As featured in:
The UK's imminent departure from the EU has raised a number of questions. We look at how this may affect investment into the UK and the potential for our start-ups to receive foreign investment post-Brexit.
The four freedoms couched in the promise of the European Union - freedom in the movement of goods, services, labour and capital - may sound too idealistic for the 52 per cent of voters who voiced their desire to leave the EU.
Regardless, the public has spoken, and the ramifications of a Brexit on UK's fast-growth start-ups are still murky at best. Experts unanimously believe that the investment appetite in the UK may slow down if not halt entirely for a few months post-Brexit.
Professor Kamel Mellahi researches emerging markets and business strategy in China at the Warwick Business School. For Mellahi, Chinese investors may lose confidence in the UK because of the economic volatility following the Brexit vote.
"A big part of the appeal of the UK for Chinese investors is access to the EU. A significant number of Chinese businesses see the UK strategically placed as a gateway to EU markets, but with a Brexit they may put on hold investment in the UK until a clearer picture over trade deals with the EU emerges," he said.
While this may be the case for sectors that rely on European collaboration, Chinese investors may not see Brexit as a threat to businesses in sectors that are more detached from EU markets like real estate and higher education.
"It will be interesting to see whether Chinese and other Asian companies that have committed investment and have their global or European headquarters in the UK will move part or all their investments to the euro zone now. If one goes by what has been widely reported by Chinese corporate leaders, Brexit will dampen the appeal of the UK for Chinese investors," he added.
For European venture capital firm e.ventures, Brexit may immediately stifle investment appetite. “Certainly choosing to vote out of the European Union, businesses in the UK will be a significantly less attractive investment proposition for us as a venture capital fund," Andreas Haug, co-founder and partner at the German VC told GrowthBusiness.
"If a British entrepreneur comes to us with an idea we can immediately assess the appeal of the idea against the European marketplace rather than just that of the UK. The difference being assessing the potential of a business with an immediate customer base of around half a billion people or against a marketplace one tenth that size,' he added.
Investors are used to assessing businesses against various markers of growth potential, including their capability to attract and retain talent. According to Haug, UK's departure from the EU would immediately stifle drivers of growth such as hiring skilled employees and gaining new customers.
As a EU-based VC, e.ventures will not bear the brunt of Brexit, but Haug highlighted how countless British start-ups may lose out on impressing cash-rich European investors now. “We recently closed a new $150 million early-stage fund for investing in European start-ups and Brexit means fewer British companies gaining capital from ourselves and other European based investors," he explained.
"When you look at the success of UK based start-ups in recent years, particularly the FinTech sector, this wouldn’t have been possible without being in the EU during this time. There has already been a more selective approach to venture capital investment around the globe in 2016 and Brexit pushes the UK further back in the list of preferred investment regions."
The VC's UK-based portfolio includes Azimo, Tandem Bank and Farfetch. Haug added cryptically that the firm will be advising these businesses to "consider their next steps carefully.”
Michael Kent, founder and CEO of an e.ventures portfolio company, Azimo, sees Brexit as a huge let-down, but not one that could blunt London's edge as the FinTech capital of Europe. “We passionately believe that the world needs less borders not more," he said. "This is also a blow to London’s financial services industry: many companies here depend on both EU market access and the ability and legal right to passport their services to the rest of Europe. I anticipate that we’ll see many finance players moving some, or potentially all, operations to elsewhere in Europe. Frankfurt, Amsterdam and Dublin are all obvious candidates," he said.
Despite the uncertainty around the UK economy and investment appetite, Kent believes that London is well-primed for a bright future in a few years' time. "The good news is that the FinTech industry is thriving across the whole of Europe at the moment, should London’s position as the heart of European FinTech now change as a result of this vote. In the meantime, we’ll continue to focus on doing what we do best: delivering better faster and lower-cost money transfers to help our hardworking customers create a better life for themselves and the world around them.”
Despite the major macroeconomic implications of Brexit, Mike Laven, CEO of Currencycloud, believes that London will remain the best placed European city for finance. “London’s advantageous time zone, strong financial history and FX expertise aren’t going to disappear overnight. Somewhere else in Europe being a global financial capital. Seriously? It took decades to develop the infrastructure of firms, services, lawyers, insurers, intermediaries, and myriads of financial niches and massive personnel base that makes London special," he said. "Talk to European tech entrepreneurs and they are concerned about being cut off from London’s resources. Will it get more difficult, of course. But with our contingency plans in place we’ll avoid the doomsday scenarios.”
