If you’re considering starting up a business in the UK or opening an office there, you’re probably wondering if and how Brexit could impact your plans. The reality is that for today, nothing has really changed from a regulatory perspective. The UK government as of this date has not triggered Article 50 of the Lisbon Treaty, which begins the process of exiting the EU. No matter when it gets triggered, it will be a long and complex process.
We believe that the UK will continue to be a great place for startups but there will be some bumps and a lot of uncertainty in the post-Brexit era as regulations change. Ongoing uncertainty is unavoidable until the new relationship with the EU gets negotiated down to the little details in the not too distant future. There are already proposals being bantered around to cut corporate taxes up to 15% to keep companies based in the UK from leaving, to keep investment flowing in, and to provide tax incentives to entice companies to enter the UK even in the face of uncertainty.
Before you commit to opening an office or starting your new company in the UK or somewhere else in the EU, here are some of the things you will want to be aware of as you make your decisions. They will impact you to some degree, both favorably and unfavorably. We’ve scored each factor by what we believe the estimated impact will be from 1= low impact to 5 = high impact. Keep in mind that ‘impact’ can be both positive and negative, just because there is significant impact does not mean it’s a bad thing.
1. Access To Funding- Seed-A-B-C-Beyond
According to a recent Financial Times article, based on data provided from research firm Pitchbook, VC funding in Europe fell from $4.3bn in Q2 of 2015 to $2.8bn in Q2, 2016. Some of this is attributed to a slowdown in VC activity at the angel and seed stage, but recently more of the decline is attributed to anxiety over Brexit. At $2.8bn, the UK has been by far the biggest recipient of VC funds in the EU, down only 5% from 2015.
It’s uncertain if a large portion of VC’s will continue to think the UK is the best place for their portfolio investments to reside. A lot of it depends upon the deal negotiated with the EU for the UK to continue to access the single market. We believe that VC’s will continue to invest strongly in the UK barring any onerous regulatory changes, but we will also see VC’s look more closely at startups in other EU cities such as Dublin, Amsterdam, and Berlin.
Estimated Impact = 4 (1 low impact- 5 high impact)
2. Access To Talent
There are over 3 million EU citizens who contribute to the UK’s economy, many of these knowledge workers. With a global shortfall of technologists, will the UK continue to draw people from all over the EU and globe? London is a vibrant and attractive place to work and live, especially for young educated people. Dublin, Ireland is also an attractive place for educated young people, with a lower corporate tax level (at least for now until the UK implements a possible 15% tax cut), and is a member of the EU. Other cities that stand to benefit from young people migrating are Amsterdam, Berlin, and Paris. How many people will decide to migrate to other EU cities is unknown, as is how easy or difficult it will be to immigrate into the UK going forward.
Multi-cultural companies and those that need unfettered access to the entire EU are considering moving. “Multi-cultural startups with 10 or more staff are telling us that they are actively seeking to move their operations to an alternative EU city such as Dublin,” Miceál O’Kane, chief executive of recruitment site JobsEngine.com, told Deutsche Welle. “They are telling us that they want to move before the bankers relocate and push up prices.”
Estimated Impact = 5 (1 low impact- 5 high impact)
3. Access To Mentorship
It takes a village to create a successful startup ecosystem and one of the most important elements for startups and startup founders is having access to experienced mentors and mature founders to help navigate difficult uncharted waters. The UK, especially London, has a fantastic network of mentors and we don’t anticipate that will be impacted much by Brexit.
Estimated Impact = 1 (1 low impact- 5 high impact)
4. Ease Of Doing Business
There are uncountable ways that the UK is integrated into the core fabric of the EU, and many of these impact how easy it is to do business within and between countries. It’s too soon to know how the negotiations with the EU will go. Some experts believe that the EU is going to play hardball when negotiating to deter any other countries considering exiting, but the reality is that the EU needs the UK and vice versa. It’s in both of their best interests to have an amicable divorce. There are many elements that fit into ‘ease of doing business’ but some of the top considerations for startups are favorable regulations, favorable corporate taxation, and favorable trade terms.
