Business development 6 April 2016

Brexit for startups: Will it cut red tape or cut life support?

Brexit for Startups- Will it cut red tape ro cut life support
Could Britain’s strong culture of angel and venture capitalist investment be damaged in the event of a Brexit?

With the EU referendum on 23 June edging nearer, expert lawyer James Fulforth looks further at the implications of what a Brexit would mean for Britain’s startup founders. Entrepreneurs have a lot to consider, with funding, recruitment, market access and regulations all likely to be affected.

In a recent survey conducted by Silicon Valley Bank (SVB), 72 per cent of UK technology startup owners said that leaving the EU would have a negative effect on business. Particular concerns included the availability of funding and an ability to recruit. Furthermore, startups fear that post-Brexit access to the single market could be a complex and expensive process. So what could a Brexit really mean for Britain’s young firms?

What could Brexit mean for startup funding?

In the immediate aftermath of a vote to leave the EU on 23 June this year, there would likely be significant uncertainty both in the UK and the EU which may translate into a short term lack of access to capital for many small businesses as venture capitalists, angel investors and private equity fund managers choose to wait and see how the exit will unfold.

The medium to long term impact of a Brexit for startups is more difficult to predict. For example, will the UK continue to attract significant foreign direct investment (FDI)? Currently, investors use Britain as a gateway to the EU and are able to benefit from the free movement of capital and the tariff-free environment. Any fall in FDI would be an issue for Britain’s booming startup businesses, many of which rely on foreign capital for growth.

However, startups may still be able to access EU funding should the UK vote to leave. Israel and Norway are part of the EU’s flagship Horizon 2020 innovation and research funding framework, despite not being EU members.

Furthermore, the UK would certainly set up its own initiatives for startups and early-stage tech businesses and, released from its obligation to contribute to the EU budget, it could well finance these to a higher level than before.

What could Brexit mean for recruitment?

The SVB survey found that 95 per cent of UK technology startup owners found finding the right people a challenge.  Tech startups tend to be particularly reliant on workers from eastern Europe, and these companies may be hard hit by any tightening of UK immigration rules.

Brexit may well make the UK a less attractive place to move for skilled EU workers.  Nonetheless, proponents of Brexit argue that the UK would be able to tailor the UK’s immigration policy to attract those with skills in areas that are required.

Would startups lose access to the single market?

The nature of any trade deals with the EU following Brexit and the potential impact on startups is impossible to predict. Some say Brexit will open up many more opportunities to trade with emerging economies across the world. Clearly some technology businesses benefit more from the common market than others, depending on the nature of their business.

Whatever the result on 23 June, any trade negotiations would take time, so startup businesses would need to be flexible to weather the uncertainty. In the longer term, a Brexit vote would mean UK imports and exports to and from the EU would face tariffs whilst the import and export of services would be significantly more challenging.

How would Brexit affect regulation?

The removal of red tape for small businesses is an oft-cited argument for Brexit. However, it is unlikely that there would be significant change in the short-term. There is even a possibility that the UK would continue to be bound by EU rules depending on the deal struck.

Of course, startups that wish to export to the EU would still need to comply with EU regulations. Businesses with EU suppliers or partners might also be required to comply with some regulations in areas such as data protection. What is more, given the UK will have no say in how the regulations are determined, it is conceivable that business regulations may become more stringent.

Should we stay or should we go?

Before heading to the ballot box on 23 June, startup owners should think carefully about what is best for their business in the longer-term. If the UK votes for Brexit, then the process whereby the UK will then negotiate to leave the EU is necessarily an uncertain one in the short-term.

The real question is whether the cost of such short-term disruption is a price worth paying in the long-term. While the answer to this may hinge on the deals Britain can strike with the EU and other trading partners, those startups that are not so reliant on funding and which already have the potential to trade with emerging markets will undoubtedly have much better prospects.

The culture of angel and venture capitalist investment in the UK has developed strongly in recent years, but it has always been sensitive to the success of the economy as a whole. Some would argue this culture is now unstoppable, as is the UK’s pre-eminence in entrepreneurship, but it’s hard to resist the argument that progress in this area has been directly linked to the UK’s membership of the EU, rather than in spite of it.

James Fulforth is a corporate and commercial team partner at law firm Kingsley Napley LLP.

London calling – Read on to find out why the UK capital’s small businesses could have the final say over Brexit.

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