`Brexit’ Nerves Cost This London Tech Startup $142,000 Already

“Brexit” is already happening for Rich Pleeth.The co-founder of friend-finding app Sup was trying to secure funding to grow...

“Brexit” is already happening for Rich Pleeth.

The co-founder of friend-finding app Sup was trying to secure funding to grow his London-based startup and thought he had good news when an offer came from a German firm to kick in 100,000 pounds ($142,000). Then British Prime Minister David Cameron called a referendum on membership in the European Union for June 23. With polls showing the result could be close, the investor backed out.

“They said, ‘we’re not comfortable’,” Pleeth said at Sup’s offices, part of a co-working space in central London opened to encourage technology companies to set up in the U.K. The investor remains interested, but will wait to see the outcome of the vote, he said. “They are too nervous.”

While industries ranging from accounting to agriculture are trying to figure out the possible consequences of what’s become known as “Brexit,” tech startups are right at the forefront of what pro-EU campaigners say Britain stands to lose: unencumbered movement of money, workers, goods and services.

Testing Times

The “Brexit” question adds a new risk as concerns start to spill over from Silicon Valley about inflated technology company valuations and unprofitable business models.

This has been especially true for “unicorns,” private companies with valuations in excess of $1 billion. In February, London had one of its first high-profile unicorn failures, when e-commerce company Powa Technologies filed for bankruptcy after raising $175 million since 2013.

Advocates of leaving the EU say companies will benefit in the longer term as Britain seeks new trade agreements and protects London from EU regulations. Two-hundred entrepreneurs from different industries signed a letter to The Daily Telegraph newspaper last Thursday calling for separation 43 years after joining what was then known in the U.K. as the Common Market.

Keeping Momentum

About 40 percent of entrepreneurs starting companies in London come from outside Britain, with about a quarter coming from the EU, said Russ Shaw, the founder of Tech London Advocates, a networking group for the city’s technology firms. It surveyed its roughly 300 members and found 87 percent wanted the U.K. to stay in the EU, whose citizens have the right to live and work in any member country.

“People in America are all talking about London’s tech hub and what’s happening here, and I worry that a potential ‘Brexit’ will slow that momentum,” Shaw said. He worried in particular that a pause in fundraising could hamper young companies that need capital to fuel their rapid growth. “People will say ‘let’s keep the discussion going but let’s not make any decisions between now and the 23rd of June’.”

TransferWise, a startup that provides cheap international money transfers, is a case study of London’s draw. Taavet Hinrikus and Kristo Kaarmann are both Estonian. They employ 100 people and Hinrikus estimates there may be 40 nationalities among them, including many from the EU’s 27 other member states.

“A Brexit would make it harder to access top talent, making London a less attractive place for growing companies to base themselves,” Hinrikus said by e-mail. He said hiring was already tough because demand for tech professionals in London exceeded supply. “To restrict where you are able to look makes scaling a business impossible.”

Situations Vacant

Shaw estimated that there are currently some 30,000 unfilled information technology job vacancies in London and there were simply not enough Britons with the right skills. Senior developers, big data scientists and cyber security specialists are in such short supply that the U.K. government last year relaxed visa rules for companies seeking to hire non-EU nationals.

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Leaving the EU might also make it impossible for entrepreneurs coming from other countries to launch their startups in Britain, said Oliwia Berdak, an analyst at Forrester Research who tracks London’s finance-related technology, or “fintech,” companies.

Non-EU nationals migrating to Britain usually have to prove they have an employment contract or guaranteed income source, requirements that few young tech entrepreneurs can meet at first, she said.

“Hiring people from Europe is really nice because you don’t have to jump through any hoops,” said Max Williams, chief executive officer of Pusher, a company whose software helps distribute data across large networks.

Beat the Valley

There’s also the ease with which U.K. companies can currently sell their products and services across a market that’s eight times bigger. It enables startups in the U.K. to compete with those launching in Silicon Valley, said Sonali De Rycker, a partner at London venture capital firm Accel Partners.

“Startups in the U.S. have traditionally been able to seize category leadership earlier on due to the sheer size of their home market,” she said. “Access to a combined 500 million consumers enables U.K. and Europe-based founders to build momentum and compete globally more quickly.”

This is particularly true for fintech companies, said Berdak at Forrester. Once regulated by the U.K.’s financial regulator, they can market their services anywhere in Europe simply by filling a simple notification form. Payments processing startups, a hot niche in London currently, might no longer enjoy access to transaction data under the European payment services directive making it harder to build their platforms, she said.

In the meantime, its another area of finance that’s been hit first. Political uncertainty over the referendum has hammered the British pound, which has lost about 5 percent against the euro since the beginning of the year.

Price of Departure

That’s compounded the trouble for Pleeth at Sup, which has about 28,500 registered users and is attempting to raise 700,000 pounds. The currency drop made it too expensive for the company to keep paying the German marketing consultants it had hired. “We can’t afford them, so we just aren’t going to use them,” Pleeth said.

TransferWise’s Hinrikus said that while his company hopes Brexit doesn’t happen, if it did, the young company would think about moving.

“We are considering our options,” he said. “London is a great place to set up a business today, but other cities are catching up and who knows, may even overtake it.”

To contact the reporters on this story: Jeremy Kahn in London at jkahn21@bloomberg.net, Adam Satariano in San Francisco at asatariano1@bloomberg.net. To contact the editors responsible for this story: Nate Lanxon at nlanxon@bloomberg.net, Rodney Jefferson

By: Jeremy Kahn and Adam Satariano

©2016 Bloomberg News

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