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London - The lasting impact of the UK’s vote to break with the European Union won’t be known for years, but the shift has immediate ramifications for the global technology industry. There are a few issues to be particularly mindful of.
No IPOs
Chaos in the global markets is not an environment that makes investors eager to buy shares in an initial public offering. Any technology startup considering an IPO will likely wait to see how the turmoil following the Brexit vote shakes out.
There has already been a dearth of listings this year and the UK vote will only extend the lull. The European telecommunications company Telefonica SA is said to be postponing plans to sell shares of its infrastructure unit Telxius and UK wireless unit O2.
Impacts have been felt elsewhere in the world, with Line, Japan’s most popular messaging service, planing to delay the setting of a price range for its initial public offering as a result of the Brexit vote.
Data Sharing
The Leave vote opens up potential headaches for anyone concerned with data protection. The UK will need to negotiate new data sharing arrangements with both the European Union and the US.
Right now, the UK’s data protection rules are in line with the European Union’s Data Protection Directive, but that regulation is likely to be replaced with a much more stringent General Data Protection Directive by 2018. In order to continue to move data freely between the UK and Europe, the UK will have to prove it offers equivalent levels of protection. This will require changes to UK law, said Jane Finlayson-Brown, a partner specialising in data protection issues at the law firm Allen & Overy.
Meanwhile, the US and European Union just negotiated a new Privacy Shield Agreement to govern data transfers between the EU and the US. This was necessary to replace the so-called Safe Harbor Agreement, which Europe’s top court struck down last year. The UK will no longer be covered by Privacy Shield and so will have to negotiate its own data sharing treaty with the US.
Many companies, Finlayson-Brown said, are likely to shift their main data protection regulatory relationship to the EU since companies must choose an EU data protection agency as their primary data regulator to comply with the new EU rules. She said companies that might have opted to maintain the UK’s ICO as their main data protection regulator for Europe are likely to no longer have that option.
Immigration
Technology companies in the UK may no longer benefit from the free flow of people between EU countries.
Alphabet, Amazon.com, Apple, Facebook and other tech giants have built large offices in the UK, in part as European hubs to recruit engineers and other employees from throughout the region. Young technology companies also have relied on the region’s immigration policies.
According to Tech London Advocates, an industry group for the area’s technology sector, roughly 1 in 5 London tech workers is an EU national and roughly a third are from overseas. Tech companies might consider moving their headquarters to somewhere in the EU if immigration rules become too difficult.
Sonali De Rycker, a partner at Accel Partners, a global venture capital firm with a large European portfolio, said that the ability of UK startups to “hire diverse talent locally” was in question following the Leave vote. She said though that for young companies, their ability to innovate and execute was more important than where they are based.
ARM Holdings Plc, the UK-based chipmaker whose designs are used in the vast majority of the world’s smartphones, has said that it’s watching carefully to see what sort of rules the U.K. ultimately enacts concerning visas for EU workers “as we employ approximately 200 non-UK, EU citizens at our Cambridge headquarters.”
FinTech
Financial services startups have been the crown jewel of the UK technology scene. Many of these business’s growth strategies counted on their ability to use regulatory approval in the UK to sell services throughout the EU. This ability to “passport” regulatory approval from Britain to any EU country will no longer be the case after Brexit, so UK fintech companies will have to get regulatory from an EU jurisdiction as well as from British regulators.
Mike Laven, chief executive officer of cloud-based payments platform Currencycloud, said ahead of the referendum vote that it was already taking steps to become regulated in another EU country as a hedge against the UK leaving the 28-nation bloc. Because this can be a time-consuming and expensive process, it may put UK fintech firms at a substantial disadvantage compared to rivals based within the EU.
“The harmonization of financial regulation is a huge, huge asset to British financial services firms,” said Tom Blomfield, co-founder of Mondo, a startup financial services company currently applying for a banking license in the UK, in an interview just ahead of the referendum vote.
BrickVest, a 10-person London-based startup that offers retail investors the ability to access commercial real estate deals, said that it will move its headquarters to either Paris or Berlin due to the Leave vote.
"Continental Europe is our key market," said Thomas Schneider, BrickVest’s chief investment officer and one of three co-founders. "We need to be in Continental Europe from a regulatory perspective."
Schneider said he and his co-founders were looking at Berlin, because it offers cheaper costs and many of BrickVest’s real estate deals are in Germany, or Paris, because France may offer an easier licensing process and regulatory framework than Germany.
Schneider said that BrickVest would likely keep a small satellite office in the UK to serve British and Asian investors.
UK No Longer a Tech Hub?
The UK government has invested time and money to develop a technology scene to supplement the country’s finance sector. The vote threatens the results of that effort, as companies and investors question whether the country is the global hub its leaders have tried to establish.
One major selling point for London-based tech companies is that they can sell to the 550 million consumers throughout Europe, an addressable market larger than the US. The Leave vote means that it is no longer clear whether the UK will continue to be the right place from which to access the European market. Investors may start wondering if it makes more sense to put money into other major European startup hubs.
“The uncertainty may push more money into other major hubs like Germany and Tel Aviv,” said Mark Tluszcz, the co-founder and chief executive officer of Mangrove Capital, a London venture capital firm with $750m under management. Tluszcz said, however, that he thought London would continue to pull top tech talent from Europe and beyond because it’s “one of the hippest and most diverse cities in the world.”
Startups have already said that the uncertainty leading up to the Brexit vote was making it harder to raise money from investors. Meanwhile, promising U.K. startups including money-transferring company TransferWise and data-service DueDil have said they will expand in other E.U. countries if the UK decided to break away.
"There’s a risk that some of these businesses will leave," said Russ Shaw, the founder of Tech London Advocates. "Things are going to be in flux for a while trying to understand what all this means."
