In April I predicted here on my blog the United Kingdom would vote for “Leave” in the EU Referendum. As to many people I was right on this analysis and the reasons were confirmed by a lot of experts. Not much here to celebrate because the outcome of the Brexit process will be an economical disaster on all levels for a lot of people involved inside and outside the UK. But everybody realized that in the meantime.
The Pound Sterling was falling like the cliffs in Dover:
The UK is facing some of its members to seek independence:
But what is coming next if Brexit happens?
Most of my fellow VCs in London were tweeting “Calm down + Carry on coding” to encourage their portfolio companies to work through uncertain times by focus on their business. It is the best advise for days like this, but it needs to be clear that a strategic roadmap needs to be developed in the evening and nights as founders usually do to grow and expand their business. ‘Nothing will change’ is rather wishful thinking in that regard.
That markets came back rather quickly could be seen at the end of the week following the EU referendum:
So changes to the London ecosystem are to look at for the future becomes important for everybody in the industry:
- With UK leaving EU legal framework (regulations, data privacy, financial transactions, etc.) and access to single market it is limiting companies to grow beyond their local markets.
- Freedom of movement for work will drive Non-UK talents to seek employment elsewhere inside EU rather than UK and make talents think twice to move a business and themselves to London in general.
- Fortune500 companies as well as startups will evaluate to move their headquarters to locations inside EU and select from various options: Dublin, Paris, Frankfurt, Berlin, Amsterdam, Lisbon, Barcelona, etc.
- VC funds depend on investment restrictions of their LPs, who could demand them to invest in EU countries only based on origin (e.g. EU supported EIF) or for limiting risks due to economical uncertainties of a location outside the EU in general.
Economical Prediction for European Startups
Based on the assumption above we will see the following impact as an eroding process over the next five years. Nothing will have an impact the next coming days even if some prominent decisions will be announced over time. We need to look at midterm statistics for the next 36 months to see the consequences and trends.
- There will be not one ecosystem gaining major uptake from companies leaving London. All EU ecosystems will have advantages to be evaluated: Dublin is close by culture, Paris by distance, Berlin by its international community, Frankfurt as a financial hub, Amsterdam holds tax advantages, Lisbon and Barcelona has a fresh community and sunny weather. Founders and corporations will pick individually by their needs.
- Entering UK markets for a startup will need a profound analysis from companies: Due to currency rates it will be cheap to enter but due to missing legal framework (trade deals) it will be expensive to maintained. So expansion into UK of new businesses will slow down and some local heroes will trigger M&A activities from outside UK.
- Public listed companies will face decreasing market caps over time. This will limit their abilities to acquire startups (limited exit channels) and at the same time will trigger potential take over activities from EU based competitors as well as U.S. and Asian based gorillas.
- Not only VCs will limit investments in UK companies but als EU itself will stop investing in UK research, science and infrastructure. This will limit growing new companies and founders in the long term. Less data science and hardware related projects at UK universities will produce less bright minds who would have started their companies in the decades to come.
While short term impacts can easily reversed over time if conditions will change, the long term consequences are more sever for the future of remaining UK.
Potential hope 2017: Brexit will never happen
While all analysis and predictions over the coming weeks will take the past into account there is the future: the undiscovered land.
The UK constitution needs a parliament to invoke Article 50 in Lisbon contracts of the EU and support will be hard to find for a step the majority of the MPs in all involved parliaments are most likely not willing to take.
With more details and reports emerging and the consequences being more visible for ordinary people the majority of a vote in 2017 could insist on a #Remain in EU. Important for such a decision would be larger time gap in-between those two election events. It looks like the UK politicians of all parties are betting on time for now at least into 2017. However damage has been done to the UK ecosystem and that can not be reversed. It will take additional time to come back from this days and weeks.
Most critical about the Brexit experience will be that the rest of the world understood there are alternatives to London and the UK for many businesses, from small to large. For the future every CEO will have the option to #Leave London and the UK to seek growth and success anywhere else. Opening that opportunity is the most critical outcome from last weeks result.