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What UK startups make of the shock Brexit vote

TechCrunch TechCrunch 24/06/2016 Natasha Lomas

Thanks to the Tory government, Brexit has been an awful prospect hanging over UK startups since this time last year — the vast majority of whom strongly hoped to remain in the European Union.

But today founders in the UK have been grappling with the nightmare made real after the public voted in a national referendum by 52 per cent to 48 per cent to leave the EU.

Shock, disbelief and disappointment were common sentiments among the startups TechCrunch spoke to, many of whom had scrambled emergency meetings to consider their immediate steps in the face of a seismic shift in the political and economic landscape of both the UK and the European region as a whole.

Uncertainty is the prevailing feeling, as you’d expect, but for earlier stage startups, and those in certain sectors with lots of customers in European markets, there can also be real fear. Or at least a sense that their founding tie to the UK might just have been unpicked.

No UK founders were pretending they knew exactly what was going to happen as a result of Brexit but concerns are plentiful in areas such as staffing and talent acquisition; how they will continue to serve European customers; and whether they’ll be able to effectively scale internationally from a British base.

And against a backdrop of concerns and questions, founders are having to make key business decisions in the face of rapidly descending political fog and a plunging pound sterling.

Welcome to Brexit-induced business blindness.

None of the startups I spoke to was considering relocating out of the UK at this early stage, but many are thinking about how they might need to restructure their businesses going forward. Including several that said they might well be setting up bases in other European countries in future.

Founder, Graham Parker, CEO of seed-funded online shipping platform UK startup Kontainers, which operates in the US and UK markets and has offices in the North of England as well as in London, is definitely in camp fear where Brexit’s “prolonged period of massive uncertainty” (as he categorically put it) is concerned.

To date the business has ploughed most of its resources into the UK market. That might have to change, he said.

“After today, having been live a year and working closely with a lot of British exporters, we’re really thinking can we afford to focus on just the UK,” he told TechCrunch. “There’s so much uncertainty around shipping, with the borders that would reappear all over the EU — no one knows what kind of complications that will have. We have customers that have big contracts in Asia and South America and places and they’re wondering will they continue to buy from Great Britain when it’s not in the EU and they lose the protection of EU trade tariffs. So we’re really worried. And we’ve been looking to say do we really accelerate our plans for the US?

It’s forcing us to say can we afford to depend on this market when it’s so uncertain?

“For us as a technology company it’s forcing us to say can we afford to depend on this market when it’s so uncertain? We just don’t know what will happen… We’re very worried that because of the uncertainty if business was to drop off our exporters in the UK we’re very exposed. So we’re weighing up the options of progressing more into Germany or progressing more into the US.”

London-based, seed funded Hubbub, a maker of software targeting nonprofits to help with fundraising efforts, which also has offices in the US and the UK, is immediately going to be switching marketing resources away from the UK.

“We have decided (this morning) that our sales and marketing focus will focus away from the UK market, as the volatility and uncertainty here will mean our customers will be less inclined to invest in new solutions,” said founder and CEO Jonathan May.

May added that the startup will also now be focusing its new hires in the US, noting the “wider access” to skills there vs a go-it-alone Great Britain.

“London was a very, very attractive home whilst it remained in the EU, giving us access to the integrated European market both from a staffing and a customer base point of view, as well as good access to the US East Coast market. But now we will need to look at growth elsewhere.

“We are looking at whether a base in Berlin would more appropriately serve the (geographical) European market, and give us access to the EU skills market,” he added.

It is of course entirely possible that economic turbulence caused by Brexit rebounds on the UK’s European neighbours too. And concern about the risk of a regional recession being triggered by Brexit is also making London-based early stage digital signage startup ScreenCloud reconsider its market focus.

“I think we will double down on our growth in North America and Australasia where we are already doing well and maybe bring forward plans to base more of our team there and pause on Europe,” says founder and CEO Mark McDermott, adding: “That’s sad.”

“We are currently raising our seed round and talking to existing and new investors in London and also in Singapore. I figured London was our likeliest bet, and it might still be, but right now Singapore looks like it will come with less baggage,” he added.

It’s a similar story being told by the founder of a London-based retail-focused startup which operates in multiple markets and has raised Series B levels of funding at this stage. The company took the snap decision to pull commercial operations out of the UK market in their post-Brexit meeting this morning — in order to “reduce our exposure to zero”, with the founder also citing fears the UK brands they work with won’t be able to weather “uncertainty or potential recession” well enough.

Brexit “accelerates Amazon winning the UK retail market” is this founder’s concise summary of the likely impact on the domestic ecommerce space.

The same founder, who wished to remain anonymous, held out the forlorn hope of a second referendum being called in the fall, should the immediate economic shock to the pound evolve into a national recession and that in turn beget a grim realization of what’s coming down the pipe, even before the government has embarked on the vast task of unpicking treaties and renegotiating trade agreements and reconfiguring migration flows.

I fear the UK’s ability to fight our corner in a global world now to help us become a global star.

They added: “I fear the UK’s ability to fight our corner in a global world now to help us become a global star. As the major organizations look to or threaten to move their HQs and operational centres, UKTI and the government will have more than their hands full along with renegotiation of trade terms to nurture the new emerging champions like us and won’t be able to fight against anti-competitive and antitrust behavior as they battle to keep them.”

Offering a startup perspective from outside the UK market, Oisin Hanrahan, the Irish CEO of New York based on-demand cleaning company Handy, suggested Brexit might provide uplift for Dublin’s position as a European tech hub — given that, like the UK capital, it’s English speaking but unlike London it remains securely fixed within the EU…

“Maybe there’s room for Dublin to become the new London of Europe,” he told TechCrunch. “I do think there will be real questions around the UK’s place in Europe. I think that’s a real challenge.”

