The Brexit dilemma: Will London's start-ups stay or go?

The capital's tech companies are trying to plot a course that will steer them past Brexit. That will mean some difficult decisions ahead.

It's hard to imagine a group less likely to have voted for Brexit than the people running London's tech start-ups.

International, smart, metropolitan: London's tech entrepreneurs might be just those 'citizens of nowhere' who were criticised by Prime Minister Theresa May in a speech a few months after the UK voted to leave the EU. But they have also provided much of the energy behind the capital's tech start-up success story over the past few years. And many are now trying to figure out what to do next.

About a third of London's tech workers are from beyond the UK, and around one in five is from the European Union (so many of them weren't eligible for a vote in the referendum anyway). Start-ups with teams made up of a dozen or more nationalities are common in the capital.

Before the referendum in June 2016, a poll of the UK's tech executives found that 70 percent wanted to stay in Europe and only 15 percent said they wanted to leave. After the vote techUK, the industry group that conducted the poll, warned there was a long to-do list for government with many policy and regulatory issues requiring urgent action if it was to support the country's tech industry through Brexit.

But more than two years later — and less than six months before the UK leaves the EU on 29 March, 2019 — many of the details of those policy and regulatory issues, and much else about Brexit, remains deeply unclear.

For now, at least, May continues to champion what's known as the "Chequers deal," which sets out one vision of how the UK would trade with Europe after Brexit, even though the rest of Europe has signalled it won't go along with it. Apart from an unexpected, oblique, reference to blockchain, there's no mention of the impact of Brexit on the tech industry. Indeed, the deal has been met with dismay by some in the tech industry because it focuses on trading goods and is largely silent on services, and on many other of the tech industry's concerns.

But, of course, the worries go well beyond this. A "soft" Brexit deal could tackle many of the concerns of the tech industry, but that's not the only option on the table. Not only are the details of the deal undecided, but it's also not even clear that there will be a Brexit deal at all — or indeed that Brexit will happen.

Some commentators put the chance of a so-called "hard" Brexit — the UK leaving the EU without a deal at all — at as high as 50:50. This could have a huge impact on everything from the ability of the UK to import goods including food and medicines to aviation safety, at which point the problems of the tech industry would be a very low priority. The Prime Minister herself has said a no-deal Brexit would be a bad outcome.

At the same time there is pressure from some for a second referendum, which would aim to undo the decision of the 2016 referendum. While this possibility remains unlikely, if a second vote overturned the first then all the money and time spent on planning for the UK leaving the EU could be entirely wasted.

With Hard Brexit, various soft Brexits, or no Brexit — and their wildly different possible outcomes — companies are finding it hard to plan for the future.

"Any resources we have are just put into growing and focusing on our strategy, so we're not putting any resource into planning different scenarios about what happens after Brexit because it's so uncertain and it's so complex," said Melissa Morris, founder of healthcare workforce management company Lantum.

Morris says she could "scenario plan to death", but if any one of the Brexit variables change, then all the planning is wasted. "We don't have huge amounts of resources to put behind really robust forecasting and planning in the event of a no-deal Brexit," she said.

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Melissa Morris, founder of healthcare workforce management company Lantum: it is the talent that has created such a great and vibrant tech community in London.

Image: Lantum

Many of her peers are taking a wait-and-see approach right now, she says, relying on being nimble to respond to however Brexit turns out. But that doesn't mean they are happy about Brexit.

"Generally, in tech, people didn't want Brexit to happen. Most people voted remain and there's definitely a kind of resentment towards the way that it all went," she said. "At the end of the day it is the talent that has created such a great and vibrant tech community in London, and if you are putting barriers on that talent entering and moving around freely, then that does put everything that has been built in London at risk."

Morris said some European staff had left London following the referendum and gave Brexit as one of the reasons, saying they no longer felt welcome.

"I guess the mood has changed and people are uncertain about just what will happen to the community in London," she said.

Brexit's impact

Certainly, London and the UK is going into Brexit from a position of strength. According to research from London and Partners, since the vote in June 2016 up to June this year, venture-capital funds have continued to flow into the country's tech companies.

