The surge of entrepreneurship has been one of the most encouraging and under-reported trends in the British economy of the last decade.
The number of companies in the UK has reached an all-time high of 3.7m – or one company for every 17 people in 2016. In addition, the UK is already home to 40 per cent of Europe’s unicorns – defined as tech start-ups worth $1bn or more – even though the Kingdom only has slightly over 10 per cent of the continent’s population. The coalition for a digital economy (COADEC) found over 80% of companies were in favour of staying in the EU, citing the single market, free movement of labour and economic stability as their reasons. However, on the 23rd June, the British majority made the decision to leave the EU after 40 years of membership. If you're a startup founder, however, you will naturally want to setup your business in a market that gives you access to the most customers and where the legislation encourages trade between different nations. As part of the EU, London’s advantages where clear: the status of London as a preeminent global finance hub, the abundance of European talent, and the uniformity of regulations that allowed London-based companies to easily roll out products Europe-wide. But now? What will change for the start-up ecosystem in both the UK and the rest of Europe and will Britain become a less attractive destination for entrepreneurs? What are their alternatives and who will take London’s spot as a major finance center and hub for investors and bankers?
A loss for some, an opportunity for the rest
London’s favored status among start-ups seeking a European base is in peril and its counterparts on the continent are wasting no time in announcing themselves as worthy alternatives. France’s PM Manuel Valls introduces incentives that will be adopted in order to make France an attractive environment for entrepreneurs. Most of the measures are tax-related, such as tax reductions for foreign employees which would be valid for eight years instead of the current five. In addition, a service will be introduced to help companies with questions about real estate, residency permits, schools and other issues. If France starts welcoming new businesses as a result of their move from London, it would also open "as many international sections as needed in schools" to allow children of foreign employees to have classes in their mother tongue.
Brexit could also turn out to be an opportunity for Germany, which has seen its share of the tech market growing fast and is hungry for more. In 2015, Gründen, which advises fledgling firms, said a new start-up was founded in Berlin every 20 minutes. Berlin’s start-ups attracted more venture capital than those in London in the past two years — with €2.1 billion heading to Germany and €1.7 billion to the U.K., according to Ernst and Young. Berlin is getting more start-ups because of tax incentives and grants, public funding for firms that have difficulty attracting venture capital and a simple immigration process for foreign workers. Another cost of London is that it has some of the most expensive real estate in the world which makes rival European cities more comfortable to live in, which gives just another advantage to Berlin.
Could London lose its crown as the fintech capital of Europe?
London may suffer as it relates to financial technology firms, which challenge the existing system of how we transmit money, use credit cards, get a loan, or even what we think of money. Many companies will be nervously watching to see whether the UK can retain its “passporting” privileges, which allow a bank to operate in all European countries as long as it has a licence from an EU member state without the need to obtain additional authorization from regulators in new markets it enters. In other words, passporting is the process that allows UK-based companies to use their British financial licences to allow them to do business in the EU. This is of particular importance for fintech firms, which are in the business of moving money around. Money-transfer and payments startups would be those hardest hit by the end of EU passporting after the UK officially leaves the Union. Considering that major European Union members have publicly stated that they are opposed to granting the UK financial services access (passporting) without agreements by the UK on freedom of movement, this would mean additional costs and administrative burdens. Other potential fintech hubs are already using tax breaks to attract fintech startups — including Frankfurt, Amsterdam, Dublin, Switzerland, and New York and could as a result see more investment and entrepreneurship shift in their direction as London’s advantages are eroded. In addition, major financial institutions such as Morgan Stanley and JP Morgan have already announced they are considering a relocation of investment banking and other key groups to Frankfurt, Paris, and Dublin. That may happen even before the so-called Article 50 process is begun by the UK. Shifts such as these would hack away at London’s preeminence as a financial center overall, with negative knock-on effects for fintech.
From a talent base of 500 million people to 60 million people
Another crucial benefit of being a part of the EU is access to talent because of the free movement of labour. With Brexit, and a possible end to the free movement of labor for EU citizens, UK startups could find themselves starved of the crucial workers they need to expand. Currently, however, international employees are anxious and insecure about their future in the UK. Many of the jobs that need filling require technology experts and other skilled grads and often startups have to look to the EU to fill these roles as the UK is facing a skills gap. However, it will become more difficult for start-ups in the UK to attract new, talented staff once Britain no longer has access to the EU talent base of 500 million people. Once it does become harder for start-ups here to hire people from inside the EU, they are more than likely to consider opening offices in places that are a part of the European single market.
“Nothing’s changed yet but everything’s changed.”
Detached from the EU, London could lose some key advantages - its status as a world financial center, European talent, and the uniformity of regulations that allowed London-based companies to cater to the European market. Once Britain formally leaves the EU, London-based venture capital funds stand to lose out on money from the European Investment Fund (EIF) unless they relocate. Last year, the UK benefited to the tune of €655.8m (£559m) from EIF coffers. It should be noted, however, that this will be a long process and is not expected to happen overnight. Let us not forget that an agreement on the four Freedoms (goods, services, persons, and capital) is yet to be reached as a part of the larger process of Brexit negotiations to be held between the new British cabinet and the EU and will certainly be one of the hottest topics during the negotiations and also one that the EU and the UK will have different views on. This is one of the reasons why large banks like HSBC and Morgan Stanley have said they’ll consider moving jobs to the Continent; again, much depends on the outcome of negotiations over the comings months, and possibly years. The key for European businesses is to remain flexible and informed so that they can make the best decisions. As Taavet Hinrikus, the Estonian CEO and co-founder of cross-border money service Transferwise, based in London said: “Nothing’s changed yet but everything’s changed”.