Christian Stadler has spent years researching Europe's biggest companies as the author of author of Enduring Success. According to Stadler, the impact of Brexit won't be felt for a few years, but it is likely that foreign multinationals may lose interest in expanding in the UK. "It is not clear what’s happening next and businesses will be reluctant to invest. I don’t expect that there will be a massive exodus, but rather than expanding in the UK, companies are likely to do it in Europe instead, particularly for businesses which export to the EU," he said.
"In the long term if the UK follows the Swiss model, which is essentially adopting EU regulation minus having a say in the decisions, this would be the better option for businesses as it puts dealing with the EU more or less back to where it is at the moment," Stadler advised. He predicts this may be an issue for some industries like banking, as they won’t have much of an influence on regulation anymore.
"We see that in Switzerland for the pharma sector for example. Politically this would be a difficult one to pull off as people have to put up with the things they did not want - most prominently immigration," he added.
A number of pre-vote surveys and sentiment polls revealed that a top consideration for voting to leave is the issue of open borders and immigration. According to a report released days before the vote by The Economist, Brexit negotiations eventually comes down to the key trade-off between control of immigration and access to the EU’s single market for the UK’s large services sector.
Stadler added: "If the UK takes a tougher stance on immigration, for businesses this will be a disaster as the EU will retaliate. Access to the EU will become difficult. For some companies this means doing business in Europe won’t be attractive any more. Others will have to deal with complicated bureaucracy. In short: a nightmare."
The impact of Brexit on foreign direct investment may last much longer than the expected months according to research from Warwick Business School's Nigel Driffield. "Our research has found Brexit would greatly reduce the level of foreign direct investment to the UK and for those people who think there might be just a short-term ‘blip’ we have found it will take four years to recover and even then the long-term trajectory will be lower," he said.
Echoing the sentiment of the global investment community, he added “EU membership has made inward investment more stable and has increased the long-term trend for the UK, so leaving would make the country less attractive for non-EU investors."
Shares plunged and the pound plummeted to a 31-year low on Friday morning, which set many traders into a panicked frenzy. For Paul Surtees, MD and co-founder of Capitalise.com, this morning's impact on the FTSE and the GBP/USD currency rate as a sign of things to come.
"Uncertainty causes investments to slow and activity to dry up. This is evident in the small business market, where a Capitalise.com and PKF poll indicates that 40 per cent of companies say their investment decisions have been affected by the referendum and 20 per cent say they are less focused on business growth," he said.
"The greatest currency speculator George Soros yesterday suggested GBP/USD would fall by 15 to 20 per cent on a Brexit. A 15 per cent Brexit decline in the value of GBP/USD would create market violence that would inevitably impact small businesses," Surtees added, explaining that financial markets may respond instantly, but the impact of Brexit on smaller businesses may only be apparent in subsequent quarters.
Access to finance
According to Julie Adams, senior partner at Menzies LLP, UK businesses that rely on European financing could feel the impact of Brexit almost immediately. “Following the Brexit, European SME funding could be affected. Cessation of access to the EIB’s (European InvestmentBank) £100 million investment of loans for UK small businesses may be a concern for business owners. However, in reality this is likely to have very little impact on SMEs as proportionally very few seek funding in this way," she said. “EIB funding aside, investor confidence, interest rates and the activity of UK banks is most likely to impact SME financing and growth.”
Doomsday prophets see Brexit as a harbinger of a second recession, but Paul Goodman, the chair of the National Association of Commercial Finance Brokers (NACFB), believes that the UK can avoid that fate. "Nobody knows how the result of the EU Referendum will play out, and its ultimate impact on the economy, but choppy waters in the short-term are almost guaranteed," he said.
"What we shouldn't forget is that the economy is robust and employment levels high. Managed correctly, the result of the referendum does not have to trigger a replay of the Global Financial Crisis," he said.
Bank of England Governor, Mark Carney, made a statement to this effect shortly after the Prime Minster’s resignation, reaffirming its commitment to the UK business community. Goodman added: “Lending to UK SMEs in 2016 to date has been strong. The challenge now, for us and other bodies like us, is to ensure SMEs continue to receive the funding and support they need in uncertain times.”