The last few weeks have been tumultuous to say the least. Four weeks post Britain’s decision to leave the European Union, we have a new Prime Minister, Theresa May; Labour, the main opposition, is a shamble; and economic uncertainty has led to the pound’s devaluation, leading to an increasing likelihood of a technical recession, with the Bank of England widely expected to reduce already historically low interest rates. What does this mean for Britain’s entrepreneurs and venture capital industry?
Free movement of labour, capital, goods and services are the fundamental economic building blocks of the EU. These four pillars, in particular the free movement of labour, which was a central theme of the Brexit debate, and the negotiated terms of Britain’s exit from the EU will determine whether London’s entrepreneurs will be tempted to relocate to a start-up hub within the EU, say Berlin. The ability to attract and retain top talent without too much red tape will be at the forefront of many founders’ minds during a forthcoming period of uncertainty (Theresa May has already announced that Article 50 of the Lisbon Treaty, which activates a two year period of exit negotiations, will not be triggered this calendar year). According to DueDil, 20% of directors of UK technology businesses are foreign citizens, a rise of 133% since 2010 and an increase of 176% for those from EU member states. The uncertainty may prompt management teams to seriously consider relocation in the search for certainty.
From a regulatory standpoint, both entrepreneurs and investors are also facing ambiguity. Founders of businesses, particularly those in regulated industries such as financial services (e.g FinTech), are facing uncertainty over their passporting rights (being regulated in the UK means regulatory requirements are met across the EU). Venture capital fund managers will in the same vein be affected by the potential loss of distribution capability and thus their ability to raise assets under management from investors across the EU. The investment activities of high net worth individuals investing in this asset class should in theory not be affected by the regulatory uncertainty, though it remains to be seen whether there will be a slowdown in activity amongst this class of investors based on potential impacts to their wealth resulting from wider economic uncertainty.
Amidst all this uncertainty, what we do know is that the decline in sterling’s value should in theory be positive for British businesses exporting globally. International acquirers are likely to see British targets as more attractive as well. Unfortunately, the flipside is that Britain’s economy is likely to deteriorate further before it recovers. Recent data in the form of the Manufacturing Purchasing Manager’s Index (PMI) suggests a weakening economy: it is at its lowest since early 2009. Add to this the International Monetary Fund’s reduction in the UK’s growth forecast for next year and both give a sense of current market sentiment.
Despite the turmoil in which we find ourselves, the team here is upbeat about the prospects of entrepreneurs in the UK. Their innovation and ingenuity never ceases to amaze and as they say, adversity breeds success. It is no coincidence that some of the world’s most successful disruptive businesses (Google and Amazon to name but two) were born out of the depths of previous recessions. The UK continues to benefit from all of the qualities which have attracted people here for centuries: English as its main language, world class business and financial talent, being located in an ideally placed time zone and perhaps most importantly the fact that it is a cultural melting pot which facilitates exchange of ideas. These are all reasons why the UK has attracted so many foreign entrepreneurs over the last few years; none of these reasons will be disappearing anytime soon, especially not because of Brexit.