Brexit causes tech uncertainty

Two weeks after the unexpected result in the EU referendum, uncertainty remains.

Questions are being asked about how the result will affect the future of the UK socially, politically and economically, as well as the nature of its ongoing relationship with the European Union bloc and the countries of continental Europe.

Uncertainty is also palpable in the UK’s tech sector, especially given that the industry was almost universally against Brexit ahead of the referendum. The tech sector is growing in economic importance and will undoubtedly be a big source of jobs and growth in the years ahead. The recent Tech Nation 2016 report estimated combined turnover of businesses in the digital economy at £62.4 billion in London, and £161 billion in the UK more widely. It is also estimated that 1.56 million people are employed by these ‘digital’ businesses in the UK, and job creation within the sector was 2.6 times that of the national average between 2011 and 2014. With the vote to leave, London’s claim to the crown of Europe’s tech capital is under attack.

Other cities have already started to position themselves as the successor to London as the capital of European’s tech industry. The Dublin commissioner for start-ups apparently sent out an email claiming that “Thanks to Brexit we have a new opportunity to attract Europe’s serial or first-time entrepreneurs to set up shop in Dublin.

The vote to leave affects the industry in some important ways.

One of the biggest priorities for start-ups is access to talent. As part of Silicon Valley Bank’s UK Start-up Outlook 2016, 95% of entrepreneurs asked said that it was challenging to find the right talent and 57% said access to talent was the important public policy issue affecting their company. Depending on the post-Brexit settlement, it’s possible that access to talent is going to be curtailed by the vote to leave. Before the vote, Taavet Hinrikus, co-founder of fintech start-up Transferwise said that “the biggest constriction to growth is hiring people”. Directly, after the result, Hinrikus told the Guardian that one of the main benefits of the EU was access to talent and the result meant that “headquartering elsewhere was a possibility.”

How the result affects the city’s financial services industry will also have a knock-on effect. Venture capitalists - who sit at the crossroads of technology and financial services - provide funding, expertise and a network of contacts to London’s start-ups. The extent to which they stay or go will largely be determined by whether they think London will be able to continue producing great companies. Again, the majority of people in the industry came out against Brexit before the result but some have struck a more cautious tone since the then. Prominent investor Saul Klein expressed his confidence that the entrepreneurial community would “make lemonade” and that it “rises to the occasion” and is “very, very strong at this point”.

However, there are question marks about whether VCs will themselves be able to attract the necessary investment they need to invest in start-up. Somewhat ironically, the EU-backed European Investment Fund is the largest institutional investor in Europe.

Perhaps the biggest question mark is over access to the single market, the raison d’être of the European Union. The total nominal GDP of the European Union is about $18.5 trillion, which represents a huge market, giving these start-ups the opportunity to scale quickly. New trading arrangements negotiated by UK politicians will govern how all UK-based companies will trade with the rest of the European Union. Barriers to the single market for these companies will make it more difficult to trade with the bloc and may ultimately mean that London loses its lustre as a tech hub. Leaving the EU will also mean that the UK will no longer be a part of the proposed Digital Single Market. The European Commission launched its strategy for the DSM last year, aiming to create better online access to digital access to goods and services (e-commerce), enable an environment where digital services can prosper and use digital as a driver for growth. While the DSM has been in the works for many years and progress has been slow to this point, the UK will now no longer have automatic access, whatever happens.

As with most aspects of the vote to leave the EU, the impact for the UK’s tech sector is unclear. However, this is perhaps the point – it may prosper outside of the bloc, finding new advantages to steal a march on the rest of Europe and remain the focal point of the continent’s tech scene. It may also decline, overtaken by ambitious rivals like Dublin. It’s the current uncertainty, deterring investment and decision-making that’s most damaging. As Hussein Kanji, partner at Hoxton Ventures put it, "This is effectively going through a divorce and you don't know what is going to happen to the kid”. At the moment, the tech industry is one of many kids that is waiting to see which parent gets custody.

Neil Thomas

Hill & Knowlton Strategies Search