An advertisement trying to lure British tech companies to Berlin, as shown in London in July 2016. Image: Matt Dunham/AP

The Spectre of Brexit Is a Real Drag on British Startups

Seven months on, entrepreneurs in Britain are worried the foreign workers powering the Silicon Roundabout will disappear.

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Feb 1 2017, 12:42pm

An advertisement trying to lure British tech companies to Berlin, as shown in London in July 2016. Image: Matt Dunham/AP

Joris Magenti, a young entrepreneur based in London, knows firsthand how frustrating borders can be. Born in France, Magenti grew up in Spain, close to the French-Spanish border. Magenti recalled trips between the two countries, before freedom of movement came into effect under the Schengen Agreement, as laborious, unnecessarily complicated, and tiring. Magenti and his family had to change currencies, present passports, and wait in long queues.

"When they opened the markets and the borders, that was amazing," Magenti told me, as if recalling a miracle he'd witnessed firsthand.

After working as a consultant for the United Nations, Magenti decided to attend business school at the University of Oxford. Thanks to freedom of movement under EU law, Magenti's move to the UK—and his subsequent decision to stay—seemed so natural as to be nearly thoughtless, like an American choosing to move to a different state after college.

When Magenti and his classmate Vana Koutsomitis, a dual citizen of Greece and the United States, decided to create a new dating app, they chose to establish their company, DatePlay, in London. While neither Magenti nor Koutsomitis hold British citizenship, both hold the right to live and work in the UK as citizens of the EU. Magenti laughed as he recounted how simple it was to start making his entrepreneurial dreams a reality: "In Spain, building a company takes weeks or even longer. Here you can do it very fast. You can register a company online!"

The path Magenti took to establish a start-up in the UK is a common one. Drawn to the UK by top-ranked degree programs, job offers from large tech firms, and the familiar desire to move to the big city, young European entrepreneurs and engineers from across the Continent now stand at the heart of Britain's burgeoning tech scene. But today, the image of Britain as a sound environment for disruptive innovation is under threat as a result of one of the most politically disruptive events in modern British history: the nation's decision to leave the European Union, and the ongoing political uncertainty that has followed.

Ricardo Varela, a Spanish-born engineer, explained that before Brexit, there were two clear options for European entrepreneurs hoping to grow their startups: Move to the UK, or move to the US. Varela worked as an engineer for several major tech companies in the US and UK before deciding to establish his own company, Localistico, in London. "Up until now, you didn't have to double think, Is the UK the right place? Everybody thought, it's either the States or the UK."

UK Prime Minister Theresa May enters the stage at the 2017 World Economic Forum. Her speech came amidst continued uncertainty about the effect on Brexit on global business, although she has said Brexit will indeed happen. Image: Bloomberg

Then, of course, there was Brexit. On June 24, stunned UK residents woke to the news that Britain had voted to leave the European Union. The certainty and uncluttered regulatory environment the Britain was known for were thrown to the wind. Hours after the vote was announced, Prime Minister David Cameron—a vocal champion of the British startup scene—resigned, triggering weeks of political chaos. The instability that followed made it clear to the global markets that no one had a concrete plan, or even definition, for Brexit, and the pound tanked. The currency and the political system of the UK, previously viewed as a solid bet, suddenly appeared tenuous.

Riding the Underground in the early weeks after the Brexit vote, it was not uncommon to see Londoners openly crying in public. (As an American resident of London, I can say that few things so clearly signalled the unprecedented nature of the Brexit vote as the sight of the perennially-reserved British population expressing sincere emotions in public.)

Seven months on, the United Kingdom remains plagued by uncertainties. For months, Prime Minister Theresa May spoke in Zen koans rather than concrete policies, confirming only that "Brexit means Brexit" and that she will push for a "Red, White, and Blue" Brexit. Earlier this month, May delivered a sliver of information to the public in a speech on Brexit, confirming that Britain will not seek to remain in the European single market. But when pressed for further concrete details on the government's Brexit priorities, May again reverted to vague catch-phrases, this time warning the EU that "no deal for Britain is better than a bad deal for Britain."

More intel on Brexit has emerged from the accidental flash of aides' notepads than from any official government statement. Over the course of five weeks of reporting on Brexit and the UK tech scene, all requests for comment from the UK government went unanswered. And while entrepreneurs are used to risk, with each month that passes without clear information on the direction of Brexit, the image of the UK as a stable and welcoming place to start a business continues to erode.

"In a startup, when something goes wrong, you just get on and deal with it," Stephen Bourke, co-founder of health-tech startup Echo, told me. "But without being able to know what we're reacting to at the moment, it's difficult to plan. We need to rip off the plaster and get on with it, because then we'll know what we're contending with. We need to stabilize."

"We need to rip off the plaster and get on with it."

As we split a cinnamon bun at Nordic Bakery, a cafe down the road from Google's London Headquarters, Varela, visibly frustrated, told me, "The way [the government] is doing this thing is worse than the thing itself." We were surrounded by the din of other tech workers on their caffeine breaks. The duo at the table next to ours seemed to overhear our interview, and began their own chat about Brexit. "It's not actually going to happen," one man muttered to the other. Many of the entrepreneurs who spoke to Motherboard expressed their own ongoing doubts as to whether Britain would, eventually, leave the EU at all—an outcome that May appears to have dashed.

