Brexit vote has already hurt tech but the next step could be worse

One of the favoured plans to restrict freedom of movement but protect the UK economy following the vote to leave the EU would exacerbate the damage of Brexit to the technology sector companies fear.

According to commenters such as the Financial Times’ Wolfgang Münchau, the UK might negotiate a bilateral free-trade agreement which would see it giving up “passporting” rights (the ability to offer financial services throughout the EU without needing to be subject to overseas regulators) in order to secure an opt-out of one of the EU’s four fundamental freedoms: the freedom of movement of people.

The deal, which would represent a sort of “EEA minus” arrangement, would essentially trade the primacy of the City of London in Europe’s financial trade for the ability to limit inward migration from the EU.

Such a deal would please Frankfurt and Paris, which stand to gain from London’s loss, and it would reassure many of Britain’s non-financial industries, which rely on free movement of goods, services and capital to carry out their day-to-day trade. It would, of course, kneecap Britain’s financial sector but that could be seen as a vote-winning move, at least in the short term, due to the unpopularity of the sector in most of the UK.

But it would also be especially bad for Britain’s technology sector, which relies on immigration to fill the hole left by years of underinvestment in technical education in the UK.

The UK technology industry made the need for freer migration clear even before leaving the EU was considered a serious proposal. In October 2015, executives from tech startups across the country penned an open letter to the government warning that “changes to immigration policy will make it more difficult to attract and recruit the talent high-growth companies need to compete and succeed in a global marketplace”.

That same month, at a dinner convened to convince the government of the seriousness of the problem, they doubled down, describing barriers to growth from slow visa approvals and overbearing inspections from the Home Office. The dinner was also where many first spoke out against leaving the EU, with Taavet Hinrikus, the co-founder of foreign exchange site TransferWise, saying it would be “a freaking catastrophe”.

Now that the country has voted to leave, Hinrikus is no less blunt. “Immigration is part of the solution we need, not the problem. Without immigration, nations would stagnate. It is key for innovation and for economic growth,” he wrote a week after the vote.

Damian Kimmelman, the founder of London’s DueDil, a business data provider, is similarly frank. “Tech will particularly suffer” from leaving the EU, he wrote. “The UK’s startup scene, nurtured by international venture capital and skilled workers’ willingness to move here, was starting to create global challengers – and thousands of well-paid jobs. Development will now stall as companies struggle to find the staff and cash they need to scale.”

Mike Butcher, the editor of industry news site TechCrunch UK, strikes the same chord. “The two main ingredients for a startup, after the idea, are people and money. Assuming you can raise funding, it’s the people that are really the most important component,” he said.

“Leaving the EU throws the ability to hire from Europe - and, crucially, highly engineering oriented countries like Poland and Romania - up in the air. And there is no guarantee we will have better visa relations with the US. It must be remembered that tech companies offer the jobs of the future.”

Dissenting voices are few. In an editorial for tech site the Register, developer Andrew Fentem argues that the call for migrant workers is motivated mainly by a desire to pay low wages. “In the early stages of my career I was an engineering apprentice and benefited from a considerable amount of on-the-job training. Apparently British tech employers no longer feel the need to provide that, either,” Fentem adds.

Employers disagree, pointing to the length of time it takes to fill technical roles as evidence that demand for talented workers outstrips supply. And while hiring from overseas helps, it brings its own problems: language and cultural barriers, cost of relocation, and difficulty in advertising vacancies worldwide all mean that tech companies would prefer to hire locally if they could.

In a bizarre turn of events, “conceding” passporting could be less damaging than the “benefit” of opting out of freedom of movement that it is supposed to secure.

One technology sector the UK leads in is financial technology (fintech). Unlike many other nations, from the US to Germany to China, Britain’s technology capital is the same as its financial capital, its political capital, even its fashion capital. That centralisation has caused many damaging reactions, and can even be partly blamed for the success of the leave vote in the first place, but it has certainly helped British technology firms that exist at the crossover between those sectors.

Losing passporting, therefore damaging London’s position as a financial capital, wouldn’t have a direct effect on most fintech companies. Few sell regulated financial products, and those that do usually partner with a traditional financial institution to overcome regulatory hurdles.

But it could hurt more firms indirectly. Tech startups such as fintech accelerator Level 39, digital bank Mondo and financial data firm Markit all work closely with the traditional financial world, and losing that access would be inconvenient at best.

More worryingly, future fintech startups would be unlikely to choose Britain as their home in the first place. If banks relocate to Paris or Frankfurt, that is where young entrepreneurs who want to build products in the same sector will work, even if the benefit is simply more face-to-face meetings and fewer Skype chats.

Kimmelman argues that the loss of passporting could have an unexpected upside, however. “Fintech companies are infinitely more agile” than traditional banks, he says. “Startups can pivot quickly and solve the new problems created for companies by Brexit – meeting evolving compliance requirements, finding new suppliers and customers and making data-driven decisions.

“And although the potential end of passporting rights does significantly impede the UK financial sector, it has far less impact on fintech than for banks.”

Whether or not that rosy view is true, it certainly seems that Britain’s international competitors believe the opposite. The German centrist party, the FDP, has hired an advertising van to drive around east London with the message “Dear startups, Keep calm and move to Berlin”.

TransferWise’s Hinrikus reports that he’s had invitations from Ireland, Switzerland and others to move there.

taavet hinrikus (@taavet) Ireland, Switzerland, others reaching out and tempting @TransferWise to start/move operations there - competition between states is good :)

And Paris has launched an aggressive campaign to entice London-based businesses to hop over the channel, including a number of tax breaks for firms that relocate. “The Brexit vote is providing us with an opportunity to show that France is business-friendly,” a member of the French PM’s team told the Financial Times.

Just four days after the vote, the New York Times ran a feature discussing where the “new London” would be. It ranked Amsterdam as the winner for reasons including its location, transport options and cultural life. Venture capital firm Index advised its entrepreneurs similarly, writing that “London was previously the obvious choice for a European base – and it may still be for many startups. However, we advise that you also consider other locations, such as Dublin, Amsterdam and Berlin and remain nimble enough to switch locations if better choice becomes apparent.”

Ultimately, few in tech believe that Brexit will be anything other than damaging for the industry overall. Kimmelman thinks it could be “the making of UK fintech”, in the sense that “what doesn’t kill you makes you stronger”, and Fentem argues that “the angst and disunity” of “project fear” will damage the UK more than Brexit.

But most stick with the assessment made back in October: it’s a freaking disaster.