August 7, 2017    5 minute read

Are London Startups Thriving Post-Brexit?

Forging Onwards    August 7, 2017    5 minute read

Are London Startups Thriving Post-Brexit?

On the 23rd June 2016, the pound closed at 1/1.49 against the dollar. By July 7th it had hit 1/1.29. The outlook for the rest of the year was no better, and the pound was named one of the worst performing currencies of 2016. Social and political impact aside, the long-term economic impact of Brexit is unclear. However, in July of 2016, if you were a UK startup – the truth was it didn’t matter. The long term implications of Brexit operate on timelines that far exceed the meaningful time horizon of a startup.

What Referendum?

Startups often fundraise to allow for 12-18 months of runway (cash reserves). This lets them transition out of fundraising mode to focus on hitting growth projections with money set aside for contingency, pivots and the ability to capitalise on unexpected opportunities. The UK startup sector has two key fundraising periods, September to December and January to April. These two periods account for approximately 30% and 40% of all funds raised respectively. The remaining 30% spreads across the remaining five months of the year.

This means a significant wave of startups would have closed rounds in time for the April tax deadline, driven by investors deploying EIS and SEIS allocations. Back of the envelope calculations suggest that companies who raised capital in April would at best have 15 months of runway left by the time Brexit occured. To make matters worse, some would be down to as little as 3-9 months.

Companies were expected to hit targets and find the next available opportunity to recapitalise in a significantly depressed environment. In the meantime, it would be a further nine months until Article 50 was even triggered and investors had disengaged with startups due to mounting uncertainty.

Crisis to Recovery

In the 7 days that followed the EU referendum, one fundraising intermediary noted that their investors withdrew £1.2m worth of offers, citing economic uncertainty and pressing professional issues in all cases. This cold withdrawal of cash would be felt by other UK entrepreneurs for several months to come. A particular well-respected figure in the industry raised £700k between April and June of 2016, but failed to secure a penny between July and October. The same fundraising intermediary noted that the three months following Brexit represented their worst quarter in recorded history.

However, 13 months later and all signs point to recovery. Recovery has focused on connecting startups to investors in Hong Kong and Singapore. Both territories represent large expat communities familiar with the UK who were able to benefit from the weak pound. Between September and December, the industry experienced a 40% increase in entrepreneur/investor engagement and a 27% increase in funds committed from these regions. They have remained an important part of our diversification strategy moving forward.

Response in the Community

The initial reaction of startup founders to Brexit, particularly in London where the majority reside, was shock.

The uncomfortable truth is that London voted overwhelmingly in favour of remaining in the EU with only 5 out of 33 boroughs voting to leave. Many in the startup community felt the vote failed to represent their interests. Worries ranged from immediate cash-flow concerns to long-term security for their workforce due to alienation from the EU.

However, the vote was a national outcry for change and entrepreneurs have proven time and time again they are comfortable with change. The mindset in the community has been stoic (at least in the philosophical sense). Entrepreneurs can be guilty of operating in a bubble, thinking the problems they are trying to solve are both progressive and exist for everyone. This forms part of a bigger conversation about technology which has the power to deliver huge cultural and economic shifts but in doing so forms its own ideological borders.

Conclusion

The startup ecosystem is an important and burgeoning part of the UK economy. Support for it keeps the United Kingdom globally relevant, and inspires a culture of innovation. Although, it is easy to forget that compared to the US, the UK industry is still in its infancy. The recovery has shown that the industry can withstand large shocks and that both the UK and international investors will continue to support it. It should be noted that this is fuelled by substantial government tax incentives.

Brexit is going to cause uncertainty for several more years to come so this is by no means the end of the chapter. It is no secret that a big driver for the London tech scene is access to EU talent, whose ability to work in the UK now has a big question mark hanging over it. However, the government supports the UK startup community with tax breaks and founders live in hope it wont contradict its own goals by making London unattractive to EU talent. Furthermore, the UK can continue to support homegrown talent so that its education system can produce workers to complement the requirements of its growing SME’s. If this happens – and it is a big if – the future promises to be bright.

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