Brexit is Not a Disaster for UK Startups

…but it isn’t a great thing either. I recently wrote a working paper together with Demos Helsinki on entrepreneurial ecosystems. The paper identifies ten factors that shape entrepreneurship. A quick glance over these factors and news over the last few weeks suggest that Brexit touches upon high-technology entrepreneurship in the UK in a number of ways.

Local culture, institutions and demography shape entrepreneurial ecosystems. Startup companies employ mainly young, highly educated and often immigrant population who were mainly supporters of Remain. How welcoming to foreigners and diversity the UK is in the eyes of these and prospective entrepreneurs will have an impact in the long run; founding team diversity and entrepreneurial confidence drive positively entrepreneurship. The government will need to reassure entrepreneurial hotspots around the UK that their success factors are not sacrificed in the divorce settlement with the EU. The precedent on how the government is making it more difficult for non-EU citizens to settle here is not promising.

Geographical proximity and cross-border connections are very important in high-technology business that is inherently global. Brexit will impose more or less painful immigration bureaucracy where there was previously none. Large companies have routines and staff to deal with border-crossing bureaucracy, but small startups don’t have assets to deal with such hurdles and are in a position suffer the most. Yet, I don’t expect a major impact in the short-term. The UK has very strong domestic entrepreneurial ecosystems and lots of talent that won’t disappear overnight. Over time, however, new barriers to movement of people and their ideas cannot be a good thing for entrepreneurship.

The most important resource for an entrepreneurial firm is talented founders and employees. The UK has grown a considerable talent base over the years. This is largely thanks to its excellent higher education system and the ease of settling in to the country. University graduates are an important source of entrepreneurs. Any points-based immigration system will make it more difficult to attract and retain talent from the continental Europe especially for startups that have little resources to deal with extra bureaucracy. Berlin, a rising continental startup hotspot is already preparing to use Brexit to its advantage.

Early-stage startup companies need local venture funding. The period of increased uncertainty and potentially diminished role for the City in the global financial system can result in less available venture funding for startup companies. The impact may not be immediate because numerous venture funds and their staff are currently firmly established in the UK and in London in particular, but it won’t take years to change if there are better investment opportunities elsewhere. The government can try to compensate by making life otherwise financially easier for startups, but this costs money that has been promised to many other purposes as well.

The intellectual property regime is relatively similar in developed countries so in principle there is probably not going to be massive changes due to Brexit. The difference may come from how companies manage and administer their IPR portfolios in the international arena. In the worst case, the UK companies have to file their patents again, maybe in multiple countries. Again, large companies can deal with the extra workload but for smaller companies it will be yet another headache they could very well live without.

General economic uncertainty is not a good thing for high-technology entrepreneurs that operate at the risky end of economic activity: capital retreats to safer assets; consumers and companies are less prone to try out new things. The immediate Brexit shock is fading but there will be a period of uncertainty as different stakeholders get their plans sorted out and negotiate how Brexit will actually happen. The shorter this ‘short-term’ uncertainty stays, the better. However, given that it is the EU and Brexiteers around the table, I woudn’t hold my breath. Some people are already talking about the possiblity of an interim deal.

Lasting effects on high-technology entrepreneurship are all but impossible to predict, but it is clear that Brexit involves major risks for startup entrepreneurship in the UK. While strong entrepreneurial ecosystems in the UK would probably cope with any individual issue alone, it is the potential convergence of various factors that can cause serious problems down the road. It’s quite worrying that the Leave campaigners seemingly had do plan beyond the referendum. Entrepreneurial ecosystems are difficult to cultivate even with a good plan, and they are certainly easy to destroy without one.

There will also be new opportunities due to Brexit although at the moment it is difficult to exactly see what those might be. One of the key promises of the Leave campaign has been to cut excessive regulation imposed by the EU. This can help entrepreneurs in particular industries, yet I don’t remember any significant obstacle to doing business that would have been specifically imposed by the EU when I was a startup entrepreneur. Indeed, the Norwegian model of very close relationship with the EU including the single market access would be a good or the least bad option. It would perhaps allow the UK to practice more experimental governance while retaining many of the benefits of the EU. The problem is that Boris Johnson may have to kiss more fish to sell it to those who thought they could vote the EU to disappear.

Aleksi Aaltonen is an Assistant Professor at Warwick Business School. He is also a successful entrepreneur and a course director for BSc Digital Innovation and Entrepreneurship at WBS.