WINTER IS COMING

After Brexit, the race is on to replace London as Europe’s startup capital

Obsession
Brexit
Obsession
Brexit

“Thanks to Brexit,” reads the title of an email from the Dublin commissioner for startups sent this morning.

“Thanks to Brexit we have a new opportunity to attract Europe’s serial or first-time entrepreneurs to set up shop in Dublin,” the email, from the organization tasked with boosting tech startup activity in Ireland’s capital, continues. “With Brexit comes opportunity. Let’s not waste it.”

London’s favored status among startups seeking a European base is in peril, and its counterparts on the continent are wasting no time in announcing themselves as worthy alternatives. Besides Dublin, there’s Berlin, already home to successes including Rocket Internet and Soundcloud; Amsterdam, which has spawned the major payments player Adyen; and Stockholm, with Spotify and Minecraft’s maker, Mojang.

These cities have good reason to capitalize on the UK’s separation from the European bloc. Labor from the EU gives a significant boost to British tech startup headcounts. With Brexit, and a possible end to the free movement of labor for EU citizens, UK startups could find themselves starved of the crucial workers they need to expand.

A survey by Wayra, a startup incubator owned by Spanish carrier Telefonica, last year found that one in three UK tech startup workers came from outside the country. That 34% was made up of 20.7% from EU countries, and 13.3% from elsewhere. The most common non-UK nationalities were Irish, American, and Spanish, the survey found.

Some of the brightest stars in London’s startup firmament are already pulling the trigger on Brexit contingency plans. The American Damian Kimmelman, founder of the corporate data firm DueDil, told Forbes that he couldn’t put his company’s expansion plans at risk because of talent pipeline shortages. “We’re scaling far too quickly to jeopardize our ability to scale because we have to hire people in the UK,” he said. “From today onwards we are an international company. We’re not a British one.”

Taavet Hinrikus, the Estonian co-founder of money-transfer company Transferwise, one of the UK’s rare “unicorns” with a valuation of over $1 billion, told the Guardian that his firm is unlikely to continue growing headcount at its London headquarters. His firm has grown from 40 to over 400 people in under three years. Transferwise would now consider moving its HQ elsewhere, although no final decision has been made.

Fintech in peril

Transferwise’s next moves bear watching, not only because of its sky-high valuation and high-profile marketing stunts, but because it’s a big player in financial technology, a niche that the British government has been trying to nurture. George Osborne, the chancellor of the exchequer, has loudly pronounced his wish for London to be the world’s “fintech capital.” To that end, he has opened his residence to host fintech founders and industry luminaries. And he has even appointed a fintech “special envoy” to improve London’s chances.

Fintech is also a segment of the tech economy that’s particularly vulnerable to Brexit’s uncertainties. That’s because of financial services “passporting,” which allows a firm regulated by one EU member-state to offer its services across the bloc without the need to obtain additional authorization from regulators in new markets it enters. This is particularly advantageous for fintech firms such as Transferwise, which are in the business of moving money around.

Passporting allows Transferwise to be regulated by the UK’s Financial Conduct Authority, but offer remittance services across the EU without additional hurdles. That means that the fintech firm can keep its staff in the UK while offering those services across Europe, without the need for physical branches elsewhere, says Tim Dolan, a partner at law firm King and Wood Mallesons. But, he says, “If there is a Brexit … it means the UK can’t take advantage of the passport, and it suddenly falls away.”

Money-transfer and payments startups would be hardest hit by the end of EU passporting, Dolan observes. That includes Transferwise and WorldRemit, another British fintech star; as well as European firms with sizeable UK presences like Adyen and Stripe.

The end of passporting for British firms doesn’t mean UK fintech firms will have to stop doing business with the continent, but it does mean an administrative headache and added cost. British companies seeking to take advantage of EU passporting would have to set up a subsidiary in an EU country, and obtain permissions from that member state’s financial regulator. Its EU subsidiary would then have passporting rights across the bloc.

There is still huge uncertainty around what sorts of regulatory and trade deals the UK will work out, and indeed, whether Brexit will actually happen, but for the risk-averse fintech startup seeking a hedge, the big question is what European city might offer a suitable landing point?

Dublin, as mentioned earlier, would be happy to oblige. “Having a large cluster of fintech startups ourselves, it would be a no-brainer place for them to come too,” says Niamh Bushnell, Dublin’s startup commissioner.

Of course, the net effect of Brexit on Ireland’s economy is likely to be negative, Bushnell acknowledges, and it may also be bad news for Irish startups looking to sell goods and services in the UK. But the opportunity for Dublin is too good to pass up, she says. “We’re set up to welcome those companies in.”

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