The Impact of Brexit on the UK Tech Industry

A historic event took place on the 24th of June: Brexit. In the UK referendum, 52% of the electorate voted to leave the European Union (EU). This is an unprecedented situation in history - no country has ever left the EU before. The situation left the country on uncharted legislative territory, which lead to general financial turmoil. The pound crashed to its lowest level since 1985 and global markets were affected.

The App Developers Alliance team in London reached out to find out how our members, partners and the tech community will be affected and what the impact will be on the industry as a whole.

Brexit: Opportunity or Threat?

Brexit was an outcome that the majority of the UK startup community was not expecting. As one of the leading tech hubs in Europe, almost 60% of the London electorate opted for staying in the EU. So when the City woke up outvoted by the rest of England, the opinions were as divided as the vote.

Niall Bellabarba, Co-Founder & Managing Director,  The Oak, shared that “From a business perspective it is natural to expect the presence of tariffs and generally unfriendly or conflicting regulation appearing on all fronts, from medical devices to financial standards.”

George Osborn, Founder of Mobile Mavericks, reflected on the effect of Brexit on his work with EU clients,  "Brexit is a blow for the tech and games industry in the UK. As a self-employed businessman who regularly travels to Europe and who works with EU clients on a weekly basis within the gaming sector, I can’t pretend that I haven’t been concerned about its potential impact on my business.”

However he felt that the current situation offers a way to shape the future in the right direction.

“Though we have voted to leave the EU as a nation, we have not actually left it yet – meaning we can still draw upon all the benefits that membership offers. Furthermore, the fact that we haven’t passed through the exit door gives those of us who hoped for Remain a chance to shape the future. As the economy shakes under the weight of business uncertainty, our voices will carry more weight when our political representatives consider our negotiating position.”

For others, Brexit presented a business opportunity. Edward Cooper, Head of Mobile at Revolut, shared, “Interestingly, during the referendum Revolut was one of the only app based FX platforms who stood by all our British and European customers and continued providing the interbank rate during extreme market volatility. As a result we saw a 50% increase in user acquisition. Whenever there is change and uncertainty, there is opportunity.” He added:

"UK startups will also be in a unique position to leverage their size and nimble nature to seize post-Brexit opportunities, and deal with post-brexit challenges far quicker than larger, more risk averse incumbents."

Brexit and the EU Single Market

According to Edward Cooper, Brexit could actually prove to boost innovation in the UK. “One possibility is that, freed from the burden of EU over-regulation, the UK could become an even more attractive place for startups. The UK government is already very supportive of entrepreneurs and new businesses, and I imagine that this support will now intensify.”

However Niall Bellabarba expressed concern as there is “uncertainty as to what will happen with the Payment Services Directive (PSD2) and how UK banks will now react. This has an immediate impact on our long term valuation which will restrict our ability to raise capital and therefore hire more staff here. "

Decreased Access to Funding in the Short Term

The EU funds a big number of research, innovation and SME projects through programs such as Horizon 2020, which has nearly €80 billion of funding available over 7 years (2014 to 2020). Niall Bellabarba reminded us that:

“Without access to EU funding for research, the European Union funding, and the access to European brain power, the UK’s position as a leading player in research in numerous fields will be challenged.”

Martin Macmillan, CEO, Pollen VC, warned that Brexit will affect investment opportunities in app companies in the short term.

“Uncertainty and the current value of the pound will make VCs more cautious, so it will be harder for tech start-ups who don’t have a proven track record to raise cash, so they will need to look for alternative sources of funding.”

He added that with a volatile pound, earnings will be affected. “In the short term UK developers should be mindful of where their apps are sold and make allowances for how their earnings will be affected by foreign exchange conversion rates back into GBP before any structural adjustments are made to pricing tiers by the platforms.”

Drummond Gilbert, CEO at GoCarShare, shared this concern  “The uncertainty about Brexit adds an additional layer of risk to investors in terms of the potential returns on their investment, and there is a significant risk that investment levels will decrease immediately as investors wait for clarification as to how things will pan out.”

Scaling to the European Single Market

One of the biggest Brexit concerns is growth and the opportunity to access and scale up within the European Single Market. Many fear that London will seem less attractive for investment, if it loses its key position as a European gateway.

This resonated in the word of Niall Bellabarba “I remember seeing strategy slides when I worked at Deloitte with big titles: ‘London: the US Gateway to Europe the biggest Economic area in the world’. Now that gate is getting closed so the consequences are obviously negative.”

Drummond Gilbert shared this view:

“The ability to prove the concept in the UK, and then to expand an offering amongst Europe has allowed London to turn into a tech hub, almost to rival San Francisco and the ability of its startups to expand around the US. Brexit puts both the ability to trade and expand into other European countries at risk, and complicates matters by the potential loss of a common european legislative system.”

A New European Gateway?

Talk of new city gateways has already started among the tech community. Drummond Gilbert believes that London has a strong lead and is more developed than other tech hubs in Europe, but is also very expensive by comparison. He added “I believe few startups will move, but Brexit will make London less attractive for new start ups deciding where to set up and locate themselves.”

Niall Bellabarba noted that if the Brexit challenge deepens, he would consider moving his business to Dublin, as the Irish capital is  “probably best placed because the legal framework is Anglo-Saxon and there is no language barrier" 

Drummond Gilbert expressed his concern about hiring tech talent. “To build our platform we work with developers in Slovenia. If you look at the makeup of startups in London, the teams span many countries from around Europe. Anything that potentially impedes the movement of high quality labour to the UK, puts startups at a disadvantage.”

The Future of London as a Tech Hub

Yet not everything is lost for the vibrant English capital. According to Edward, from Revolut “Whether in or out of the EU, London remains one of the coolest cities to live on the planet, and when it comes to attracting top talent, this is an ace in the hole.”

Martin Macmillan supported that position, “I believe that in the longer term, London will weather the storm and will be very resilient in terms of access to capital. However there are several other successful regional tech hubs in the UK, and we need to ensure that these do not suffer from a decrease in funding. With continued investment and skills training, these will continue to strengthen the UK’s reputation for innovation and competitiveness.”

Political Limbo

Catriona Meehan, Director of EU Policy and Government Relations at the Application Developers Alliance, added that the UK’s future relationship with the EU is unclear at this stage.

"The UK is home to one of Europe's biggest tech hubs and this historic event could have a negative effect on many startups and developers in the UK and throughout the EU. When considering how to regulate the tech sector and creating a Digital Single Market, the UK is often looked at as a positive example of how 'soft law' and industry codes of conduct can enable the industry to flourish."

Further Steps

Brexit has triggered the resignation of Prime Minister, David Cameron, in three months’ time. Cameron has stated that it will be up to his successor to invoke Article 50 of the Lisbon Treaty, which will trigger the process for the UK to leave the EU. This means that the government has three months to prepare for the process of leaving the EU.

Article 50 states that once it is invoked, the Member State must enter into a negotiation period with the EU in order to determine their future relationship. EU Member States are entwined in thousands of laws and treaties with each other, and it is a very complicated process to remove themselves.

Catriona added that "While the UK's future relationship with the EU is unclear at this stage, we hope that it will not imperil innovation and that UK and EU small businesses and startups will continue to thrive in a competitive environment."

 

Beverley Eve
Director of Membership & Marketing, EMEA