The lingering suspicion that Brexit might not go forward is wishful thinking on the part of an industry reliant on European talent and uncomplicated access to the European single market. The government has given no clear indication as to whether or not startups will be given assistance in sponsoring foreign workers after Brexit. Hiring and sponsoring an employee from outside of the EU is costly in the UK, and most startups can't afford the process. Entrepreneurs fear that if EU citizens will require visa sponsorship to work in the UK, startups will fail for lack of talent.

"If I want to hire candidates from the US or Canada, it's not affordable," Stan Karpenko, a Lithuanian-born entrepreneur, told me. "If Europeans are treated the same, this is going to be my number one nightmare."

Karpenko knows the value of the EU talent pool firsthand. Until recently, his Birmingham-based company GiveVision was run exclusively by immigrants. "My CTO is from Poland," Karpenko told me, "my co-founder is French, from French Polynesia. We have interns from the US and we had temporary workers from China. We didn't have a single British person." GiveVision, which develops smart glasses that function as eyes for the blind, now has two British employees on its team of five.

When I asked Karpenko why his company had so few Brits on board, he explained that the British engineers he interviewed didn't come across as "as motivated and skilled and agile and willing to work" as the foreign-born workers. Another entrepreneur, who did not wish to be named, said that British tech graduates are largely risk-averse, and more likely to work for larger, more established tech companies than to take the leap into lower-paid, less-stable startup positions. While Brexiteers trumpet the importance of giving British workers first pick of British jobs, it's unclear whether British workers want these high-risk startup jobs in the first place.

Other startups rely heavily on offshore tech talent, and it is unclear how Brexit will complicate their ability to pay remote EU workers. Freedom of movement and tax scheme agreements across EU nations have allowed for novel arrangements at British startups. Irish entrepreneur Stephen Bourke's team at Echo, for example, has one employee in Austria and two in Poland. "Three weeks a month, that's their home, and one week a month with us. What does [Brexit] mean, for us and for them?" he said. Similarly, Varela's company employs skilled designers based in Spain, while Magenti's app is being built in part by developers in Europe and Latin America.

Frank Bertele, CEO of the financial services startup Netz, in July 2016. Five investors in Netz suspended hundreds of thousands of pounds in investment within a day of the Brexit vote. Image: Leonora Beck/AP

For companies whose contracts with overseas workers were written in GBP, offshore employees were forced to take a sudden 15 percent pay cut after the post-Brexit pound crash. For companies whose offshore worker contracts were tied to local currencies, projected costs were abruptly raised.

In this sense, the Leave voter who envisioned a Britain where jobs currently held by EU workers will now go to British-born UK citizens was dreaming of a pre-digital past. While there may be fewer immigrants to the UK after Brexit, the digital jobs may not come back.

After the Brexit vote, the UK must now decide whether it will restrict companies who rely on remote workers, both inside and out of the EU, or whether it will continue to allow companies to grow by taking advantage of the eager, lower-cost international workforce. At present, the latter seems more likely. If that is the case, Brexit will see not a rise in jobs for British citizens but an even greater shift of job opportunities to workers living overseas as the end of EU free movement makes remote workers the more economical option.

"It's open season."

Professor Hanadi Jabado, the executive director of the Entrepreneurship Centre at Cambridge's Judge School of Business, expressed concerns beyond the question of talent, saying that the combination of Brexit instability and a weak pound was creating a hunting ground for American and Asian firms to acquire nascent British startups.

"The UK is amazing at innovation," Jabado told me, citing the UK's significant internal investment in research. "Very often you see big US companies come here to shop for leading-edge technology and great brains. Already we were seeing a lot of our companies being acquired by US companies. Before [Brexit], this was happening a lot. Now, with Brexit, and the pound so weak, we have become a third cheaper."

Jabado pointed out that within a week of Brexit, the Japanese firm SoftBank had acquired the UK research firm ARM. She adamantly believes that if the vote had been Remain, the firm would still be in Britain. "It's open season," Jabado told me, shaking her head.

This tidal wave of uncertainties has led many to speculate as to whether another European capital will take over London's place of privilege in the European startup ecosystem. Berlin, Barcelona, Amsterdam, and Paris have each been floated as possible new hubs. But Alexandre Covello, founder and CEO of investment-led accelerator AngelsCube, shrugged off these suggestions. When I asked whether he thought, say, Berlin, might compete with London in the years to come, he pointed out some obvious impediments: "They speak German. It's a different ballgame altogether. The startups, the regulatory framework, the money, the big names: they're all in London."

And while Varela, Magenti, and Karpenko each conceded the attractions of other cities—citing the lower cost of living, better food, and better weather alongside guaranteed access to the European single market—none have plans to move their companies out of London in the foreseeable future.

In this sense, what emerged from my conversations, alongside all the unease and frustration, was a sense of UK-based entrepreneurs' determination to make it work here in Britain. Bourke re-affirmed his love of London.

"I've lived in Paris and New York and for me, London is like nowhere else," he said. "It's a total integration of people. London is properly mixed up, properly messy. I don't see that changing. If you look at immigrants in London, they are CEOs, they are hedge fund managers, they are startup entrepreneurs. You don't see that so much in the rest of Europe. London's not going anywhere."

Brave faces aside, the Brexit vote has still left many European entrepreneurs shaken. At the end of our interview, Magenti, who had projected so much optimism throughout our conversation, sighed. I asked him whether he wanted to add something. "At the personal level it's very annoying," he said. "At some point you just hope all these tensions disappear so you can focus on the work. In the UK, if your startup or your idea starts happening here, you feel accepted. Then you have this Brexit situation, and it's confusing. You know, do they want me? It creates a disconnect."