What Brexit Means For U.S. Entrepreneurs
The Brexit vote two weeks ago sent shock waves around the world. We awoke to the realization that the world economy had changed suddenly, U.S. markets swooned, 4 million Britons petitioned for a re-vote, and people everywhere wondered how much damage had been done. Friends and relatives called me asking if they should dump all their stocks and hunker down because they feared a financial catastrophe was looming.
Two weeks later the U.S. markets have bounced back and seem to be forgetting Brexit. The UK (United Kingdom, also called Great Britian) is struggling, however, with at least two major problems. There is broad consensus that the loss of easy access to the EU (European Union) market will depress growth of the UK economy, and there is also huge uncertainty about when the new basis for UK access to EU markets will be established and how big the depressive effect will be. Investors hate uncertainty. Hence the British pound continues to explore new lows.
And, the UK has been thrust into a severe political crisis: Scotland and Northern Ireland, two of its constituent nations, voted to remain in the EU. Not long ago the Scots narrowly rejected a referendum proposing they leave the UK which contemplated them joining the EU independently; Scottish exit from the UK is likely to be proposed again. London thrives on the basis of its position as an international financial hub, which is seriously threatened by Brexit because UK financial products will no longer have automatic regulatory approval in the remaining 27 EU countries (called “passporting”) and would instead face tedious and expensive approval processes (the exact extent of which is also uncertain). The majority for Brexit came from the UK’s rustbelt and from Wales. London might well try to secede from the UK, if that is possible.
So what effect will Brexit have on entrepreneurs in the U.S.? Commentators on the U.S. startup market have mostly said the impact will be small. I see two areas to watch, however. First, European entrepreneurs and start-ups will now need to expand to the U.S. sooner than they did before. The EU is diminished by the loss of the UK: it’s economy shrinks by 17.5% and it loses a sophisticated, high-income, English-speaking market that is only slightly smaller than Germany, the EU’s largest market. The UK served as a gateway to global financial markets for European companies. It’s financial market size is comparable to New York, hence it provided scale to companies offering financial technology products. And it has a large pool of later-stage capital to which European entrepreneurs look for B round and later investments. The chance that European companies can establish themselves is global competitors by focusing on the European market is significantly reduced now, especially for business-to-business companies. U. S. entrepreneurs can expect the best European start-ups come to the U.S. sooner and more aggressively than before.
This increases competition for U.S. entrepreneurs but also brings more energy and innovation to markets. Startup activity in the U.S. is about 5x bigger than in Europe, so more entry from Europe does not change the market balance much. However, some category-leading companies have come from Europe: e.g., Skype, Spotify, Criteo, Net-à-Porter, and Vente Privée. U.S. entrepreneurs will need to look more closely at the leading European competitors to understand what they are doing well, and to gauge where they create either competitive threats or partnership opportunities.
Second, the “new populism” political dynamic that drove Brexit has a strong parallel in the U.S. and in other parts of Europe, too, such as France and Germany. The world economy of the last 20 years, which is driven by globalization and information technology, has not benefitted a large part of the population. In England most of the prosperity happened in the London region and missed the industrial and agricultural regions in the north and west.
The UK has also seen a wave of immigration from other parts of Europe, enabled by the EU’s fundamental policy of right to live and work anywhere in the EU. Average workers in both the UK and U.S. feel threatened by immigrants who will work for less and trade deals that expose their jobs to international competition. Voters in large numbers have been rejecting much of the underlying logic behind a dynamic globalized economy that on paper seems to make the world much richer.
U.S. entrepreneurs are big beneficiaries of this dynamic, globalized economy. The most successful among them (Bezos, Page/Brin/Schmidt, Zuckerberg) have defined it. The whole local/mobile/social industry stands on the platform and cloud that is has created. Immigrants play a far disproportionate role in the start-up economy: in the U.S. they are responsible for about 25% of business creation. Small entrepreneurial companies benefit greatly from Google search advertising, web sites, Facebook’s lead generation tools, the distribution channels provided by eBay, Amazon, and app stores, and the young and eager-to-work labor pool that immigration fosters.
Entrepreneurship is Dawinian. The most able (and lucky) people prosper, and the others get left far behind. There is relatively little equal opportunity or safety net, and hence it is hard for disadvantaged groups to break in enjoy the rewards of success.
Entrepreneurship can also be elitist. Larry Page and Sergei Brin are Stanford alumni. Eric Schmidt, Jeff Bezos, and Meg Whitman all attended Princeton. Mark Zuckerberg dropped out of Harvard, as did Bill Gates. A large proportion of venture capitalists attended top schools, too.
And, while new businesses have driven much of the new job growth in the U.S., there are concerns about the quality of those jobs. The big internet companies employ relatively few people directly. Uber is at the center of controversy about the rights of workers in the gig economy.
I’m concerned that entrepreneurs will find themselves in the political cross hairs in the next decade. The U.S. has been friendly to entrepreneurs, providing favorable tax treatment (low capital gains rates, qualified small business stock), low cost capital via the Small Business Administration, patent protection, set-aside for government purchasing, etc. This continues with recent expansions of the JOBS act. And Donald Trump positions himself as a self-made entrepreneur (albeit one who started his career with $30 million of assets).
But, the rising wave of populism puts priority on protection of the jobs, incomes, and status of people who have been left behind by the globalized, information based, geek-powered economy. This will drive large amounts of spending that will come from other programs or higher taxes. The populists will care little about the success of entrepreneurs unless they can deliver “good middle class jobs” to workers with average qualifications: $25+ per hour, health benefits, 40 hours/week, job security. This goes against the very high skill levels and workforce flexibility that many startups need. Progress on immigration reform in particularly seems unlikely, which means that high-tech startups will continue to struggle to hire the talented foreigners who earn the majority of advanced technical degrees at U.S. universities.
Economic rebalancing is needed, and it will affect entrepreneurs. We will need to work hard to get it done in a rational way that preserves the wellsprings of strength in our economy. Otherwise we could put ourselves in a position similar to that in which the UK finds itself, and face self-destructive chaos and perhaps a lost decade for entrepreneurship.
Originally published at www.forbes.com on July 8, 2016.
