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The Effects of Brexit on European Startups | The Good and The Bad

A portmanteau of the words “Britain” and “exit”, “Brexit” is the nickname given for the British exit of the European Union. When the moment came for Britain to vote to leave the EU, the margin of victory astonished even the proponents of the exit. The campaign won by 52 percent to 48 percent.

According to The New York Times, “Pro-Brexit advocates have framed leaving the European Union as necessary to protect, or perhaps restore, the country’s identity: its culture, independence and place in the world. This argument is often expressed by opposition to immigration.”

As Britain focuses on its place in the world and its future, this exit has left the rest of the world wondering what problems will arise across Europe – with the weakest entities likely to suffer the most. Unfortunately, the weakest in business by definition are startups.

Many are concerned about the long term ramification of Brexit on European startups. For the most part, they are unknown. Ultimately, it will be the trade deals and pacts that will determine the long-term outcome. But for those in the early stages of their startup, the next 6 to 24 months are clouded with major questions and concerns (a typical time frame for a startup’s initial cash in the bank).

According to Forbes, “The ramifications of the Brexit on this short-term time frame are much, much clearer.”

In the months to come following Brexit, there are several changes experts are predicting we will see – both good, and bad:

  1. European startup funding will plummet

London is and has been a key component of the European venture capital scene. Especially in the later stages, it compromised approximately 50% of European startup funding. Experts are now predicting that, as a result of Brexit, this amount will drop by 20% or greater by the end of 2016.

Why? It will be very difficult for London VCs to carry on as usual until the regulatory implications of Brexit are more clear. In short, the task of raising funding in Europe for startups just got harder – much harder.

  1. Entrepreneurs will pack up and leave

In the months to come, decreased funding rates across Europe will likely cause entrepreneurs to move elsewhere (New York, Singapore, Silicon Valley, etc.). For a startup founder, having stability and being able to “make payroll” are critical. If this is not the case in Europe, entrepreneurs may find they have no choice but to move.

According to Forbes contributor, Adeo Ressi, “I would expect to see half of the top 5% of entrepreneurs leave the region within the next two years.”

  1. Incorporation will no longer be welcome

For some time, the UK has been a very attractive global startup hub to incorporate a business. Favorable rules of law, a plethora of available capital and market access have been the three key advantages. Because of Brexit, access to market and capital have been taken away. At least for the next 6-24 months. To add to this, the rule of law seems to be destined for change as well.

Is there good news?

While there are many negative effects of Brexit on startups, there are a few potential positive outcomes. First, if London does find itself “out”, other cities may have an opportunity to move in and become the new center for startups. Second, businesses born during hard times are often hungrier and more efficient. In the face of less capital, European startups have an opportunity to focus on other core aspects of their businesses; such as, refining their product, developing profitable revenue streams and focuses on their customers.

Are you currently seeking working capital for your startup? Finding business funding is not just a problem in the Europe; entrepreneurs face this same struggle in the U.S. as well. Where the “big banks” have failed, alternative lenders – like First American Merchant – have stepped in to offer even more efficient solutions. To learn more about our startup funding options, feel free to contact our team of experts today!