28 Jun 2016   |   News

Brexit fallout will damage ICT sector across Europe

Europe’s digital sector, already grappling with skill shortages and a lack of scale, is bracing itself for the Brexit hit. Entrepreneurs, investors and CEOs fear UK withdrawal will undermine competitiveness in the sector as a whole

The UK vote to leave the EU is having an instant impact on investment in the information and communications technology (ICT) sector, according to Francois Mazoudier, managing partner at Tech Leaders Capital and a serial entrepreneur. “Forty-eight hours after the vote, I already received a call from a UK tech start-up I'm advising,” he said. “With two UK investors lined up to complete this week, they decided to review their options and let things settle down a bit: in other words, no deal until further notice.”

Up to this point, entrepreneurs regarded the UK as an attractive place to found digital start-ups, despite the high cost of living in the main technology hubs of London and Cambridge.

More than one in five of the directors of the 27,395 new tech businesses founded in the UK in 2014 were foreign nationals, according to research firm DueDil. As a result, the UK has become a leading hub in Europe’s digital economy with a strong financial services technology cluster near the international banks in the City of London.

The UK is also home to two of Europe’s largest telecoms operators, Vodafone and BT and to world-class computer companies, such as chip designer ARM and software company Sage. Many of Europe’s most prominent and active venture capitalists are based in the UK, while Internet giants, such as Microsoft and Google, conduct significant research and development around machine vision and artificial intelligence in the UK.

The tech sector accounts for around 10 per cent of UK GDP, and is one of the fastest growing components of the economy, according to market research firm Frost & Sullivan. The UK’s tech companies raised more than $3.6 billion in funding in 2015, up 70 per cent on the $2.1 billion raised in 2014, which was itself a record, according to figures compiled by London & Partners, the Mayor of London’s promotion company.

But Brexit may bring that growth to an abrupt halt, as the UK venture capital industry finds itself cut off from the wider EU ecosystem. Mazoudier noted that most new VC funds today get their anchor investment from the European Investment Fund, an EU entity.

Still, some investors think Brexit could create opportunities for digital entrepreneurs. “It could go one of two ways,” said Tony Fish, a seasoned tech entrepreneur and investor based in London. “When there is uncertainty, there is opportunity and the fleet of foot will create solutions to the problems. At the same time, we are already finding individuals who have been employed in the same role for a period of time now want to stay put and reduce their risk.”

Skills shortages

If it becomes harder for UK nationals to work in other EU states and vice-versa, the existing skills shortages in Europe’s digital industries could be exacerbated.   “We struggle to hire enough skilled developers, solutions engineers and product managers,” said Sarah Wood, co-founder and co-CEO at Unruly, a video ad tech company, with 250 employees and five offices across the EU. A fifth of the employees at its London HQ come from EU countries beyond the UK.

“There’s a real risk that leaving the EU would make it more complicated for companies such as Unruly to hire European developers and digitally-savvy employees,” Wood said.

Larger technology companies are also worried about the implications of Brexit for EU nationals working in the UK. Andy Winstanley, a spokesman for ARM, said, “We are paying close attention to the negotiations, particularly around the subject of the right of EU citizens to work in the UK in future, as we have approximately 200 non-UK EU people working for ARM at our headquarters in Cambridge.”

Some investors believe skilled engineers and entrepreneurs will still come to London. “The government will hopefully compensate for the loss of talent from the EU with a points/visa based system that means you can hire from US, Asia etc.” says Frank Meehan, co-founder and partner at SparkLabs Global Ventures.  “However the problem with these systems is that you are reliant on government approval, rather than a simple right to work.”

Meehan advised UK-based companies that want to keep hiring talent from within the EU to start thinking about locating some operations overseas. “Eastern Europe, particularly Romania/Hungary, makes a ton of sense, because it will be easy to recruit from within the EU and those countries will want to stay in the EU for a very long time. “Keep in mind that Netherlands and Sweden will likely try to exit EU next.”

In a similar vein, big UK companies may also decide they need to be based inside the EU. Vodafone's CEO Vittorio Colao told the BBC his company would have to reconsider its position if the free movement of people and capital is restricted. “The next big opportunity is in digital. Britain is particularly strong in digital, and it would be a missed opportunity if it tried to sit outside,” he said. “There is a difference between being a neighbour and being a co-owner.”

Launch pad

As English-speaking countries with strong cultural ties, both the UK and Ireland have long served as a launch pad for North American and Asian technology companies seeking to break into the European market. If Brexit results in barriers to trade and inconsistent regulations, the UK may find this investment dries up. Ireland, which has attracted billions of euros in investment from Amazon, Apple, Facebook, Google and Microsoft, may also suffer. Some executives say that Ireland has relied on support from the UK to fend off French and German opposition within the EU to its generous corporate tax regime.

Conversely, as the only English-speaking member of the Eurozone in the EU, Ireland’s tech sector could benefit from a UK withdrawal. Axelle Lemaire, France’s Deputy Minister for Digital Affairs, noted that London has become the “tech nucleus of Europe” in part because of the “universal use of English in the digital world”. But London also benefits from being tightly integrated with other European hubs. “London is important in today's digital world precisely because of Paris, Berlin, Dublin, Stockholm, and because European ecosystems connect spontaneously, in a context of free movement of people, goods, projects and skills,” she said.

University research in doubt

Rahim Tafazolli, director of the Institute for Communication Systems at Surrey University’s 5G Innovation Centre, which is researching the next generation of cellular technologies, says Brexit could have serious ramifications for research and development. “Co-operation with Europe is extremely important,” he said, noting that the EU is playing a major role in steering both the research and standardisation of 5G wireless.

Other UK universities are also concerned. Imperial College London says its academics have produced more than 60,000 research papers in collaboration with peers from other European countries over the past decade. Alice Gast, president said, “Imperial is, and will remain, a European university, whatever your view of the referendum outcome…We are urgently seeking clarification from the government on the visa and fee status of non-UK EU students, as well as other key policy areas for the college.”

However, Neil Parsons, an angel investor in the fintech sector, believes the UK could benefit from no longer being part of the EU R&D system. “Tech R&D was the EU giving us back our own money for its own purposes,” he said. “The EU preferred large firms over small, indeed it was effectively impossible for most grants even to be applied for by small UK firms... A specific and explicit objective of EU grants was to make large EU firms work across border, regardless of whether the research was any good.”

Brexit may also mean the UK turns its back on some of the more stringent EU regulations, such as that governing the use of data and artificial intelligence. Benedict Evans, a partner in the venture capital firm Andreessen Horowitz, said the net result could be tighter regulation within the EU and correspondingly looser regulation in the UK.

But UK companies targeting the European market will still have to comply with the tougher rules. Indeed, the consensus among entrepreneurs, engineers and academics is that Brexit is likely to increase friction in the UK tech sector, while simultaneously curbing the economies of scale the EU needs to build a globally competitive digital economy.