Will Brexit Kill European Startups?
TheFamily Notes
By Nicolas Colin (Co-Founder & Partner) | TheFamily
On the eve of the Brexit referendum on June 23, the campaign on both sides is in full swing. Several key Cabinet members support the UK leaving the EU, opposing Prime Minister David Cameron even after he renegotiated the UK’s position within the EU and obtained concessions from Brussels. Last week, London mayor and Tory megastar Boris Johnson added his voice to the Leave chorus when he declared that after much “heartache” he decided he would campaign against the PM in favor of Brexit.
Everyone suspects him of doing it only because he hopes to be in the best position to succeed Cameron as leader of the Tories. But his support makes Brexit all the more acceptable politically, rather than just being the lunacy of a few fringe far-right and far-left politicians. Financial markets are reacting strongly: last week, the pound has reached its lowest level against the dollar in years. Opinion polls now show that the two sides are neck and neck. Prominent pundits predict a victory for the Leave side, which now has the ‘Big Mo’.
What would Brexit mean for the UK startup ecosystem? As I wrote in “What Makes an Entrepreneurial Ecosystem” (TheFamily Papers #000), an entrepreneurial ecosystem has three characteristic ingredients:
Capital — by definition, no new business can be launched without money and relevant infrastructures (which consist of capital tied up in tangible assets).
Know-how — you need engineers, developers, designers, salespeople: all those whose skills are necessary for launching and growing innovative businesses.
Rebellion — an Entrepreneur always challenges the status quo. If they wanted to play by the book, they would innovate within big, established companies, where they would be better paid and would have access to more resources.
For the UK, Brexit’s major consequence would probably be an unprecedented shortage in know-how. Besides the abundance of capital, the UK’s large pool of international talent has long been one of the ecosystem’s major strengths. British companies and startups are prone to hiring talent wherever it comes from and encouraging a diverse and creative workforce. After all, being able to recruit the best talent from all over the world is what has made the Silicon Valley ecosystem into what it is today (still today more than half of all startups in the Valley are created by foreign-born founders).
Alas the number one reason why the UK could choose to leave the EU is also the number one expected consequence of an EU-exit: less immigration. For a few years now there’s been a wider political consensus for letting Britain’s pool of foreign talent dry out. Brexit would make it even more difficult and expensive to hire talent. A talent-short UK economy would end up relying on the other two ingredients, capital and rebellion. The financial economy would grow at the expense of entrepreneurial ventures and lead to an even less inclusive economy. As written in the aforementioned paper,
A financial economy captures a great deal of value and creates a great deal of wealth. But the essence of the financial business does not lead to inclusive institutions: as it is concentrated in the hands of the few, it makes it complicated to ignite widespread economic development. A few rich traders won’t make a flourishing economy!
A more pessimistic view of Brexit is that the UK would lose both in know-how AND rebellion, because a less diverse workforce is less rebellious and because Brexit would usher in an era of Conservative, conformist domination. This could make the UK into a rent-seeking economy:
Those are often dominated by real estate, natural resources, and utilities. In such economies, know-how is not rewarded (if it exists at all) and rebellion is repressed, sometimes through violence. Rent-seeking may also involve lots of lawyers: lobbying the government and suing innovative Entrepreneurs are simply two ways of seeking rent in democratic countries.
The most difficult thing to deal with for a post-Brexit UK would be how it could maintain full access to the EU market—50% of the UK’s exports go EU countries. It is even more critical for UK services, including financial services, whose exports are growing quickly. One of the options for the UK would be to “go Norway”, i.e. keep access to the single market without being a EU member. But Norway has to make payments into the EU budget and abide by EU regulations without having a say in them. As a Norwegian minister once said, “if you want to run Europe, you must be in Europe. If you want to be run by Europe, feel free to join Norway.”
What could Brexit mean for entrepreneurial ecosystems in continental Europe? Many Europeans are tempted to say they’d be better off without a reluctant partner (that’s pride speaking). But the reality is EU minus the UK would likely suffer from a capital shortage. The financial industry would naturally remain in London but there would be fewer bridges for that industry to invest capital into entrepreneurial ventures in the EU economy. That could affect continental ecosystems and pull them back into the “playground economy”:
The playground economy exists where research is entrapped in the academic world, or startups are prevented from growing due to hostile regulations and a lack of capital… In such an economy, people may look like Entrepreneurs when in fact they’re more like children without the right (or the means) to grow… When the economy lacks capital, local rebels are unable to go from fleshing out an idea to building an empire. The playground economy is a bit as if Larry Page and Sergey Brin had invented PageRank, published their famous article, tested the algorithm on the Stanford campus, then moved on to business as usual because the banker refused them the loan they needed to start a company.
Furthermore, reduced access to the only native English-speaking market in Europe may only reinforce bad EU-English in the remaining member countries, which would widen the distance between continental startups and the dominant US ecosystems. As written in another paper, “The Power of the Tongue”:
Many people read English. But only some of those also understand spoken English. Few people speak English to the point of being able to inspire an audience. Almost none are able to write down English that qualifies for publication.
All in all, Brexit is a pretty depressing prospect for European startups, both in the UK and on the continent. However, there are three reasons to not give up on entrepreneurship yet.
First, it’s not as if a failure of Brexit would be reason to rejoice. France is a mess, with the far-right Front National on the verge of making unprecedented gains in the electorate. Germany’s great coalition is expected to break up as early as next year over the refugee crisis. National borders are being sealed all over the EU, making the Schengen agreement irrelevant. A new financial crisis is looming. Brexit is simply one of the many symptoms of our weakening 20th-century institutions. It will only accelerate the ongoing disintegration of the EU and highlight the need for new institutions that protect people from all the risks associated with the digital economy.
Second, startups are organisms that thrive on chaos. Often more friction or more red tape mean more business opportunities. As long as governments don’t stifle them completely, Entrepreneurs could flourish and solve many problems in an EU further damaged by Brexit. As encapsulated in TheFamily’s motto, “Entrepreneurship is the new politics”.
Finally, remember that in such situations there is always a status quo bias — an emotional bias that implies a preference for the current state of affairs — , as could be seen in Scotland two years ago. It is often said that Britons are a “pragmatic” people who will always heed the economic interests of their nation. The ‘Stay’ side has not fully entered the campaign and the dice are not yet cast.
(While “TheFamily Papers” series is made of long-form stories, this “TheFamily Notes” series presents shorter reactions and highlights related to current events. Thanks to Oussama Ammar, Laetitia Vitaud and Kyle Hall.)