​How Brexit could affect UK startups

Exploring the possible effects of Brexit on startups and SMBs following the UK's departure from the EU

7Dec

The UK may be one of the best countries in which to kick-off a startup, but that fact could easily change due to the effects Brexit might bring. In 2016, the European Union (EU) referendum result set the wheels in motion with a process that is now commonly known as "Brexit"; so, unless something else occurs in the meantime, the referendum will be concluded in the next few months, ending the UK's membership in the EU on March 29, 2019. Of course, nothing will change immediately; the process will last until December 31, 2020.

With the UK's departure from the EU on the horizon, Brexit headlines are changing every day and often contradict each other, so business owners lack the certainty of what to expect. While Brexit optimists maintain good predictions for British businesses, skeptics continue to say it was a big mistake for the UK and forecast a significant impact on employers and employees. Due to this confusion, many entrepreneurs have taken a "wait and see" approach. However, nearly half of them remain concerned about the future of their startup and the IT industry in general.

It is indeed difficult for businesses to make challenging and expensive adjustments in circumstances where it is not obvious whether they will be necessary. So, today I decided to give you some clarity on the consequences of Brexit. In short, I found that Brexit is likely to cause the reduction of capital investment in innovative startups, access to external finance will also reach lower levels post-Brexit, and the number of talented technicians from the EU will likely drop significantly. But, there also a few silver linings in this negative prognosis such as more freedom to make trade agreements with any country in the world and eliminating the necessity to comply with EU regulations. Let's figure out bit by bit what is going on right now, what you should definitely expect in a post-Brexit period and how to prepare your business for these big changes.

Overall economic impact

Unfortunately, the economy in general has failed to grow as much as analysts forecast prior to the referendum, according to The Guardian. After the Brexit vote, the British pound has fallen to its lowest level in the last 30 years — 5% over the past couple of months. The trade deficit has unexpectedly widened, with Britain's trade balance reaching £12.3bn, compared to analysts' prediction of £11.3bn ($14.4bn). Targeting EU countries with your products or services could drastically affect your profit due to the current weakness of sterling.

Some parameters, nevertheless, showed better results than was expected of them. Inflation, for example, continues to surprisingly fall, and Brits will probably be able to maintain it at the level of 2.3% to 2.5% until the end of the year. This is good news for entrepreneurs as they could cut off some expenses and reduce their cost of doing business.

Even though Britain would be free from the mandatory net contribution to the EU of £9bn, analysts say the cost of leaving the EU will eventually exceed these financial benefits for the UK. In a worst-case scenario, the UK's exit of the EU could mean that British startups will no longer be able to enter European markets on a cross-border or branch basis. Analysts have similar concerns for the businesses that depend on the items they export from EU companies that mainly do business on the British market.

Level of investment

Brits can already feel the drop in the level of financing, as foreign investment has fallen 92% since the referendum in June 2016. And the main reason why businesses hesitate to contribute any money in the UK right now: Brexit.

If you preach an enterprise investment scheme (SEIS or EIS, for example) your worries are apparently in vain, as your approach is supported by the UK government. But, if not, you may be in trouble, as more than half of all foreign direct investment comes from the EU, and after December 31, 2020, a higher trade cost, and increased fees and taxes would surely cause a weakening of European investment in Britain.

Previously, the UK had no trouble attracting international financing, having relatively low-cost tariffs and government initiatives through subsidies and grants. Now, if the UK loses access to the EU single market, the damage to the level of foreign direct investment — or FDI for short — could be significant.

As reported by governmental sources, FDI may well reduce by no less than 22%, after Britain divorces the EU. So, in the next couple of years, more than ever, investments in UK startups needs to be encouraged.

Employment

British businesses and startups in particular are about to face a severe workforce crisis for the first time in almost 50 years. The freedom of movement always was one the core backbones of the EU, but after Brexit, it will probably sink into oblivion for UK citizens. Following the referendum in 2016, Indeed noticed that the number of qualified personnel looking for a job outside Britain significantly increased in just a few days after the official announcement. Unfortunately, this trend has not changed over the years. Employees are now more interested in working in Ireland, which is still a member of the EU, or other English-speaking countries.

It is highly likely to leave startups at risk of facing a labor shortage and losing some immigrants that occupy key roles in your business. That's why it's necessary to identify who among staff may be vulnerable due to being a resident of the EU but not the UK. Help them assess their chances of staying in Britain and applying for citizenship, if applicable. With those who cannot or don't want to consider this option, you should discuss other alternatives such as the renewed working visa procedures as soon as they will be agreed upon by the government. For employees who cannot be replaced, startups should begin preparing to ensure their retention and facilitate potential relocation.

This will allow you to determine areas of risk and create a plan of how to deal with retaining or replacing key players who will be affected by Brexit.

Some initiatives may also be introduced by the government. For example, the Scottish Parliament, which represents a part of the UK that voted to stay in the EU, is dedicated to covering immigration fees for EU citizens who will continue work in the public sector of Scotland after Brexit.

"It is simply wrong that people already making a contribution to our country should have to pay to retain rights they currently have to live and work here," said Scotland First Minister Nicola Sturgeon. Maybe, the rest of the UK will chose the same path to soften the Brexit aftermath for businesses.

As one of the common concepts, you should also consider the option of moving your team to another location or creating your own R&D office outside the UK to avoid legal difficulties and cut off your financial expenses.

Legal issues

The legal and regulatory positions in your contracts with employees, clients and outside contractors must be carefully examined under the new jurisdiction. These frameworks will surely evolve to become more complex and will require some time to get used to.

Given the additional bureaucratic strain that is connected to the Brexit and its cost, analysts advise startups and SMBs to prepare for reorganization, as it's quite possible that the access to the EU internal market for the UK and the British domestic market for the rest of the EU will be restricted.

So, is Brexit actually a good thing?

It's hard to answer this question unequivocally. On the one hand, constantly evolving EU regulations completely frazzled the UK, as they are costing the country tens of millions of pounds every couple of weeks. From a financial standpoint, Britain no longer has to pay the EU membership cost to the common budget. Considering the UK contributed somewhat about £13.0bn in 2017, it could use this money for the country's needs to ensure its far-reaching success and growth. It may also mean that the government will be more welcoming and forthcoming toward emerging startups.

Also, in the business context, Brits will soon be free to set their own custom terms when trading and negotiating with other nations. Countries such as Australia and China, for instance, are now getting ready to make free trade deals with the UK in 2021 (following the conclusion of Brexit). In that case, you may consider new market opportunities for your business and already start looking for long-term clients from the abovementioned countries.

On the other hand, Brexit will not be easy for the UK. If sterling continues to weaken and the increase in the economy continues to fail its prognosis, it may significantly backfire on startups, especially if they are only in the angel or seed stages.

In any case, to tune your startup's attitude toward future success in the changing market, your current structure and operations need to be examined and reconsidered, if necessary, to fit the new paradigm.

Sources

A version of this article has previously been published on X1 Group Blog.

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