Despite political turmoil and uncertainty, the UK is still in the lead in Europe in terms of tech funding and innovation. 2018 saw British technology ventures raise £6.14 billion and the UK closed more exits than any other European country – which included Farfetch’s IPO at a whopping $8.2 billion valuation.
London’s ecosystem has always been and remains the life blood of the British tech scene, concentrating about 40% of all innovative startups. Its large pool of highly skilled international talent, easy access to the EU market and startup-friendly regulatory environment are some of the key assets that have allowed London to become the capital of European tech. In fact, that is also why we at Early Metrics chose this as the first city to expand to from our Paris headquarters in 2016. As a rating agency specialising in assessing early stage ventures, we have had a front row seat in the rapid growth of innovative sectors, such as fintech, healthtech and retail. We have not yet seen this dynamism decrease since the Brexit vote.
Brexit therefore hasn’t made much of a dent on the success of UK tech or London’s ecosystem. But the red flags are multiplying and there is definitely a case to be made for other European tech hubs to pick up the crown, were it to fall off London. Let’s take a look at the major concerns surrounding Brexit and the potential heirs to Europe’s tech throne.
Highly regulated and international businesses will suffer the most
Businesses that operate in highly regulated sectors (like finance) or rely on international trade could be heavily hit by changes in regulation and loss of EU rights. For instance, for UK-based fintech startups the loss of passporting rights would mean having to comply with different regulations and get extra certifications to trade in the EU. How tariffs and checks will be carried out at the border and where this border will be are factors that are obviously set to have a huge impact on startups that produce or ship B2C goods – especially in a no deal scenario. Effectively, losing access to the single market without a secured trade deal between the UK and the EU would dramatically shrink the potential user base and growth perspectives for all British businesses, big and small.
Potential changes in regulation surrounding cross-country data transfer raise further questions for all digital businesses and could become major hurdles for the development of Big Data and AI innovation.
Moreover, the impact of Brexit on British tech depends on the movement of big corporations. If we take the example of fintech again, most startups operate on a B2B2C business model where they sell their products and services through banks. Hence, the density of financial institutions headquartered in the City is a key factor in the success of British fintech. If these banks move, the fintech startups that rely on them will follow.
Losing skilled talent could push high-tech startups to relocate
Our core business is to rate the growth potential of startups and we can say with confidence that there is one aspect of business above any other that is crucial to surviving the first five years of activity: the quality of the founding team. London attracts technical and diverse talent from all over Europe and has until now always been perceived as a welcoming city to foreigners. However, the uncertainty and rising hostility towards immigrants that comes with Brexit is already discouraging Europeans from coming to the UK. The government has expressed the intention to keep attracting skilled workers from abroad but it is still unclear how this will translate into regulation.
If London were to fail in maintaining its rich talent pool, it would likely start a vicious cycle: less talent means less startups and eventually less investment. Indeed, it will probably be too expensive for startups to sponsor foreign talent and pay for their visa, so in the case of a no deal Brexit it is certain that entrepreneurs will move their business to a country where they can access better talent for less. For instance, Eastern Europe and Spain have attractive pools of affordable and skilled computer engineers as well as other technical profiles. It is also worth noting that currently about one in five tech business directors in the UK is foreign, so London’s ecosystem would definitely lose out if these entrepreneurs were forced to leave.
If not London, which city will be Europe’s tech capital?
As mentioned earlier, Spain and particularly Barcelona could gain in popularity with tech entrepreneurs thanks to its cheaper qualified workforce. However, due to their larger market sizes, France and Germany are better positioned to become Europe’s next leading tech hubs.
From a funding perspective, the two countries are pretty much neck and neck. On the other hand, from a “startup culture” standpoint, Paris is becoming increasingly open to disruptive businesses and embracing a culture of entrepreneurship. The Macron administration has put significant effort in promoting entrepreneurship and bringing more flexibility into the regulatory framework. For instance, in December 2018, the government announced it would spend €500 million on blockchain. The PACTE law currently being reviewed by the French Senate should also improve the legal framework for fast growing startups. Another perk, which might seem trivial but is still significant, is the ease of travel between Paris and London via the Eurostar. This would be useful for startups that would want to leave London but still keep a connection with the City.
Germany is also attractive but more scattered when it comes to its startup hubs. Indeed, while Berlin has a huge pool of international talent and big retail market potential, Frankfurt benefits from its historical position as a financial centre and therefore attracts more fintech startups.
The verdict?
While funding is still abundant, the impact of Brexit on London as a tech hub is starting to be felt from a cultural perspective – with valuable foreign talent feeling unwelcome and threatening to leave. Whether London retains its status as tech capital or another European hub takes the lead will all depend on the manner in which the divorce happens.
London’s friendly regulatory framework, diverse workforce and strategic geographic position between the US and Asia, could allow its tech ecosystem to weather a Brexit storm relatively unscathed. But one thing is for sure, a no deal Brexit will be much worse than a bad deal as uncertainty will seriously damage investor confidence, talent retention and business growth. And while big corporations will take time to relocate, most SMEs are agile enough to set up in another country in a matter of months. So, if no deal is to be struck by 29th March, the UK should probably brace for a tech startup exodus.
By Antoine Baschiera, CEO and co-founder of ratings agency Early Metrics
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