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What will Brexit mean for UK tech startups?

UK’s tech entrepreneurs remain concerned over Brexit despite the government’s recent investment guaranteed on the Spring Budget.

recent investment guaranteed on the Spring Budget. Old Street, known as Silicon Roundabout, is the home of many UK tech companies. (credit: Minghao Gao)

Old Street, known as Silicon Roundabout, is the home of many UK tech startups. (credit: Minghao Gao)

Talent access

Jack*, a london-based tech entrepreneur, said that he is to launch a startup company, but is concerned over Brexit. He told Westminster World that he fears the hiring cost of his business would spiral because of a “hard Brexit deal”.

The 29-year-old will create a digital publishing platform where consumers could be engaged by various visual content. He said: “Especially for digital startups, their employees have never had to think about residential opportunities here, whether they need visa or not. Even if Brexit is not here yet, for many of them it would make no sense to take jobs in the UK if after a year they will have to apply for certain things to be eligible to work here.”

And, while the government has not announced specific plans yet, the ambiguity of the post-Brexit situation has caused growing concerns in the UK tech sector.

UK’s technology industry relies on overseas talents. According to the report published by the Coalition for a Digital Economy in February, EU talents are significant to UK’s tech start-ups’ development, especially in their early but critical period.

Source: The Coalition for a Digital Economy

Source: The Coalition for a Digital Economy

The survey focused on 150 tech start-ups, the majority of which have fewer than 50 employees. The report indicates that 97% of these start-ups had hired EU workers among their first ten employees, and over a third had more than half of the talents from EU in their initial stage.

Nikki Watkins, CEO of Tyche Leadership Consulting which focuses primarily on the tech sector, explained that while “no one” is certain about what will happen, she and most technology companies she works with are devastated.

Nikki said there is already a talent shortage in the industry in the UK.

“We are already short of around 100,000 roles in the UK,” she said, “We want people to know that this is a tech hub of the world and we want to attract the talents from Europe.”

“But actually we found them leaving, and that is not what we want,” she added.

The uncertainty over Brexit has already led to negative impact on the access to these candidates in the technology sector.

According to Cem Barris, director of technology, sales and data from employment agency Morgan McKinley, around “45% of employees within the technology sector in London, specifically startups, are from overseas, and a great portion of them are from EU.”

“We don’t see the employment going away. What we have seen is in particular a reduction of interests or applications coming from EU citizens,” he added.

Investment

Another concern over Brexit among tech startups centers around funding. Some startups are worried that it would be harder for them to gain attention from EU investors after Brexit.

The latest report published last month by the Association for Financial Markets in Europe suggested that UK’s startups still rely significantly on EU investment as a major source of funding.

Source: The Association for Financial Markets in Europe

Source: The Association for Financial Markets in Europe

The figures showed that in 2015, a total of 2,574 startups across the continent received €37.5m through European accelerators. Among these companies, 1,124 are UK startups which alone received almost 30% of the overall investment.

But after Britain leaves the bloc, will the UK, and London, still be able to attract investment from the EU?

So far it seems the UK tech industry is still attractive despite the referendum vote, according to the Tech Nation 2017 report

Source: Tech City UK

Source: Tech City UK

Figures from the report showed that in 2016, the UK tech industry received £6.8bn investment, which doubled that of any other country across the continent.

UK’s small and medium-sized enterprises (SMEs) will also benefit from  the new investment plan of the European Investment Fund (EIF) which includes £30m funding for UK’s innovative businesses.

Besides, according to KPMG’s 2017 Global Technology Innovation report, in spite of the uncertainty caused by Brexit, London has moved up from the seventh to the fifth major tech hub on the globe. The main reason, suggested by the report, is the recent £2 billion research and development fund promised on the 2017 spring budget.

But this does not mean Brexit will cause no harm to the future tech investment from the EU, according to Allan Kelly, founder of Software Strategy Consulting which specialises in improving the business side of small digital startups.

He said: “For all those investments we heard about, how many didn’t happen? How much better could it have been? Investment growth is continuing since June. But the question is, how much more growth we could have had if it had not been slowed by the Brexit vote. ”

When Jack met one of his potential investors in Italy, he felt the European investor’s worry.

“He is massively concerned. He doesn’t know what Bexit will do to his investment. From investors’ point of view, they want to have clarity before they start throwing their money out,” he said.

Market access

The UK tech industry, especially the digital sector with a highly tech-intensive focus, has a large reliance on the EU market. According to the report published by Frontier Economics in January, 20% of goods and services in this sector are exported to EU countries.

Source: Frontier Economics

Figures from the Frontier analysis showed that “a hard Brexit deal” might put UK’s tech industry at risk, especially the digital sector electronic and computer products as well as telecommunications and information services.

In a meet-up called “Tomorrow’s Tech Success”, many tech entrepreneurs shared the concern over a potential harder access to the single market post Brexit.

Among them was the Global Diversity and Inclusion lead at BAE Systems, Abu Bundu-Kamara, who told Westminster World about his worries.

“We could have companies that are not buying from us anymore. They might just want to do businesses with themselves in EU, which is a huge concern,” he said.

Potential solutions

Facing a potential harder access to talents from Europe, Arjun Hassard, head of product at SyndicateRoom, an investment platform for early-stage companies, offers his solutions to UK’s tech startups.

“The only solution to get around it is by maybe opening up to remote working. So you have teams that are based on the continent, whether it’s in Ukraine, Lisbon or anywhere else. You are able to innovate despite not having your entire team in one room, ” he said.

But for those tech startups which are unable to raise enough funding, “it might be not easy from an economical point of view.”

However, remote working does not sound like a good idea for Allan Kelly. He does not believe remote working “will lead to the same innovation”.

“When people are face to face, drink coffee or beer together, they have a different kind of conversation, ” he said, “IT people are not renown for social skills. So if you let them sit at their lofts, on their own, and geek out, I don’t believe we will have the same innovation as we would for having those people in the same room together.”

Another more “economical” solution for tech startups is to merge with their competitors or some complimentary service providers in Europe, according to Elise Ngobi, product manager of the Storefront.

The tech startup company hires only 50 employees, but is already operating globally in three continents: Europe, Asia and America.

Elise said: “It’s about growth strategy. If you merge with a company in a territory that has different regulations, it gives you an open door to break into a new market.”

“But it’s important to find the right people. It’s difficult to find businesses that have the same vision, work towards the same goal, and also are established in each territories,” she added.

March 29 is the day when Theresa May will trigger article 50 and start the process of leaving the EU. After that, how will UK’s tech startups survive?

Allan expressed that the worst scenario would be the case in which startups might not only face talent shortages, lack of funding, fierce competition with big companies, but also suffer from stricter non-tariff barriers if the UK ends up crashing out without a free trade agreement with the EU.

“I remember working with a large German computer company in the 1980s. They employed a guy in the warehouse just to fill in forms so that they can send a truck every week from Germany to England and back to Germany with broken computers. Somebody is employed just to filling forms, ” he said, “Most young businessmen have no idea of the potential of the cross-border conflicts.”

*Name has been changed

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