I frequently get frustrated by comparisons between London and Silicon Valley. London and Silicon Valley have different DNA – the Valley is a monoculture where technology IS the business. The Valley excels in large-scale, horizontal B2C businesses.
London with its strong history in industries such as finance, advertising, retail and fashion (amongst others) is a polyculture. In London, successful technology businesses are being built in these deep verticals where there is rich experience and skill.
However, there’s no doubt that in the UK we have a great deal to learn from the development of a technology hub like Silicon Valley.
As Elon Musk has commented, “Silicon Valley has evolved a critical mass of engineers and venture capitalists and all the support structure – the law firms, the real estate, all that – that are all actually geared toward being accepting of startups.”
In London, our development as a technology hub is still nascent – building up over the last fifteen years in areas like Old Street’s Silicon Roundabout, and now dispersed in clusters across the city such as Canary Wharf (fintech) and Soho (adtech). The Valley has been evolving over 50 years, and with its critical mass comes a robustness. Even after the dot com boom and bust era, Valley-based entrepreneurs were able to pick themselves up quickly and return to the business of startup creation given the maturity of the surrounding ecosystem.
Our relative immaturity here in London, as well as wider across the UK, means we are more vulnerable to ambiguity and shocks in the wider economic environment. Whilst you could argue with valuations being more conservative here, European startups are naturally more protected from fluctuations within the tech sector itself, uncertainty caused by political and economic contexts has the potential to hit us far harder.
Part of the job of a VC is to future gaze, taking bets on businesses and markets which could deliver the unicorns of tomorrow. My role as an investor is also to understand the economies in which startup investments operate – both today and in the future. With this in mind, I’ve spent significant time considering the potential impact of Brexit. The tech ecosystem (including both startups and their investors) is eternally focused on the exit…
However I can’t help feeling that Brexit is the one exit that won’t be good for UK and European tech.
Talent has no boundaries
The UK’s EU referendum will take place on June 23rd this year. One of the biggest impacts of a winning ‘leave’ vote will be on startup talent.
As anyone involved with startups knows, the greatest challenge is finding people – the rockstar team with the right skills to build a big business in a huge market.
London has long been a global city: a place where people from across the world and particularly across the EU have relocated to, in the hope of finding streets paved with gold. To put it in a different way, London offers startup founders and potential employees a plethora of jobs and opportunities, a liquid funding environment, and the platform from which to build an international business. In fact, from the last UK Census showed that around 37% of Londoners were born abroad.
I fear that should the ‘leave’ vote win, the biggest short term blow startups will have to bear is related to recruitment. And it’s not my fear alone.
At Forward Partners, we conducted a survey to canvas startup views on the EU referendum amongst our community and portfolio companies, in the last few days. Nearly 80% of respondents stated that the primary reason they would vote stay would be to enable hiring talent from the EU.
Startups struggle to hire great talent from the EU even without visa restrictions. Whilst the UK Government has been relatively proactive in introducing visa routes such as the Tier 1 (Entrepreneur) Visa, it can be very challenging – not to say time consuming – to apply for and be awarded such a visa.
Amongst our portfolio companies alone, we’ve heard numerous incidents of visa processes being protracted over months and months, or being ultimately unsuccessful. What effect would leaving the EU have on the ability of UK-based startups to hire the best and brightest talent from across Europe?
Luke McCormick, CEO of Edge Retreats (a global curated marketplace for luxury villa rentals), comments “We cast our net far and wide when it comes to finding and hiring the best talent, particularly with respect to developers. Based in the UK, our current team contains hires from the EU. We’re concerned about the impact of a referendum on our current team and on our ability to hire in future”.
One has to assume that hiring from the EU will only get harder. Also what of the EU nationals already working at UK-based startup companies? How will these people – already working in the UK, adding value to our economy – be affected? Will they be able to stay? Or will the Government introduce caps on the number of EU workers? What does this mean for the future growth and success of these startups?
Demand heavily outweighs supply in the software engineering talent market. The role of ‘software developer’ and ‘systems engineer’ have been added to the UK Government’s Shortage Occupation List – a list which highlights roles in which there are not enough resident workers to fill the available jobs in that particular occupation. In order to keep pace with the global tech race, UK-based companies have to be able to hire talented EU developers.
If they can’t, what will this mean for the UK’s startup skill base, as well as the overall startup contribution to the UK’s economic growth?