UK tech companies have received more than £5bn in VC funding; more than France (£1.55bn), Germany (£2.15bn) and Sweden (£644m) combined. London's tech firms alone have managed to grab over £4bn in investment — well ahead of its big rivals Paris (£1.14bn), Berlin (£814m) and Stockholm (£542m), with financial technology and artificial intelligence being two of the hottest areas where VCs are putting their money, together accounting for more than half of that £4bn. Data from January this year suggested that there are around 250,000 software developers working in the capital — well ahead of Paris (160,000) and Berlin (85,000). Apple is due to move into a huge new European headquarters in London 2021, while Facebook is doubling the size of its London office.

"If you are putting barriers on that talent entering and moving around freely, then that does put everything that has been built in London at risk."
Melissa Morris, Lantum

Still, the potential impact of Brexit has the tech industry worried.

Services make up about 80 percent of the UK's tech exports, and the EU is its biggest export market. Tech companies worry that they will be left out in the cold by a government more focused on trade in physical goods. Without even a vague plan in place, tech companies can't be sure about the rules that will govern trade. That means, for example, they could end up being required to comply with two sets of regulations: one to sell in the UK, one to sell in Europe.

Another big area of concern is data protection. Data of all sorts flows to, from and through the UK and its data centers as a part of daily life for businesses and consumers. Everything from internet shopping to cloud computing and the Internet of Things — all of this data is currently governed by EU law. But after Brexit, a new deal on data protection is needed otherwise those data flows could be disrupted or even stopped, with predictably chaotic consequences.

"Data flows and data protection are fundamental to the modern way of life and, increasingly, to the functioning of the economy, particularly in areas of UK comparative advantage such as services," warned a committee of MPs earlier this year, noting in understated language that any breakdown in data protection will have "serious implications for businesses and consumers on both sides."

But perhaps the biggest concern for tech companies relates to people. One of the main issues raised during the referendum campaign was about the scale of EU immigration, and it's likely that the current freedom of movement that allows EU citizens to work in the UK with few limitations will come to an end after Brexit. That's going to make it harder to attract staff from the EU, and to keep workers who are already here.

And there are some signs that Brexit is now having a negative impact on London's tech ecosystem.

Half the entrepreneurs and investors surveyed by industry group Global Tech Advocates in cities including Shanghai, Singapore and San Francisco, said they wouldn't expand their business into the UK as a direct result of Brexit, and a quarter would not invest in a British tech company in the next 12 months. One in three said that Brexit has made it less likely that they would hire British talent for their tech companies. Two-thirds said Brexit had harmed London's reputation as a tech hub.

Russ Shaw, founder of Global Tech Advocates, says London's start-ups and scale-ups continue to look for greater clarity about what Brexit means for them practically.

For now the biggest issue is around finding talented staff. Companies are already finding it harder to persuade people to move to the UK, and that's understandable, he said.

"Why would you come to the UK at this point in time if you don't necessarily know what your future's going to look like? Now the UK government has been making a lot of the right noises, basically saying EU nationals shouldn't worry, but businesses are getting increasingly concerned and the tech sector is getting concerned because they know they are already having a hard time finding that talent and that's going to get tougher."

The Brexit effect on jobs

The impact of Brexit on tech jobs is hard to measure. Some, but certainly not all, of the start-ups I spoke with said the UK's decision to leave the EU is already having an impact on recruiting.

Ott Jalakas, co-founder and COO of language learning app company Lingvist, arrived in London thanks to a tech accelerator programme, but said today Berlin would have advantages over London.

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Lingvist co-founder and COO Ott Jalakas: As a startup founder you want to minimise the uncertainties.

Image: Tonu Tunnel

"The reason for establishing the office and the company in London is getting access to the talent. London is a hub where different nationalities, people with different backgrounds tend to go, and it's much easier to find the rare talent, at least compared with Estonia or some other continental European countries," he explained.

But Jalakas said some of those talented people are already leaving London as a result of Brexit. "We try to be as flexible as possible, going after the talent. But if talent is moving away from London, then we need to follow the talent," he said.

"For me it's very confusing and confusion creates uncertainty. As a startup founder you want to minimise the uncertainties. That's why it's definitely negative for me," he said.

Francesco Bovoli, CTO at TuneMoji, is on his sixth start-up and says that while London had been one of the most sought-after destinations, it has already become less attractive. Around 90 percent of the staff in the music-and-GIF sharing start-up are from outside the UK. "Talent is the life blood of start-ups. You literally cannot open a startup if you cannot attract the best talent, and as of now Brexit has made Britain significantly less competitive, which means opening a start-up in Britain has become significantly less attractive," he said.

Other start-up founders have similar stories to tell.