Right now he said London is Handy’s “second most important city” from a volume and revenue perspective. It remains to be seen how Brexit might change that.

“Whenever you’ve got these periods of uncertainty it’s not wonderful for business,” he added. “Right now we’re in one of those moments where if you’re in a financial services business or you’re in a business that has a lot of cross-border dependencies between the UK and other European countries it’s a challenging time.”

One thing in the Brexit mess that’s looking reasonably clear is that later stage, better financed/resourced UK tech businesses are feeling less exposed to the risks created by a period of sustained uncertainty vs newer, smaller startups. Even though the larger entities are also more anchored in the domestic market.

Early stage startups can — and might — just up sticks and leave. London-headquartered, Juro, for example, which is applying AI to b2b software for managing and signing contracts, is considering its future on that front. Its team is split between London (product and marketing) and Latvia (dev) right now. But founder Richard Mabey said it’s possible they might move the entire team to Latvia in future — underlining that Brexit’s destabilizing uncertainty might extend to where entrepreneurs choose to try to build a business. Why bother trying to start something in a location where there’s one more (gigantic) uncertainty on your plate?

On the more established startup front, Michael Kent, founder and CEO of London-based online international money transfer startup Azimo, which has been operating since 2012 and has raised some $46 million from investors to date, described the referendum result as “depressing” but said he does not envisage a huge immediate impact on the business.

“I’ve already had all my investors on the phone,” he told TechCrunch. “We stopped trading for a period, 12 hours I think it was, whilst there was a bit of volatility in the market. And we did that because we didn’t want to expose our customers to huge swings in foreign exchange.

“Up until last night that was looking like we might have been overly cautious. This morning it looks like we were pretty sensible because Sterling [dropped massively]. So we would have had lots of customers whose rates and orders were probably unable to be fulfilled… [But] we’re back up and trading and orders are going through and customers are sending money again. So things are back to normalish.”

But even if things are “normalish” for Azimo’s day to day business, the looming reality of Brexit is forcing Kent and his team to consider how they might need to restructure for the longer term — in order to best serve what is now set to become two market entities, rather than one, in the not too distant future.

“We need to think about how do we organize ourselves so we can both continue to service the UK market and the European market. They’re our two most important markets,” he noted, adding: “I don’t think we would ever leave the UK but if the UK do leave Europe, as is likely now, it’s unlikely the regime of passporting will be able to be effective in exactly the same way as it is now. And because of that we would need to set up operations outside of the UK so that we could service the Spain, the Germans, the Italians, the French — all huge remittance markets. Full of migrants, sending billions of dollars back every year.

We’re certainly thinking about where else would we shift resources to?

“So we would look to set up additional operations in those territories… We’re certainly thinking about where else would we shift resources to?

“There’s still loads of talented people in the UK, and there’s still a fair amount of capital but I just think it’s going to get tougher for everyone — particular early stage startups… It’s a shame but everyone, ourselves included, will think of at least moving some of our functions to other parts of Europe.”

Kent, who is also an early stage fintech investor, added that he would hate to be having to raise money from international investors as a UK startup in the current uncertain climate — underlining another key consideration that could encourage the newest startups to take their ideas elsewhere: the quest for funding, which just got that much more complex if your business is based in the UK.

“What is anything that’s based in the UK tackling a regional or a global problem worth right now? It’s hugely dependent on what happens in the next 12 to 18 months,” he added.

On the human resources front, the post-Brexit uncertainty for existing EU staff is a huge worry for several UK founders I spoke to, including the Series B stage London-based retail business, which has several staff hired in from the region. The founder said the management team’s intention now is to “lobby lobby lobby” government on this front. “We are aiming to be a global business and key to that is hiring the best global diverse talent possible,” they noted.

But the founder also said they would not now be able to prioritize efforts specifically to hire EU staff. “The non EU visa process is at least certain so we can understand the ROI and length of stay. If an EU resident wants to come then great but with a fluffy two years of uncertainty we couldn’t of right mind devote hiring investment actively,” the founder noted.

Not having easy access to strong talent from Europe will be a big bottleneck for us.

Another London-based startup — a Series A funded business which operates in the food delivery space in the city but has designs on scaling internationally — named its existing staff as its immediate concern. Unsurprisingly so given that European hires comprise a large majority of its team. (A much larger proportion, 75 per cent, than voted for Brexit, incidentally… )

“We’re a London based business and so we rely really heavily on talent throughout the EU… We really have a diverse European team and obviously my main priority is to make sure that they are safe,” said the founder. “What I’m hearing is that that should be the case — the Europeans that are here working in London are not going to be asked to move back to Europe. But that’s by no means a certainty right now. That is my first and major concern.”

That staffing concern is also intrinsically bound up with the future of the business, though, with the founder going on to discuss concerns about whether the company will now be able to scale in the way it had hoped. After all access to key talent underpins everything a startup does. No people, no product; no product, no business…

“Our expansion plans and our growth plans were very dependent on us being able to have access to that [European] talent pool… Not having easy access to strong talent from Europe will be a big bottleneck for us and I think a problem in terms of even getting investment.

“It’s really bad news. So we need to make sure we can find a way to mitigate that risk.”

This startup also complained that hiring outside the EU can be a “long and painful process”. As, doubtless, will Brexit be.

“This really restricts our potential for getting talent and London has always been quite a diverse place — so it’s very disappointing if it stops being that way.”

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