The Impact of Brexit on London Startups

The Impact of Brexit on London Startups
Innovation

For the past three years, one word has been on everyone’s minds in the UK: Brexit. The sudden decision to leave the European Union has been endlessly scrutinised, discussed and delayed, but the end result seems to be an indelible cloud of uncertainty floating over the whole of Britain (and Ireland). While British politicians seem to have little to no idea on how to deal with the whole situation, UK businesses have been preparing for the shift away from the European Union since the day Brexit was announced.

The referendum result came as an especially harsh surprise for many Londoners, who came to the city for its vibrant and diverse tech hub. In London, one in five tech workers is from the European Union and a third of the whole industry are from abroad; many start-ups in London boasting teams with up to 12 nationalities.

While it’s easy to imagine London will be impacted the most from the potential regulatory changes to come once the UK leaves the European Union, London-based start-ups have already had to deal with significant consequences stemming from the Brexit impasse.

Staying or going?

One major dilemma London-based startups have had to face since the announcement of Brexit is whether they should remain in London or move their businesses to mainland Europe. The main reason for moving across the Channel? Trade. As it stands, the UK is hoping to still be able to conduct “frictionless” trade within the EU. However, if Brexit ends up taking the UK out of the Single Market for services, London-based tech startups will have to deal with two competing regulatory regimes, as they will not be trading goods and services under the same policies and regulations in place across the rest of Europe.

A month after the referendum, The Independent reported dozens of start-ups were already relocating to Berlin. Others, like Duco, have opted for Poland; more and more start-ups are relocating to Eastern Europe due to favourable regulations. Estonia, for example, is granting “e-residencies” to foreign startups – British e-residents have already set up 312 companies in Estonia, 40 of which were set up this year alone. TableYETi, a startup that facilitates restaurant payments, is one of those startups – they offer software and hardware solutions and currently work with many EU partners. A no deal Brexit could have terrible consequences on their business, hence why they are taking precautionary measures to ensure they can remain in the single market. This shows that there is growing concern among London startups, and that they are considering all options to remain in the single market and trade within the EU.

That being said, the startups leaving London are still a minority if you consider there are over 660,000 startups in the UK. The number of startups in London is actually still growing and shows no signs of decreasing.

Higher prices for imported goods

London based start-ups are already experiencing the disadvantages of Brexit. For example, Jamie Oliver’s restaurant business reported higher prices for products imported from Italy, leading to the closure of four restaurants and a focus on international launches.

Jamie Oliver won’t be the only one making this decision. Start-ups are bound to be affected even more, as the price of almost all imported goods is set to increase despite which “soft” or “hard” deal the UK will go for. That being said, there are still startups moving their operations to London, such as Feed a French startup that helps you maintain a healthier diet. This shows there are still startups who think the UK market will still be worth it, even in the event of a no deal Brexit.

Dealing with staffing (and animosity)

While 72% of founders in London-based startups are ultimately happy to stay put despite Brexit developments, issues will arise when it comes to staffing and finding foreign talent. With so many European employees in London-based start-ups, many have started noticing there are fewer applicants from European countries. In fact, Language startup Bernhard Niesner said talent acquisition from Europe has dried out, as many potential European employees do not feel welcome anymore.

Lower access to external finance

Generating EU funding for London-based startups will also become increasingly difficult. Future financial services relationships between the EU and the UK will be based on a principle called equivalency, whereby the banks need to recognise each other’s regulations. These rules are set to be finalised by 2020, and ultimately mean London based start-ups will be facing more regulations when selling financial services to the EU.

In the event of Brexit, many will have to set up EU-based subsidiaries and/or move teams and capital, and they will need to revisit their relationships with clients outside of the UK to be able to trade within the set regulations of the EU.

More upcoming support

A quarter of founders in London-based businesses feel that the government should do more to educate them on the impact Brexit will have on their business. However, one unexpected impact of Brexit is the increase in support and assistance offered to London-based startups who are facing the uncertainties of Brexit. For example, the government has set up a “Brexit Fund” London is a place where innovation and hard-work are prioritised. Many London-based start-ups, especially those backed by bigger corporations, are getting ready to take on and overcome the challenges and uncertainties Brexit is presenting.

Considering how Brexit has been dealt with so far by the British government, we can only speculate on what the future holds for London startups. Higher prices, difficulties with hiring foreign talent, or limitations when travelling are all ramifications that the London startup scene is already dealing with, but there is no way to quantify these changes until Brexit has actually happened.

London-based startups will need to adapt to this environment of uncertainty. The startups most likely to survive and remain unaffected will be the most flexible ones which have anticipated more than one Brexit scenario. Hope for the best, but prepare for the worst.

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