"The fact that we were in the EU was a huge draw, it was a big reason to set up the business in London. Our first developer was a Spaniard, our first firmware engineer was Hungarian — it was a really diverse team," said Alex Klein, CEO of Kano, which makes computer and coding kits.

"We have twenty nationalities represented at the company and we have people who have left not because of Brexit, but who have cited Brexit as one of the reasons. We've got people who are sensitive to the message that the vote sends," said Klein.

"Developers are like unicorns, and do we really want to create more borders here to prevent the unicorns coming into the UK?"
Alex Klein, Kano

"For the London tech scene it represents a bit of a challenge," Klein added. "There was this notion that we would create the new Silicon Valley, and we have all the elements required. We have a supportive government, a decent tax regime, a good intellectual property regime, amazing talent from across Europe. Developers are like unicorns, and do we really want to create more borders here to prevent the unicorns coming into the UK?"

One of the tech industry sectors where the impact of looming Brexit is most obviously seen is financial technology. In the past few years, fintech start-ups have been a key feature of London's tech scene, many of which have benefited from the capital's status as a financial services hub.

Brexit throws up additional complications for companies providing financial services because, in the case of a hard Brexit, they will no longer be able to provide services across Europe (so-called "passporting") but most likely will have to be regulated in the UK and by another European regulator, adding time and cost.

London-based online payment provider Checkout.com has already applied for a second licence in France. The idea is that if there is a hard Brexit, it will then be able to service European customers from France and the UK office will serve the UK only.

"That's the hard-Brexit worst-case scenario," said CEO Guillaume Pousaz. "It's additional cost and it's additional work. It really is a duplication of effort. Prepare for the worst and hope for the best I think is the best way to put it."

When the company was started, the UK was the obvious choice, he says. "We will stay in the UK, we know that for a fact, but we really hope for a soft Brexit," he said.

Cross-border payments platform Currencycloud is another fintech company in the process of getting regulated in Europe — in its case choosing the Netherlands — and opening a small office there.

"If there wasn't Brexit I don't know if it would have been [in] Europe. It may well have been Manchester, for example, or somewhere else in the UK. The reason we are doing it now is precipitated by Brexit for sure," said Todd Latham, the company's chief marketing officer and head of product. Latham says he has noticed the company is already getting fewer applicants from EU countries, and he predicts that in future fintech start-ups may decide to only get regulated in Europe.

"If I was going to get regulated as a start-up, why would I get regulated in London, with an addressable market of 60 million people, relative to getting regulated in somewhere on the continent with an addressable market of 450 million people?"

The upsides of Brexit for tech

Across the tech industry the picture is mixed. Those tech companies that mostly deal with US customers or suppliers are largely unaffected by Brexit, and if a mooted UK-US trade deal happens these companies may even see significant benefits. Kano's Klein points out that the drop in the pound since the referendum has helped his business, too.

In a survey of mid-market technology, media and telecoms companies by the consulting firm RSM, 40 percent said that a No Deal Brexit would have an advantageous or favourable effect on their revenues; another 31 percent said this outcome would have no effect on their future turnover; 20 percent felt it would harm revenues; and four percent said it would have a catastrophic effect.

And while some companies have paused investment, not everyone is standing still. Companies are still opening offices in the UK despite the uncertainty, like ecommerce company BigCommerce, which opened a new office in London recently, heralding the move as a rare Brexit good news story.

The company's European general manager Mark Adams points out that the UK remains the third largest market for ecommerce after the US and China. Waiting for Brexit wasn't an option. "There was a huge business imperative," he said.

"We will stay in the UK, we know that for a fact, but we really hope for a soft Brexit."
Guillaume Pousaz. Checkout.com

"We have partners and customers that are using our technology in territories where we don't have any personnel and the UK was one of the biggest, so actually we had to land here and get started."

Others see an upside for their business in the changes that Brexit is creating.

"We're benefiting from Brexit in a way that I didn't expect," said David Richards, CEO of data replication company WANdisco. He says banks with data centers in the UK are moving their data into the cloud — within the EU — to guarantee that they remain compliant with data-protection law after the UK leaves the EU.

The lead time to build a data center is about four years, so they can't build data centers quickly enough, said Richards. "That means they have to choose an alternative. The alternative they are going with is the cloud, so Brexit is going to be a catalyst for cloud adoption," he said. "We're seeing a lot of banks doing this. It benefits us because we're going to move that data and build those hybrid clouds and full cloud implementations."

