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Spinning that Brexit wheel: Regulation lotto for tech startups

Divorcing Europe, custody arrangements, post-nups and more...

The reality of running a new business or doing something innovative is that you're hunting for cracks and niches that others have not yet filled – spaces too small for the big girls and boys already in the market. And many of those niches are fragile, formed in part by chance, opportunistic spaces in the current markets and regulations.

We may grind our teeth or cheer Brexit, but now that we're spinning the wheel, we can be fairly certain that there will be much extra uncertainty and cost, probably for many years, as the UK's relationship with the rest of the world is shaken out.

Some of us have markets and staff and assets scattered across the current EU, as well as beyond it.

My own business is only about half British nationals (though most of the rest are generally not EU citizens), and not all of our work is done "here" in the UK.

Others have more complicated arrangements, eg, with incorporation and assets here in the commerce-friendly UK, but staff and customers and work mainly elsewhere.

Planning: We've heard of it

All business plans are works of fiction to some degree, and many plans based on sales across the EU's half-billion person market just got less believable and will need to be reworked repeatedly as key elements of the UK's future are resolved. I'd rather businesses were spending their limited available time and effort on perfecting their products and services rather than second-guessing the regulatory landscape in a year or three's time!

Brexit will very likely change many landmarks of the business landscape, from tariff barriers to testing and standards such as: CE, REACH, RoHS, GDPR, and WEEE.

If we're lucky the Brexit shock may induce some useful reform in the EU too.

AI lawyering

I spoke to Vasilis Tsolis of (Cognitiv+), which is based in London but with some non-UK workforce. His business could lose out if funding becomes more difficult. Conversely he may benefit from the extra legal analysis that other businesses will need.

We discussed the risks of a smaller talent and funding pool post-Brexit, along with regulatory uncertainty that discourages entrepreneurism, and the specifics of his "fintech"/"regtech" and others like it that depend very much on the details of London's current relationship (eg, "passport") with the EU.

Where should a tech startup concentrate now, wondered Vasilis?

Here are some issues that he sees as critical:

  1. Finding "human capital" may prove an even more difficult task, and will depend on the future policies that the UK government will implement in regard to the movement of EU citizens. Recent changes in the visa system have already proven cumbersome when bringing overseas talent to the UK, and this problem may escalate.
  2. Depending on the UK's new access to the EU single market, there may be an immediate effect on areas of legislation that almost every technology startup is heavily affected by, eg: cyber security, privacy, data protection and data transfer.
  3. The UK is a pioneer in regulatory innovation, and the recent FCA initiatives Project Innovate and FinTech Regulatory Sandbox have shown that the government can facilitate such innovation for the benefit of consumers. However, should the scope of the innovation be limited in future to the local/UK market rather than the wider EU, startups may be reluctant to expend their resources in the UK.
  4. R&D opportunities may be more risky or restricted, as it is still unclear if UK could be part of future EU research programmes, such as H2020, European Research Council and Marie Curie grants.

However, Vasilis points out that startups along with all other companies will need to deal with this regulatory change tsunami as part of BAU, which is a massive task and potentially a massive opportunity for regtech and compliance startups such as Cognitiv+.

German fantasy

I also discussed Brexit with Rafael Montes Macias, a Spaniard selling software to big multinationals, based in the UK, with staff in Portugal and Moscow.

For his type of business there is no need for people to be in the place where the company is incorporated or the customers are.

I have known Rafael since university days, and did not anticipate the views that he expressed to me. Less liberal handwringing and more brave new world than mine!

From the perspective of a small software business entrepreneur (I have successfully founded three companies, the first one was active for 15 years and was sold to a large multinational, the second is operating in Spain, and the third one in the UK is developing a software platform for Business Process Applications that hopefully will sell well):

For me a country is more attractive to start a company in if there is:

  • Business freedom
  • Protection of property rights
  • Trade freedom
  • Moderate to low taxation

I found that the arguments about Brexit tend to be too much centered around EU politics and people, as if the rest of the world did not exist. It seems that the world (or the "civilised" world) does not exist outside the EU.

For instance, most people in the EU do not take into account that most of the "21st century key technology" they use is not produced in the EU. This applies also to Germany as most of the computer and electronic equipment is designed and produced elsewhere (USA and Asia).

In my opinion we need to see a larger picture of what is going on in the world as the accelerating adoption of new technologies will diminish the competitive advantage of the economy of scale that many firms have enjoyed during the 20th century and the beginning of the 21st.

Brexit: Good or bad?

Is Brexit good or bad for small tech businesses? For the UK, it all depends on what is the direction the country takes, ie, mainly free trade and open economy (lower taxes, less regulations, open labor market) versus protectionist. I think that if the first direction is taken it could be very good for the UK and for other countries that could follow its path.

In my opinion, the EU is becoming a protectionist environment for the benefit of German industry. I have close knowledge of several instances in Spanish industry where the regulations force them out of business to the benefit of some large German firms (regulations are tailored to suit these firms). Also I think that EU subsidies, whether in the form of grants, research projects or direct subsidies, destroy competitiveness. I know many companies and institutions living out of EU subsidies.

There is a risk of the UK becoming even more protectionist than the EU (many Brexit voters from northern England seemed to hope for this). I do not see a clear position from the new Prime Minister on this issue, and it is too early to know if she stands for a truly free economy. She has said some very "dangerous" things about imposing workers representation in company boards (as in Germany).

I think that statists and big corporations go hand in hand. It does not matter if they are socialists or crony capitalists. This is the reason that big companies sometimes support socialist (or statist in more general terms) governments. Probably the exceptions are the high-tech firms like Google, Apple, etc.

One good side-effect of Brexit could be a reform of EU institutions, eliminating excessive Brussels bureaucracy and making the EU less centralised. But I am not optimistic at all about this outcome, as it would be opposed vigorously by the EU establishment.

Anyway, given the huge imbalances between EU economies, either with Brexit or without, some populist parties will reach power in some countries in the near future and start a break up. The EU politicians are in denial about the deep structural problems the EU is facing, and Germany is in a trap of imaginary assets consisting of trillions of Euros owed by insolvent countries.

It's complicated

So, as with any impending divorce, "it's complicated."

There will be costs, including simply defining and dealing with the changes, and the UK may or may not overall be better off a few years down the line, though in any case there will be individual winners and losers.

Strategically, policy on the central elements of access to markets vs immigration and free movement have yet even to be decided, and I suspect that no one will be entirely happy with the new compromises (just like the old ones).

In the interim, those of us with jobs to do just have to make the best of where we are, month by month, year by year.

Further reading:

[1] Vasilis suggested "What Brexit Means for Tech Startups" from The Wall Street Journal.

[2] Cut out and keep this handy guide to the pre-Brexit position.

[3] Sara Bell, founder and CEO of Tempus Energy, says: "In the last week, every innovation company I have spoken to has cut between 20 per cent to 50 per cent of their staff because they know they can't fundraise." See this from PV Magazine. ®

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