Regulatory Changes In order to see which laws might be impacted, CMS Law created a useful checklist of all of the potential legal implications. The comprehensive checklist provides a good perspective on how complex this separation will be. We anticipate that over time there will be a lot of changes and the impact will be significant. Keep in mind that impact can be favorable, neutral, or unfavorable for your business and it’s too early to tell which it will be.
Estimated Impact = 5 (1 low impact- 5 high impact)
Tax Changes As mentioned earlier in this blog article, there are already discussions by the UK government to provide a corporate tax rate decrease of 15%. The goal is to make corporate taxes even more favorable than in Ireland to counteract any negative impact that Brexit may have on the UK and to incentivize companies to stay, start up, and expand into the UK. The impact on startups could be very favorable if corporate taxes are lowered.
Estimated Impact = 5 (1 low impact- 5 high impact)
Trade Terms Changes One of the biggest concerns for most importers/exporters around leaving the EU is the ongoing ability to access the EU single market for trade at favorable terms. This will be one of the hottest topics during the negotiations and also one that the EU and the UK understandably have different views on. The reality is that there will be changes to the trade terms, but it’s too early to know what those changes are and if they will be favorable or unfavorable. If your startup requires easy access to EU trade, you may want to consider other EU startup cities. If the UK is your most critical market and other EU countries less so, the UK will remain the best choice to headquarter from.
Estimated Impact = 5 (1 low impact- 5 high impact)
5. Friendly To Foreigner
Since the vote to leave the EU, there has been a 50% increase in documented crimes and negative sentiment towards foreign workers. Why? The perception of excessive and uncontrolled immigration was one of the major reasons that approximately 30% of the voters gave for choosing to leave the EU. We anticipate that the pent-up frustrations will simmer down and cooler heads will prevail in the long run. This area will need to be monitored since it can certainly lead to an unfriendly working and living environment for expats.
Estimated Impact = 3 to 5 (1 low impact- 5 high impact)
6. Government Support
The UK government is very helpful, has high quality programs that make it easy to set up a business, and is currently very supportive of startups and foreign companies doing business in the UK. We anticipate that the UK government will continue to be pro business, supportive of startups, and provide detailed information and assistance throughout the upcoming EU negotiations and beyond.
Estimated Impact = 1 (1 low impact- 5 high impact)
7. Strong Startup Community
There are pockets of very strong startup communities in the UK, and London is seen as a top 10 startup ecosystem in the EU. Even smaller UK cities are supporting startups and strong communities exist in Edinburgh, Manchester, Cambridge and others.
Overall, we suggest monitoring if startups begin to migrate to other EU communities going forward due to unfriendly business terms with the EU or a slowdown in funding. We believe the existing strong startup communities will remain strong.
Estimated Impact = 2 (1 low impact- 5 high impact)
8. Quality of Life
Startups are made up of people who work extremely hard and when they can, also play hard. While UK cities in general don’t rank very high as compared to other EU cities for traditional quality of life metrics such as affordable housing, low traffic, low smog, etc., both London and Edinburgh are considered fun, high-energy, diverse, and great places to live and play by the startup crowd. Startups we talked to say that high rental and real estate costs for both living and working are the biggest drawbacks, but are balanced by all of the advantages offered by these cities.
It’s hard to predict if Brexit will have an impact on the overall quality of life in the UK. We believe that some of the other startup factors will be much more likely to impact companies.
Estimated Impact = 2 (1 low impact- 5 high impact)
In Conclusion
For many years now, the UK has been one of the top choices for international startups to move to and for the incubation of new startups. We’re very bullish that the UK will remain a great place for startups, even though the next couple of years will be bumpy and filled with high impact changes. We do anticipate that other startup cities in the EU will gain traction because of Brexit. The changes coming will be both favorable and unfavorable, the key is to remain flexible and informed so you can make good decisions for your business.