There is a downside for the wider tech industry in this, Richards admits: when the data leaves the UK, the jobs associated with the applications and analysis that fit around it may go too.

The Entrepreneur's Dilemma

So what should the UK's tech companies be doing right now, with only a little information from the government to guide them? It appears the advice, in classic British style, is a modified version of "keep calm and carry on".

"What we are seeing across the board is small businesses knowing that they need to start preparing, but not knowing what to prepare for," said Emma Jones, a board member of industry group Tech Nation.

Jones says the best approach is to start preparing now. "If you don't know the specifics of what the trade deal would look like, that doesn't mean that you shouldn't be looking to get your business in a good financial state, also look at making the most of — hopefully — the opportunities that Brexit might bring," she said.

For those companies that feel they should be doing a bit more than that, the answer may be that there isn't really much they can do right now.

"There is an awful lot of stuff on which it is not possible to really plan," admitted Giles Derrington, head of policy at industry body techUK.

"You don't necessarily know, as a company, what rules and regulations are going to apply to you, and therefore what changes to your market access might look like, and that's really concerning."

Some larger companies are looking at whether they need to rent extra storage space for stock or components in case a no-deal Brexit causes them import problems. Others are looking at their broader supply chains, trying to figure out where everything comes from and what they'd do in the event of problems, he said.

Big companies are looking at their data supply chain too, trying to understand where their data flows across international borders and where it is stored, in order to understand their risks under a no-deal scenario. If a looming no-deal does risk bringing data flows to a halt, individual companies could use legal mechanisms like binding corporate rules or standard contractual clauses to keep the data flowing. But these take months to sort out and are only an option for the largest companies with deep pockets and plenty of lawyers.

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Alex Klein, Kano: Brexit "represents a bit of a challenge" for the London tech scene.

Image: Kano

The reality is that large companies can throw money at these problems to solve them, said Derrington, and start-ups are quite nimble. They can move quickly to deal with emerging problems. He worries about the tech companies in between. These companies are well established in the UK, with maybe a couple of hundred staff and can't so easily move their office out of the UK.

These organisations feel that they don't know what they are planning for, don't know what they could do to plan for it anyway, can't move quite so nimbly, and don't have the funds to ride things out if something seriously goes wrong, said Derrington.

He gives one less-than-trivial day-one problem that firms could face in the case of a hard Brexit. If the UK ends up outside the European value-added tax regime, these companies could find that 20 percent of their revenue is held up for six weeks on a rolling basis. "That cuts into almost any company's margin by more than the margin is on a lot of stuff," he pointed out.

"The reality of this, particularly on the services side, is that there aren't clever work-arounds for a lot of this. The cold, hard reality is the contingency planning in the event of a hard Brexit is no longer to employ people in the UK and to employ them somewhere else," he concluded.

A Brexit dividend for tech?

Assuming (and it's a reasonably big assumption, like everything else to do with Brexit) that the UK does actually leave the EU, what does that mean for the tech industry in the longer term?

Those who have enthused about the "sunlit uplands" that the UK will enter after Brexit argue that more flexibility around rules and regulations, plus the freedom to strike new deals beyond the EU, will more than offset the downsides of leaving.

Not everyone is convinced, yet.

"There may be areas where flexibility is really valuable to the sector. We haven't been able to identify them yet but I couldn't say they are definitely not there — and the government certainly seems to think they are," said techUK's Derrington.

One potential benefit is that when the UK becomes a member of the World Trade Organisation (WTO) in its own right, it could play a bigger role in discussions around things like ecommerce, he said.

Post-Brexit, the goal for the UK is to find a new selling point. Outside the EU it could perhaps be a bridge to the EU market for other advanced digital economies like the US, India, Australia, Singapore and perhaps Japan, says Derrington. Whether that can happen will depend to an extent on how closely the UK remains aligned with Europe after it leaves, so that it can still function as that bridge to the mainland.

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Russ Shaw: Brexit could make tech start-ups stronger down the line.

Image: London Tech Advocates

Shaw, of Global Tech Advocates, makes a similar pitch: as UK tech start-ups have to work harder outside of the EU they may find that over time it helps them to better connect into places like China, making London a global hub for many of these businesses.

"Maybe it might make us down the line a much stronger global ecosystem rather than one that's so fully reliant on the European Union — it's a big question and none of us fully know the answer to that, but it's what we'll have to aim for," he said.

