How Brexit Could Ruin London's Startup Scene

  • Fintech unicorns to Brexit backers: don’t make us extinct
  • Brexit vote could result in loss of favorable trading rules

Would Brexit Attract More Business to London?

Entrepreneurs who’ve flocked to London in recent years to upend the financial world with technology are dreading one potential disruption they can’t control: Britain leaving the European Union.

A decision to quit the 28-nation bloc in Thursday’s referendum would threaten trade and regulatory benefits that have made London a hub for financial startups, as well as a center for global banking. Polls show the outcome is too close to call. 

"The people we deal with are petrified about Brexit," said Mike Laven, chief executive officer of Currencycloud Ltd., a London-based firm that processes cross-border payments.

Finance-focused startups are a bright spot for the U.K.’s technology scene, making launch parties at the top of the Gherkin in the City or pizza-fueled conferences at Level 39, the tech accelerator in the heart of Canary Wharf, regular events. The so-called fintech industry has benefited from fast-track regulation and EU immigration rules that have lured legions of young European code writers to London from elsewhere on the continent.

Investment in the British firms soared 53 percent to 660 million pounds ($974 million) last year, topping any other European nation, according to Accenture Plc. At least two London-based fintech companies -- Funding Circle Ltd. and TransferWise Ltd. -- have been valued at more than $1 billion.

Young firms have attracted investments from Barclays Plc, Banco Santander SA’s U.K. unit and other British commercial banks. Last Friday, Bank of England Governor Mark Carney announced the 322-year-old institution was launching an accelerator to work with fintech startups.

Click here for a guide on what to look out for on the night of the vote count

This promising story could have an unhappy ending if Britain opts out of the EU. Today, companies can save money and time by getting licensed in one EU nation and selling their products across the bloc, an arrangement known as "passporting." Many companies set up shop in the U.K. because of its speedy licensing compared with other EU countries. If the U.K. leaves, a firm such as Currencycloud could lose the passporting privilege, and have to submit applications in every nation where it wants to operate, a costly chore.

Separating from Europe would be "catastrophic" for the fintech industry, resulting in a loss of $5 billion in investment over the next five years and prompting companies to leave for the U.S. or other European countries, according to a report Tuesday from research firm William Garrity Associates.

Diminished Role

“Following Brexit, fintech startups may realize it makes more sense to set up an office within the EU, and existing companies may relocate some of their staff to the EU,” said Jan Hammer, a partner at Index Ventures in London, a venture capital firm that has invested in the sector. Splitting with the EU would “diminish London’s role as a leading fintech hub,” he said.

Laven said he’s taking steps to become regulated in different European countries before the vote as a precaution. “There’s no denying that a break from the EU would cause disruption to businesses -- especially in the financial industry,” he said in a statement.

Brexit would cloud the plans of British peer-to-peer lenders. Funding Circle, the U.K.’s No. 1 online marketplace for small and medium-sized companies, announced Tuesday that the European Investment Bank would use the platform to make 100 million pounds in loans to British firms. CEO Samir Desai says Brexit would not upset the deal, but there would be little chance of expanding the program if the U.K. left.

Tech Setback

Those concerns also apply to the broader technology industry. Entrepreneurs, venture capitalists and rank-and-file employees argue a break with Europe would undermine attempts to turn London into a global technology hub. A Brexit would make it harder to raise money and threaten recruitment.

Niklas Zennstrom, the co-founder of the Internet phone service Skype, said the city risks losing entrepreneurs like him. In 2003, he chose London for Skype’s headquarters instead of his native Sweden because of the city’s position as a financial hub and its allure to potential employees who could easily move there from across Europe.

“If Britain were to leave Europe, then today’s entrepreneurs would have to reconsider their flight options,” said Zennstrom, who sold Skype in 2005 for $2.6 billion and is now a venture capitalist. “A Brexit would put U.K. tech companies at an immediate disadvantage when it comes to raising money and finding and hiring the right talent.”

Best Recruits

Advocates for Brexit say those fears are misplaced. An independent U.K. would be able to craft more tech-friendly policies, including immigration rules that allow for more high-skill workers to enter the country, said Steve Hilton, a former adviser to Prime Minister David Cameron who founded CrowdPac, a political organizing platform. 

The U.K. has enough "Hungarian waiters," he said at a June 16 event, and should instead encourage engineers and other tech-savvy workers to move to the country from around Europe, Asia and elsewhere. 

"The EU prevents us from being open to talent from around the world," he said. “The test should be ‘do you have skills we need?”’

Damian Kimmelman, the founder of London-based DueDil Inc., a startup that provides data about private companies, said it’s not that simple. If the U.K. were to leave the EU, Kimmelman said the company will expand in other countries. About 20 of his 100 employees are from European countries outside the U.K.

“Why would I pour resources into building a company in the U.K., when I can have a tougher time hiring, a higher cost of living and have a smaller applicant pool?" he said.

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