Brexit: what does it mean for high-growth digital startups?

The United Kingdom first joined the European Economic Community, as it was then known, in January 1973. A referendum two years later saw Britons voting to remain part of the EEC - and on June 23rd this year, Britain decides once more: stay or leave.

So what will a future UK exit mean for high-growth US startups considering European expansion?

Currency

A ‘Leave’ vote could have a significant impact on the British Pound. In February 2016, sterling reached a seven-year low against the US dollar after the referendum was announced. In early June, sterling fell against both the US dollar and the Euro after the results of three polls suggested that the ‘Leave’ camp had the greater support. The following day, however, these falls were reversed when new polls showed marginal support for a ‘Stay’ vote. 

Initial signs indicate that the price of sterling will fall against other major currencies. While this would be good news for British exporters and tourists visiting the UK, it also suggests that currency traders have a negative view of what Britain would look like without EU membership. There would be an adverse impact on US businesses that export to the UK, but for startups looking to grow through acquisitions, Brexit may mean the chance to acquire partner businesses in the UK at a lower cost. Law firm Bird & Bird has suggested that Apple’s January 2015 acquisition of British startup Semetric, reported to be a $50m deal, would have been “nearly 10% cheaper in dollar terms if done today”

Access to talent

Finding and retaining the right employees is one of the key factors in a successful overseas expansion. Brexit could have both positive and negative implications for startups looking to recruit in the UK.

To some extent, it could be easier to find staff after Brexit as a predicted increase in overheads and prices could see established firms slash their employee bases to save costs, which puts more talent on the recruitment market. 

Those who plan to vote ‘Stay’, however, have questioned whether regulations covering the employment of EU nationals will remain the same, and whether migration in a broader sense may be restricted. With 6.8% of the UK workforce consisting of EU nationals, as many as 2.1 million workers could be affected by changes to migration laws.

The threat Brexit raises to multicultural tech firms is a concern for many CEOs. The leaders of both TransferWise (over 40 nationalities employed) and Memrise (17 nationalities employed) have voiced concerns over potential difficulties in hiring should the UK vote ‘Leave’. Historically, the UK government has been poor at offering visas to skilled foreign tech workers. In 2015, Tech City UK was given up to 200 ‘exceptional talent visas’ to attract overseas workers to UK startups, but only gave out seven. In a poll carried out by Tech London Advocates, 81% of respondents believed Brexit would have a negative effect on the employment of staff from EU countries.

Other sources, however, have suggested that the UK would be likely to negotiate a deal for the free movement of labour between Britain and the EU, in return for continued free movement of goods. Without such an agreement, recruiting EU nationals for UK-based roles could prove to be a more of a challenge.

A gateway to the rest of Europe?

Currently, the UK is the place to be for businesses looking to expand into the wider European market. London alone is home to 40% of the world’s top companies with either a global or regional HQ in Europe.

It is currently unclear how this would change should a ‘Leave’ vote win. Currently, numerous US businesses choose the UK for their European HQ, as trade agreements and relationships with other EU member states mean that it’s easy to take advantage of the vast EU market from Britain without introducing a language barrier. Companies with a UK base can, at present, trade freely with customers elsewhere in the EU without the need for additional import taxes, while existing agreements mean that free trade with South Africa, Switzerland, Norway and other countries is also possible.

Tech startup leaders believe that the UK’s position as an entrepreneurial hotspot could be threatened: the UK director of startup accelerator WAYRA believes that the UK could make way for emerging digital hubs such as Berlin if startup heads believe that a different location will give them a better chance of success.

Without EU membership, new trade deals would need to be negotiated. This could play out in one of four ways, as laid out in this report from the London School of Economics:

  • EEA membership (the Norwegian model) would keep the UK in the Single Market, and able to negotiate trade deals independently from the EU. It would also require contribution to the EU budget, would mean that existing EU rules of origin would need to be adhered to, and would see the UK needing to comply with Single Market rules but have no representation in setting such rules.
  • Bilateral agreements (the Swiss model). The current Swiss agreement allows free trade and free movement of people with the EU, and means that they can choose whether or not to opt out of EU programmes on a case-by-case basis. It also enables them to negotiate trade deals independently from the EU. However, there is still a fee paid to participate in EU programmes, and while adopting certain EU rules, Switzerland have no representation in decision-making.
  • European Free Trade Association (EFTA) membership would not be a stand-alone solution post-Brexit, but would offer the opportunity for free trade in goods with the EU and the ability to negotiate independent trade deals without needing to contribute to the EU budget or adopt EU economic regulations. However, it would not allow for freedom of movement of people or trade in services, and would require that all goods meet EU standards.
  • World Trade Organization (WTO) membership is suggested as a fallback option, with the same benefits as EFTA membership. However, tariffs charged would make the cost of exporting to the EU higher, would lead to reduced market access for service providers and would see no provision for free movement of labour.

Expected timescales 

Should a ‘Leave’ vote win on June 23rd, it would not mean an immediate parting of ways from the EU. After formally informing the EU of its withdrawal, Britain would have two years to negotiate its future relationship, as per Article 50 of the Lisbon Treaty. This timeframe could be extended, however, if agreed by all 27 remaining member states.

A Cabinet Office report claims that reaching such agreements would not be possible within a two-year time frame, and that the UK could face “up to a decade or more of uncertainty” as a result. That said, it would be purely the formal aspects of Brexit that would take two years: indirect economic and social effect - a suggested loss of confidence among currency traders for instance - would begin shortly after a ‘Leave’ vote.

Possible changes in British government

A ‘Leave’ vote would, say its supporters, give the British government more freedom to make its own decisions, free from the ties of EU regulation and spending the £1bn per month currently paid to the EU. Others argue that some of these funds could still be directed to the EU, depending on the trade deal agreed. Countries such as Norway and Switzerland, who still want single market access despite a lack of EU membership, still contribute to the EU: a 2013 paper from the House of Commons library claims that Norway’s contribution to the EU was £106 per capita in 2011, compared with the UK’s contribution of £128 per capita and Switzerland’s figure of £53 in the same year.

While he has stated that he will remain Prime Minister should a ‘Leave’ vote happen, it is likely that David Cameron’s position would be under threat should Britain leave the EU. An early general election could be triggered. A shake-up in the UK government could spell further uncertainty for high-growth businesses.

With no country ever having left the EU, one thing is clear: there is no way of knowing the exact outcome of a ‘Leave’ vote unless it happens. Startups planning a move into Europe will simply need to wait and see what happens - but also be forearmed with predicted outcomes should Britain decide to exit the EU on June 23rd.

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