Breaking the EU without the UK: The Brexit Effect on the European tech scene

Britain’s technology sector is booming: with approximately £1bn more investment than its closest European competitors in 2016, London remains the tech capital of the continent. With Brexit on the horizon, commentators are focusing on the impact the EU referendum will have on the UK economy.

But what about the view from across the channel? For European businesses, Brexit provides a unique opportunity to shift the balance of power away from London; one that could have major implications on how US tech companies make inroads into the region.

Can Europe benefit from Brexit?

Britain is still the front-runner when it comes to tech industries in Europe. UK tech deals hit a record high in 2016, up to 4,009 from 2,858 the previous year and 1,714 the year before. And this shows no sign of slowing: KPMG’s 2017 Global Technology Innovation report places the UK as the fourth most promising tech market, well ahead of any EU neighbour. Such is the confidence in Britain’s tech sector that total investment in the UK’s tech firms far outstripped that of any other nation in Europe, reaching £6.7bn by the end of 2016.

However, in a recent interview, Nicolas Brien (campaign director at the tech association France Digitale) was confident that EU startups who had previously hopped on the Eurostar to London in search of funding would be returning post-Brexit: “It is definitely becoming less and less attractive to go across the Channel. Now you go to Dublin or Silicon Valley,” Brien explained.

Fears surrounding the Brexit deal - in particular, anxieties around how it will affect the free movement of skilled labour - also continue to loom. In a letter to Theresa May, nine leading UK-based tech businesses, including Swedish-founded Skype, voiced their unease. The letter states that "the number one concern for entrepreneurs post-Brexit is access to talent, in particular technical talent … Quotas on specific skills could severely limit the ability of new tech companies to grow".

The free movement of skills has been essential to the UK’s nurturing of talent and innovation. Any disruption to that would play into the hands of European tech hubs who maintain cross-border access to workers. Silicon Valley Bank’s UK Startup Outlook report suggests the uncertainty of the UK’s relationship with Europe could even lead to an exodus of homegrown talent. 21% of respondents stated they plan to open a European outpost; 11% would consider moving their headquarters to Europe.

If not London, then where?

In the days following newly elected president Emmanuel Macron’s decisive victory, speculation in the business world was rife. What were Macron’s plans to woo London’s financial sector to Paris, post-Brexit?

The French capital has long tried to position itself as a European tech hub - and it’s working. According to reports from Management Today, VC funding in France has increased fivefold since 2013, whereas the UK’s has only doubled. In 2016, French startups raised over $2.5bn in equity funding. When compared to the UK’s figure of $2.9bn for the first nine months, this shows the gap is closing. Situated in the heart of Paris, Station F hopes to build on this progress by offering a new home to 1,000 startups from across Europe, within a $265 million renovated train station.

Germany’s Economics and Technology minister Cornelia Yzer has made no secret of her desire for Berlin to become Europe’s next tech powerhouse. Yzer claims technology “companies need to be in the heart of Europe, and where is better than the capital of Europe’s strongest economy?”

Following news of Brexit last June, Berlin senators quickly penned letters to hundreds of London businesses, urging them to relocate. This came alongside a much publicised campaign, funded by Germany’s ruling FDP party and involving a mobile ad hoarding that called on entrepreneurs to “keep calm and move to Berlin”. It would appear that Berlin’s charm offensive is paying off, too; financial support for digital start-ups from the State of Berlin and its investment bank (IBB), plus a €2.1 billion boost in venture capital in 2015, have lured over 3,000 tech companies to the city.

How does this impact US firms?

It’s no secret that Britain has long been used as a springboard into the European market by high-growth US startups. As a recent Brexit report commissioned by the American Chamber of Commerce to the EU explained; “the primary motivation of many US companies to invest in the UK has not been to serve only the UK market but to gain access to the much bigger EU single market.”

Continued single market access will depend on how Brexit negotiations pan out. For example, Britain could join the the European Free Trade Association (EFTA) or the European Economic Area (EEA); the latter allows for the free flow of people, goods and capital between the EU and non-member states such as Iceland, Liechtenstein and Norway. However, such negotiations are likely to take a number of years. This continued uncertainty will only dissuade US firms from investing in Britain: that same report from the American Chamber of Commerce estimates $487bn of US investment is being put at risk by Brexit.

To further complicate the matter, there has also been talk of separate trade deals between the US, UK and EU. Such reporting does not provide any clarity to US firms: it switches from a “lasting agreement” being struck between the US and UK to prioritising the revival of a Transatlantic Trade and Investment Partnership (TTIP) that provides the US access to the EU single market.

The truth is, in these turbulent times, none of us can predict how Brexit negotiations will pan out. Throw a general election into the mix and this uncertainty is only prolonged.

While the future path is still unclear, Britain continues to be a major player in Europe and the world’s tech scene. The UK attracts some of the brightest talent, raises record funding and drives innovation in spite of all its political turbulence. There may be risks involved, but when compared to its European neighbours, the UK cannot be ignored.