to protect their investments in the future.

International and UK Startups Will Question EU Expansion

For years, the United Kingdom was viewed as the gateway to Europe. Companies founded in the UK wanted to expand to the mainland while international firms started in London before moving into Paris or Berlin.

Now, some startup founders are questioning whether London has the pull it once had.

Fadi Sabbagha, founder and CEO of BornInteractive, tells The Next Web that access to European markets is crucial to his growing Lebanese business. Sabbagha had initially come to the UK through an incubator program called the UK Lebanon Tech Hub. While he’s still planning to open an office in London, he believes access to Europe is crucial to his business.

Although many British companies are still moving forward with their plans, despite Brexit concerns, they’re looking at other parts of the world, like Malta and Rwanda, which might be more financially viable.

Justin Smith, co-founder of the EdTech Exchange, believes startups need to be nimble if they’re going to survive — even if that means expanding to different countries than planned.

If UK-based startups are considering expansion beyond the EU, then EU companies will also consider expansion beyond the UK.

“London is a beacon to Europe's entrepreneurs because of its position as both a financial and business hub for the EU,” Marc Curtis writes at The Drum. “Our government invests in initiatives to encourage European founders to come to the UK and start their businesses here.”

Once that incentive is gone, then local founders and incubators will struggle to find top talent. What once was a constant exchange between the two landmasses could slow down as other countries make better offers.

Every company and industry will be affected by Brexit differently. Some will only experience minor fluctuations in sales. Others will struggle to adjust to new hiring regulations and trade laws. The keys for startups to survive these times is flexibility and contingency planning as new rules are created.

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