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Brexit Implications for UK Tech Growth Companies

Brexit Implications for UK Tech Growth companies

The recent referendum result in favour of leaving the EU has thrown financial markets and political stability throughout Europe into a period of turmoil. It is anybody's guess as to how this plays out over the next few months, but any departure that neither resembles the current arrangements nor some sort of hybrid "Norway" arrangement will almost certainly be bad news for the financial services industry in the UK and will lead to a sharp contraction of Foreign Direct Investment (FDI) into the UK.

Yet the outlook for investing in young UK technology companies is not nearly as bearish as for large enterprises. There are a number of reasons for this.

First, despite recent news that UK tech starlets such as TransferWise are considering moving to overseas locations (Berlin, Dublin?), it is not obvious that there will be an immediate stampede of young UK tech companies scrambling for the exit.

Bearing in mind that early-stage technology is a volatile and uncertain sector at the best of times, the negative impact of Brexit will be dwarfed by the ability of these UK companies to build products and services that are sufficiently disruptive to grow rapidly to many times their current size. This is not to underplay the fact that the growth technology sector in the UK is not heavily reliant on the free flow of European labour. However, the situation is not quite as acute as for a financial institution which relies on passporting permissions in order to conduct European business.

Secondly, the real threat to fast growing companies (assuming that the product/service is scalable) is obtaining finance to fund growth. Thanks to tax-efficient schemes such as the Enterprise Investment Scheme (EIS) and the Venture Capital Trust (VCT) industry, the UK has been the European leader in financing this market sector. Yet Brussels has long been viewed as something of an impediment to the long-term viability of these schemes.

A recent article by Kuber Ventures discusses a possible silver lining from the Brexit decision in this context:

"The Vote on Friday for the UK to leave the European Union will have a significant impact on the investment industry, with regulation being a key component of this change... [tax efficient investing] has been constrained by regulation because of the need to obtain EU approval... [which] have been proven to be extremely complex within the EU and going forward these will likely be much easier."

When speaking at a Kuber seminar this Tuesday, my main message was that tech investing in the UK can be very attractive given the dynamism of the sector in the UK at present. The risk/reward tradeoff is especially compelling when taken in the context of tax-efficient structures. Brexit was not discussed because frankly a supply of good tech companies and ability to finance them was more relevant. This is made considerably easier through the UK's tax-efficient investing regime.

Taken in isolation, tax-efficient investing in UK technology companies seems unlikely to be in the firing line irrespective of what happens in a post-Brexit world. This in itself is good news for young UK technology companies.

Yet nature abhors a vacuum and the current state of uncertainty will certainly cause companies and investors to pause in the short run, and the negative macroeconomic shock could be seismic if a lethal cocktail of expulsion from the single market and an increase in the rigidity of the UK labour market takes hold.

Events, dear boy, events.

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