Thursday 27 June 2019

Brexit may yet be a net positive

The impact of Brexit will be complex but it may open up new opportunities
The impact of Brexit will be complex but it may open up new opportunities

Claire lee

It's hard to believe it's been two years since the Brexit vote. That fateful evening I was actually dining with the president of the United States in San Francisco after the global entrepreneurship summit. He left the dinner saying, "better go call Cameron".

Despite uncertainty about what Brexit actually means for the continent of Europe, UK startups are successfully raising capital and the majority plan to expand and hire.

With the US President in London recently, there is talk of an 'ambitious' bilateral trade agreement between the US and the UK.

Amidst the political and economic uncertainty, we still find that UK entrepreneurs are notably confident - around half of those we surveyed for our Silicon Valley Bank (SVB) Startup Outlook report just over six months ago said they expect business conditions will be better this year. Entrepreneurs may have a default setting for optimism and confidence. Let's hope they're right.

According to the same report, around 70pc of startups believe that the outlook for fundraising internationally will stay the same or improve in 2018 (while 30pc believe that access to international capital will get harder).

Since the Brexit vote, the UK has not experienced a negative impact on the number or size of venture capital deals. Corporate venture investments are also way up, and the M&A environment is on fire.

That said, the industry is concerned about a potential funding gap should the European Investment Bank withdraw capital from the UK.

Ireland may be small in comparison to the UK, but its direction and destiny matters - an estimated 5pc of British exports go to Ireland, which is similar to the level of exports by the UK to France. On the flip side, around 14pc of Irish exports go to the UK - whereas 50pc of Irish exports go to other EU countries, and 20pc to the US.

Even with a revised trade deal, UK exports will be subject to 'rules of origin' checks by the EU - designed to prevent bypassing tariffs between both the origin and destination countries.

So more customs checks, basically. Potentially slowing down the movement of goods.

Most people think we will end up with some kind of zero-tariff trade deal, but we are still likely to see a boat-load of regulatory trade barriers.

Then there are concerns around cybersecurity and consumer privacy. New EU regulations designed to protect individual privacy (like GDPR) took effect in May 2018, increasing the cost of compliance for small businesses.

With the abundance of capital available to tech startups, access to talent has become more of a burning issue. We see that theme in the US, the UK and other centres of innovation.

With the uncertainty around the future of immigration and international trade, startups are starting to feel nervous. One CEO said we should "lay out a clear path on immigration that keeps the UK open to the sort of technical folks who have made the UK sector such a success".

Another London-based founder told us: "Brexit is complicating hiring. We are a global firm with a global team; we need them to be able to travel and relocate easily. Innovative startups already face huge barriers; the ability to hire great talent should not be one of those. Companies should be able to hire from anywhere in the world with as little friction as possible."

Six million Brits have at least one Irish grandparent and around half-a-million Irish people are living in the UK. For context, the Irish population is 4.7 million.

British-based folks don't have to worry about the impact of Brexit (on their residential status at least) but we are likely to see some changes to issues around freedom of movement, and with immigration policy overall within the EU27.

And that will have an impact on their ability to hire non-citizens into their businesses.

Fintech businesses, in particular, are looking to expand to Europe to facilitate 'passporting'.

Dublin may be able to attract a proportion of these firms, especially given the lower level of taxation and regulation in Ireland.

One blog I read on this topic said that more than 30 large insurers are in talks with the Irish Central Bank to relocate to Dublin.

So, perhaps Brexit turns out to be a net positive?

If Brexit reduces UK growth it will probably hurt Ireland too.

There's a correlation showing that a 1pc drop in growth in the UK results in a 0.3 percentage point drop in Irish growth.

One study projects that GDP in Ireland could be between 1pc and 2.7pc lower by 2030.

Almost at UK levels. Because of Brexit.

But the variables are just so numerous and complex, it's hard to predict what the outcome will be on GDP.

Many people I've spoken to since the vote two years ago are still shocked that this is happening at all, and the majority of those are fearful of the implications. However, resilience is a dominant feature in Irish and British industry and I'm banking on this opening up more opportunities.­

Challenges aside, our outlook report showed that two out of three US startups believe that 2018 will be better than last year, and the number that plan to hire is at a five-year high.

That same sentiment is evident on this side of the pond with 83pc of UK startup founders saying they'll expand and grow. Possibly looking to the talent pool in Ireland.

Claire Lee is head of early-stage banking, Silicon Valley Bank

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