The Brexit hangover has left UK startups drained — Are the brains next?

As the UK referendum result dropped in that fateful Friday morning, the tech startup world didn’t immediately grind to a halt. Websites kept loading. Apps kept opening. But what left UK technology entrepreneurs aghast was not just that Britain had chosen to leave the European Union after 40 years, but that all those years of trying compete with the giants of Silicon Valley would now be thrown into doubt.

Although Europe’s 500 million citizens dwarfs the 323 million in the US, for years European startups had to deal with 28 jurisdictions and many languages. But the EU had at least managed to harmonize (more or less) the processes of company operation, data sharing and hiring.

Hiring from a talent base of 500 million people was also an incredible asset to startups, as was raising funding from Venture capitalists. Based in Berlin? No problem. Developers in Slovenia, but the the HQ was in London? No problem. And, after several Eastern European states had joined, suddenly the whole of Europe could tap into the talent produced from Soviet-era education systems built around engineering and maths.

The truth is the overwhelming majority of the UK tech startup industry was for ‘Remain’. Industry body 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.

But “Brexit” has now thrown into enormous doubt how all of that will operate in the future.

The immediate effects on startups have been incredibly personal. Bewilderment is the word you hear most. European staff suddenly have no idea how long they will be able to work in Britain. They created business ties, friendships, relationships, often marriages. Their kids are in nursery schools and high schools across the country.

Furthermore, so many tech startups today are created by young people, who typically voted in droves for Remain. The decision to leave Europe will have disproportionate effects on them and their companies, which, ironically are so often labelled by politicians as providing the jobs of the future. What future now for them?

The immediate reaction of some in the sector has been typically entrepreneurial. “Stay calm and make lemonade,” wrote leading investor Saul Klein. Leading voices have been quick to come out as upbeat — anything not to ‘frighten the horses’ and potentially spook the pipeline of possible new companies to invest in. Some see it as an opportunity. The UK is still open for business! This, despite imploring everyone to vote for Remain only a few days earlier.

Klein’s sanguine attitude is reflected by many VCs. Early stage startups are agile and can relocate if need be. Big tech companies are global and not overly dependent on the U.K. But VCs have warned that mid-stage companies too dependent on the U.K. could feel the heat of Brexit.

Taavet Hinrikus, Co-founder and CEO ofTransferWise, a declared ‘Remainer’, says he is “moving on” from the Brexit decision. His London-based company couldn’t be more quintessentially European: he’s an Estonian immigrant living in London. Half his staff are British, a third from mainland Europe, with others from the US, Latin America and elsewhere. TransferWise also benefits from “passporting”: because it is regulated in the UK by the FCA, it’s therefore regulated all across Europe. For now. But, he blogged, “Five years ago, we chose to base TransferWise here in the UK — and we’ll continue that plan.”

And ‘seize the day’ was effectively the message put out by former Number 10 tech adviser Rohan Silva, who wrote in the Sunday Times that Britain should now embrace the technology future to use Artificial Intelligence to drive its society. Free from the constraints of a ponderous EU, the UK could now go feet-first into a tech-driven future. These were upbeat words from voices who had openly declared they were for Remain prior to the Referendum.

It was true that the EU had often lurched towards heavy regulation. Ironically, as the EU Commission had often created encouraging programmes for startups, EU legislators were making laws which could put more and more onerous restraints on startups around data privacy, for instance. There were clearly going to be many arguments worth engaging with if Europe was to compete globally. Arguments which, because of Brexit, the UK will no longer have a say in, of course.

Many felt the EU had gone too far in regulation. One startup founder told me the European Data Privacy Regulations could have “ruined” her online advertising business, which relies on being able to transport data between the EU and the US.

However, while the sun-lit uplands of a world where the UK fully embraces the advances of technology (and speeds ahead of the EU) could well be a possible future, that ideal is thrown into sharp relief when set against the realities biting today. Some, like Jeff Lynn of Seedrs, were utterly incensed.

The day after the referendum I was contacted by three separate startups to say their venture capital funding had been cancelled because they were being financially backed from the UK and were in the EU, or in the UK and backed by EU-based investors. Several more have come to me since with similar news. Uncertainty has left the normally upbeat tech sector reeling.

And we’ve been coldly reminded of the complexity of the modern international startup, once seen as a strength, but, post-Brexit, could now become a huge headache. One UK-based founder contacted me: “My entire budget is now completely invalid as we have employees in 3 different EU countries, and in the USA. We are deeply affected by the currency devaluation issue. Every single person that I employ is from a different EU country. Most are based in London and now there is a real feeling of unease and uncertainty as to what will happened to them in the future – which means that this is affecting the day to day running of the business,” she told me.

In addition, she was about to embark on a fundraising tour and was hoping to get US investors: “I now think that this will be much more difficult, if at all possible. Which means that the 6 jobs I have created and the 5 more that I need to fill – will be in jeopardy.”

The company in question also took on interns from underprivileged backgrounds. That programme will now likely be cancelled because of a lack of funding.

“Long term I think I will have to relocate my business to the USA as the market in the UK is just too small to justify staying here,” she told me. What’s that? A market of 65 million too small? Well, yes, when just a fortnight ago it was 500 million.

In Manchester, Tom New, CEO of Formisimo, believes startups in the North West and EU-backed UK regions will find it much harder to raise funding because part of their cash was raised because it had that EU cushion underneath. Without that “we would have likely have had to move to the South East and the North West’s tech ecosystem would still be where it was back then,” he told me.

The UK also could now face a potential brain drain of talent. Before June 23 London was seen as Europe’s largest powerhouse of startups. Just over a week later an adverting-hoarding truck was seen trawling the startup-filled streets of Shoreditch, extolling the benefits of moving to Berlin (London’s chief tech startup competitor). The van was sponsored by a German political party. Suddenly other European hubs like Dublin, Berlin, Stockholm or Amsterdam look attractive as bases from which to reach the EU single market. Even some London VCs are privately saying that they will invest more on the continent now as a result.

Tech companies will no doubt work around it all – moving people and HQs around, knowing they can all still work online. And it may be that the booming nature of London’s tech scene will now have to be spread more equally to Europe’s other tech centres. This much was admitted by Balderton Capital, which plans now to stockpile cash and invest more internationally. Look for talented British entrepreneurs suddenly turning up in Berlin, Stockholm, Lisbon and Barcelona.

But one of the greatest myths ever told about the tech world is that it’s about technology. The truth is, it’s about people. Extremely smart and talented people. Given that the UK had been part of a single market which allowed for enormous freedom of movement, its access to all that talent in Europe is now in jeopardy.

Meanwhile, the march of technology continues, as does the soul searching. Did those of us in London pay too much attention to our hackathons and our Flat Whites to notice that so much of the rest of the UK wasn’t interested in the tech startup revolution? It looks like we just found out.

(A shorter version of this article is also published in the first edition of The New European newspaper)

(Picture by Tom Hayton)