Shaw argued that there may actually be a post-Brexit boost come 30 March next year. "I think we are going to see actually in some respects an uptick in M&A activity in further investment going into the sector, because by then we're going to hopefully have a clearer picture and that pent-up demand which has been sitting on the sidelines waiting to see what kind of plan we have will be deployed."

However, even that kind of delay can have an impact, as Lantum's Morris points out. "That wait-and-see itself is damaging because people aren't moving forward and so procrastination is already damaging towards the industry," she said.

Richards from WANdisco also sees potential benefits emerging from Brexit. Entrepreneurs love change, he argues. "We thrive on structural changes in the market, and actually I think it will create huge opportunity for people to create companies — particularly in the tech industry where maybe there will be some regulatory advantages," he said. "If the UK government gets the regulation right and creates competitive advantage in some areas, which it could do, then I think there's all sorts of new opportunities for new companies to grow and flourish in the UK. We can see doom and gloom, but there are lots of opportunities."

And while tech companies worry about their ability to find talented people after Brexit, this could have long-term benefits for the UK if this means they look harder to find local talent.

"We as a community need to say that overseas talent is important, but we have to invest more in terms of home-grown talent," says Shaw.

"We thrive on structural changes in the market and actually I think it will create huge opportunity for people to create companies particularly in the tech industry."
David Richards, WANdisco

That might mean looking more widely across London or across the country rather than relying on persuading talented staff to come from overseas. Improving the opportunities for people across the UK has long been a goal for the government; although it's hard to see why the UK has to leave the EU to do it.

Shaw points to Ada, the National College of Digital Skills, a specialist college in Tottenham, north London, which aims to remove the glass ceiling for women and people from low-income backgrounds in the tech industry.

"We need another 40 or 50 of those across the country and put them into areas where people feel cut off or feel disadvantaged or left behind, but we've really go to get our arms around talent that's out there across the nation," he said. Encouraging the work done so far to ensure that the tech ecosystem spreads beyond London is another important step.

However Brexit plays out, London's tech ecosystem is likely to survive. "Everyone is looking for this headline that everything is fine or everything is catastrophic, and actually it's somewhere in-between for us," said CurrencyCloud's Latham.

To borrow a computing metaphor: London's start-ups will interpret Brexit as damage to their network, and they'll route around it. How they do that is the big question. Perhaps they'll hire fewer staff in the capital, and maybe hire a few more in another European capital, or set up new offices elsewhere.

And already other European cities — most notably Paris, Berlin and Barcelona, but also others like Tallinn and Lisbon — are already setting out their start-up stalls.

"Many parts of the EU are offering incentives, as UK tech companies try to work out how Brexit might affect our ability to sell products in Europe or the USA," said Andrew Pavord, CEO at London-based Apply4 Technology who has looked at some of the options in case trading conditions became unworkable in the UK. "The Canary Islands have caught our eye, given the advantages of a corporation tax rate of four percent (on mainland Spain corporation tax is 19 to 23 per cent), and all that sunshine thrown in, along with staying inside the EU," he says.

It's easy to dismiss the worries of the London's tech industry, but the reality is that what happens to the country's tech start-ups matters for the wider economy: they are creating exactly the sorts of high-wage, high-skills jobs that all cities want to attract.

These companies can help drive urban renewal, for example. The impact (mostly for better) of tech companies on the lovely but unloved Shoreditch neighbourhood in east London has been remarkable to watch over the last decade or so. London is also making the right noises about making sure the growth of its tech scene avoids the pitfalls of San Francisco and benefits its wider society.

Creating a successful start-up ecosystem doesn't just mean jobs for developers; it means opportunities for interns, jobs for intellectual property lawyers, and accountants and PR companies and office managers — and yes even the baristas who create those over-priced coffees that coders crave. These ecosystems are hard to create and easy to destroy. And the in-demand talent of developers and entrepreneurs means that they can easily set up elsewhere if need be. So much depends on the final shape of the Brexit deal, assuming there is one.

Researching this story even I was surprised by the diversity of the London tech scene and the pride that these entrepreneurs felt about living and working in London — even if most of them could not quite understand Brexit itself.

London's tech entrepreneurs didn't vote for Brexit, but encouraging them to stay in the UK after it happens may well be key to making a success of it.

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About

Steve Ranger is the UK editor of TechRepublic, and has been writing about the impact of technology on people, business and culture for more than a decade. Before joining TechRepublic he was the editor of silicon.com.