London versus Berlin: Brexit and the European start-up ecosystem

Would Brexit mean Techxit? That was the question people in the Venture Capital and start-up world around Europe were asking when the result of the Referendum came in on the 24thJune. Would tech companies with dreams of making it big now start to look at Berlin, Paris, Amsterdam, Stockholm and other cities, and not London as the place to base themselves? Questions few would have asked before — London was undisputed king of the EU start-up scene. But Taavet Hinrikus, co-founder and CEO of London-based Transferwise, summed up the view of many: “Nothing’s changed yet but everything’s changed.”

Of the European capitals, Berlin reacted first. Cornelia Yzer, Berlin’s senator for economics, technology and research, proactively approached start-ups to promote the advantages of Berlin versus London. She even went to ‘London Fintech Week’ (which took place four weeks after the vote) with her sales pitch. The German liberal party FDP sent a billboard truck around East London, encouraging London start-ups to “keep calm and move to Berlin”. Other cities such as Dublin have since followed suit. The city’s commissioner for start-ups said in an email that “thanks to Brexit we have a new opportunity to attract Europe’s serial or first-time entrepreneurs to set up shop in Dublin.”

Is this just politicians chancing their arm, using Brexit for a bit of publicity? Or has Brexit revealed something more profound — that the tide has turned against London?

The UK is still getting a large chunk of start-up funding. About one-third of European Venture Capital money in the last six months went to start-ups in the UK, according to CB Insights. This shows just how important the UK is for the European start-up ecosystem. It’s a popular place to be, because of London’s many advantages:

1. Rich ecosystem: plenty of entrepreneurs, angel investors, incubators and venture capitalists

2. Deep international talent: young companies can find exactly the right people for their stage of development.

3. Free access to the European single market.

4. EU ‘passporting’ rights: firms here can offer financial services in all EU member states while only having to follow one set of regulations.

5. London is the ideal bridgehead between Europe and the United States.

Brexit could impact all these locational advantages, but it remains unclear at this point which areas will be affected and how. It is unlikely there will be an exodus. London will retain an active ecosystem. However, new ventures will be much more likely to open shop elsewhere. Start-ups focused on the financial sector, so-called Fintechs, are a special case. Depending on what the UK negotiates with the EU in terms of passporting rights, Brexit could lead to an exodus of Fintechs to other European financial capitals.

So if London does lose some of its natural advantages with time, where else in the EU would a new business start-up, or an existing one relocate to? And if businesses do leave, what role does the UK still play in the business model?

For new ventures, Berlin has certainly become more attractive, at least for a certain group of founders: “I do expect more young single British founders to start their company in Berlin, for the low cost of living and easy access to the rest of Europe,” Rob Moffat, a partner at Balderton Capital, told the Guardian. In terms of international talent, Berlin is definitely on the rise. Walk the streets of the city in Kreuzberg or Mitte, and you will hear just as much English, Spanish or Italian as you will hear German. And with a strong industrial network and world class research bodies such as the Fraunhofer and Max Planck institutes, Berlin has a real edge over London.

The idea of moving to Berlin may be nice on paper. But relocating is a big step for any company to take. And will probably only be worth the hassle when the details of the UK-EU deal post Brexit become clearer. Similarly, there are question marks over how strong the UK economy will be in future. Many entrepreneurs will want to ‘wait and see’ if economic growth is maintained or if it slips, rather than make the jump now. Moving costs money, and you risk disrupting any momentum you have built.

Most venture capitalists operate internationally anyway, so a new European start up scene spread over many different countries wouldn’t prove too much of a headache. And the UK could still benefit. However, one important source of funds could quickly dry out for future fundraising rounds. The European Investment Fund is an EU backed investment vehicle that invests regularly in venture capital funds. Depending on the deal the UK strikes with the EU for a post-Brexit relationship, venture capital funds might lose out if they are shut out.

And even if an exodus from London sets in, it isn’t a given that Berlin will get a dominant slice of the cake. It is more likely businesses will spread throughout Europe, to destinations that provide an edge in their specific sector. Frankfurt for Fintechs, Berlin for consumer start-ups and gaming, Paris, Milan, Amsterdam and other cities will develop unique strengths as well.

For quite a while now, London has been able to make the strongest case for being THE European start-up capital. It’s topped the league tables when it comes to deals and funding. But Brexit may change all that. It will increase competition between EU member states to attract talent and technology in a post-Brexit Europe. For a long time, the start-up and venture capital scene has been looking for ‘the’ European alternative to the Silicon Valley. Now there may be the chance for several, not just one, alternatives to emerge. Cities across Europe will want to take that opportunity.


Originally published at www.cnc-communications.com on August 4, 2016.