Brexit: How will the UK's start-up scene be affected

18 July 2016

In a historic move the UK has voted to leave the European Union after 43 years of being part of the economic and political coalition. In a series of articles looking at what Brexit means for the UK Aleksi Aaltonen, Assistant Professor of Information Systems, writes on how it will affect the country's start-up ecosystem.

There will be new opportunities due to Brexit although at the moment it’s difficult to see exactly what those might be.

One of the key promises of the Leave campaign was to cut excessive regulation imposed by the EU. This can help entrepreneurs in particular industries, yet I don’t remember any significant obstacle to doing business that would have been specifically imposed by the EU when I was a start-up entrepreneur.

Indeed, the Norwegian model of a very close relationship with the EU including access to the single market would be a good, or the least worst, option. It would allow the UK to practice more experimental governance, while retaining many of the benefits of the EU.

Local culture, institutions and demography shape entrepreneurial ecosystems. Start-up companies employ mainly young, highly educated and, actually, often immigrants, many of which were undoubtedly supporters of Remain.

Related article: How Silicon Valley created a start-up obsession

How welcoming to foreigners and diversity the UK is in the eyes of these and prospective entrepreneurs can have an impact in the long run.

Team diversity and entrepreneurial confidence are positive drivers for entrepreneurship. The Government will need to work hard to reassure entrepreneurial hotspots around the UK that their success factors are not sacrificed in the divorce settlement with the EU.

Geographical proximity and cross-border connections are very important in high technology business that is inherently global. Large companies have routines and staff to deal with border-crossing bureaucracy, which is bound to increase.

Small start-ups don’t have such assets, yet I don’t expect a major impact in the short term. The UK has very strong domestic entrepreneurial ecosystems and lots of talent that won’t disappear overnight whatever happens.

Over time, however, new barriers to movement of people and their ideas cannot be a good thing for entrepreneurship, the Brexit deal needs to keep this open as much as possible.

Related course: BSc Information Systems Management & Innovation

The most important resource for an entrepreneurial firm is talented founders and employees. The UK has grown a considerable talent base over the years.

This is largely thanks to its excellent higher education system and the ease of settling in the country. Any points-based immigration system will make it more difficult to attract talent from continental Europe, especially for start-ups that have little resources to deal with extra bureaucracy. Berlin, a rising continental start-up hotspot is already preparing to use Brexit to its advantage.

Early-stage start-up companies need local venture funding. A period of increased uncertainty and a potentially diminished role for the City in the global financial system can result in less available venture funding for start-up companies.

Some of the impact may not be immediate because numerous venture funds and their personnel are firmly established in the UK and in London in particular, but it won’t take years to change if there are better investment opportunities elsewhere.

The Government can try to compensate this by making life otherwise financially easier for start-ups, but this costs money that has been promised for many other purposes as well. 

The intellectual property regime is relatively similar in developed countries so in principle there are probably not going to be massive changes due to Brexit.

Related article: Nadhim Zahawi - Passion and fear, ingredients for success

The difference may come from how companies manage and administer their intellectual property portfolios in the international arena.

In the worst-case scenario UK companies may have to file their patents again, maybe in multiple countries. Again, large companies can probably deal with the extra workload, but for smaller companies it will be yet another headache they could very well do without.

General economic uncertainty is not a good thing for high technology entrepreneurs that operate at the risky end of economic activity: capital retreats to safer assets, while consumers and companies are less prone to try out new things.

The immediate Brexit shock is already fading, but there will be a period of uncertainty as different stakeholders get their plans sorted out and negotiate how Brexit will actually happen. The shorter this ‘short-term’ uncertainty stays, the better. However, given that it is the EU and Brexiteers around the table, I woudn’t hold my breath.

The lasting effects of Brexit on high technology entrepreneurship are all but impossible to predict, though it is clear there are big risks.

Related article: Five reasons why immigrants make great entrepreneurs

Strong entrepreneurial ecosystems will probably be able to cope with any individual issue alone, but it is the potential convergence of various factors that may cause serious problems down the road.

It’s quite worrying that the Leave campaigners seemingly had no plan beyond the referendum. Entrepreneurial ecosystems are difficult to cultivate even with a good plan, and they are certainly easy to destroy without one.

Aleksi Aaltonen teaches Business Systems Analysis and Strategic Information Management on Warwick Business School's Undergraduate programme.

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