London is Europe’s startup capital
London is frequently ranked Europe’s number 1 startup capital. The European Digital City Index (or ECDi), produced by Nesta, recently released its latest dataset placing London 1st out of 35 cities across Europe.
London has attracted large number of European startup teams and founders over the last ten years, due to a number of factors.
Access to capital for starting up, according to the ECDi, is a primary reason. Venture capital investment in London has increased exponentially over the last 3 or 4 years, with some sources reporting a 10X increase in the last 5 years. CB Insights reports in their Q3 ‘15 Venture Capital Report, that London accounted for 51 deals with a value of $480.9M (compared to Berlin during the same time period which accounted for 23 Deals at a value of $293.8M). Of the 40 European unicoms reported on by GP Bullhound in their 2015 report “European Unicorns: Do They Have Legs?”, 17 of the 40 were UK-based businesses, making the UK the unicorn capital of Europe. In part this has to be down to the ability of UK-based businesses to raise funding in London and the UK.
The business environment is another key factor. The proliferation of co-working spaces, accelerator programmes and incubators is cited by the ECDi as another driver – and in London there are over 36 startup accelerators alone.
Critically London is also a great place to from which to internationalise. With its links to the US and Asia, due to its English language, timezone and business culture, scaling a business out from London to the US or Asia makes great sense. Many European startup entrepreneurs looking to grow their businesses internationally choose London as the location from which to build global scale.
It’s clear that a ‘leave’ vote would impinge on the decisions of European entrepreneurs to start up and scale out from London. Some high profile entrepreneurs have already gone on the record to this effect – for example Taavet Hinrikus, CEO of Transferwise, (one of the UK’s aforementioned unicorns) has stated that in the advent of the UK leaving the EU, Transferwise’s management team would seriously consider their options and may look to Berlin or Paris.
Daniel van Binsbergen, CEO of Lexoo (a legal tech startup connecting businesses with lawyers), says “We chose to set Lexoo up in London because of the higher potential to fundraise. I know lots of entrepreneurs from the EU who have taken the same path. London is a great city to build a global business from – particularly one where scaling across Europe is a goal. It’s unclear whether London will have the same allure if the UK pulls out of Europe.”
What does all of this mean for London and the UK? In the event of a ‘leave’ vote, we could find ourselves with a considerably less rich and diverse startup ecosystem, where we no longer attract the best entrepreneurs to start up, and from the investor perspective, with reduced dealflow. And equally, would Brexit also make it harder for UK investors to invest across Europe, thus limiting the flow of UK capital into EU startups?
The opportunity cost of ambiguity
Startup founders live in an environment of flux. Being adept and agile at managing change is part of the toolkit of any entrepreneur. Risk inside a business can be mitigated through strong leadership.
Risk in the wider environment is also to be expected. Markets are fluid, currency fluctuates, economies expand and contract. Brexit would bring an unwelcome increase to that risk.
The macroeconomic effects of the UK leaving the EU aren’t well understood. How the pound sterling and the euro will be behave is unclear. The ability of UK businesses to sell products and services to the EU post a ‘leave’ vote is opaque. What will happen to taxation is not known. How UK startups outside the EU will be able to transact in the EU market given frameworks like the EU Digital Single Market is uncertain.
In essence, Brexit would increase uncertainty. Uncertainty causes risk; and risk causes atrophy. Having lived through several global economic upheavals as an investment professional, it’s clear to me that investors sit on their hands at times like these. Should this happen as a result in anticipation of Brexit, or as a result of it, the entire European ecosystem could suffer as investors play the ‘wait and see’ game.
Should we stay or should we go?
After 16 years in the venture capital industry, working with startups to help them build and scale, everything I have been part of and witnessed tells me that voting ‘stay’ makes sense. London and the UK needs stability to continue building its maturity across its various technology hubs. Rocking the EU boat could set us back years.
The EU may not be a perfect construct, but life outside it will be far more imperfect.
To maintain the ability to hire, to ensure that investment dollars can flow inside the UK and outside to the wider EU, and to maintain greater certainty at a time of global instability, I’d urge every business person eligible to vote in the EU referendum, to tick the ‘stay’ box on June 23rd.
And again I’m not alone – back to our survey, of all those that took part from the startup community, the results speak for themselves:
Featured image credit: Lucian Milasan / Shutterstock