Mitigating the risks of Brexit for your tech startup

It took Theresa May eighteen months to reach a deal with the EU, but it Parliament less than a month to throw it out by a wide margin, most MPs believing that her imperfect compromise is worse than the status quo. The paralysis is such that the government has largely given up arguing that its deal will be good for the country, instead insisting that it is what democracy demands.

May’s ‘progress’ in negotiations has been a pantomime of democracy. Neverendum. The risk is real. Britain faces years of trade negotiations with the EU, involving more painful trade-offs between prosperity and control. All the while, the country will be falling further behind its potential.

Voters were swept off their feet by the promises of the Leave campaign, only to discover that the future relationship was that promised. Those with long-standing delusions about what Brexit would mean have been forced to swallow a dose of reality. It’s chaotic. May has appointed her third Brexit secretary as her own backbenchers are feverishly plotting to bring her down. Labour’s position is hopelessly unclear.

With negotiating time almost up, Britain has the imperfect deal that it was always going to get. Promises of having cake and eating it have given way to a less appetising offering. Yet among Brexiteers, one hopeful fantasy lives on: the idea that, if all else fails, Britain can prosper outside the EU without signing a deal at all.

If May wonders how this dire outcome has come to be more popular than her deal, she should start by re-reading her own speeches. Her mantra that ‘no deal is better than a bad deal’ was supposed to persuade the EU to give Britain better terms. It didn’t work. But it struck a chord at home.

The draft withdrawal agreement of 585 pages will guide future talks. Will we agree a Norway-style relationship or a deal modelled on Switzerland or Canada? In truth the EU27 will be in control, with Britain having few cards to play, and the process of ratifying a deal with Britain will be tortuous.

What we do know, is that the ongoing uncertainty and rhetoric of Brexit heading into 2019 will create volatility in sentiment, confidence, investment decisions and currencies, that will influence both business and consumer spending and buying power. So how will this impact tech startups?

Whether you’re a Eurosceptic or a Europhile, the UK startup environment has a supportive investor tax regime, a good intellectual property regulations and amazing talent from across Europe, but there are challenges ahead created by Brexit.

Everyone is looking for the headline that everything is fine or everything is catastrophic, and actually it’s somewhere in-between. At a high level, the potential winners will include those startups that are exporters, whilst potential losers are importers and foreign workers in the UK.

While Brexit is a ground-breaking event in the history of Europe, geopolitics, and global economy, modern agile companies have long ago surpassed the constraints of state borders and work permits. However, lets’ look at four key challenges from Brexit for tech startups, and mitigation strategies

Workforce

It’s already tough to hire good developers and engineers. While UK tech startups do create jobs for British citizens, part of the skills shortage has been filled by European immigration. We could potentially lose a large part of the startup workforce if regulations make it tough for EU nationals to stay in the UK.

Around one in five tech workers in the UK are from the EU. It’s likely that the current freedom of movement that allows EU citizens to work in the UK with few limitations will come to an end after Brexit. That’s going to make it harder to attract staff from the EU, and to keep workers who are already here.

Talent is the life blood of start-ups. You cannot build a startup if you cannot attract the best talent. While Brexit could be frustrating we might have a larger talent pool to choose from – a lack of European migrants doesn’t necessarily mean a complete migration halt. Brexit will open doors to non-EU countries, and whilst overseas talent is important, we have to invest more in terms of home-grown talent too.

Finance

The adjustments the financial services industry must undertake arguably pose a bigger challenge than the immediate geo-political uncertainty casting a shadow over the labour market to startups.

Startups looking for additional funding or support may have a harder time when pitching, but there are still plenty of options for growth.  While UK investors are cautious, EU investors are taking advantage to promote their own economic stability. This may mean a drift to Berlin and other cities offering greater entrepreneurial incentives.

As the UK exits Europe, businesses will lose access to funds that come directly from EU membership. The European Investment Bank, for example, has invested over €31.3bn in the UK economy of which 17% funded innovation and SMEs. In the tech and life sciences sector, the European Investment Fund is a key source of finance, supporting 27,700 SMEs.

A weakened pound and higher inflation after the final Brexit terms are agreed could lead to higher costs. A holistic view thus gives a perspective of many uncertainties arising from Brexit regarding finance for startups.

Regulatory environment

Services make up about 80% of the UK’s tech exports, and the EU is its biggest export market, however, the UK Government is more focused on trade in physical goods. Without even a vague plan in place, tech companies can’t be sure about the rules that will govern trade. That means, for example, they could end up being required to comply with two sets of regulations – one to sell in the UK, one to sell in Europe – with different VAT and thus cashflow implications.

Another area of concern is data protection. Data of all sorts flows to, from and through the UK as a part of daily life, everything from IoT devices to cloud computing, and all of this data is currently governed by EU law. After Brexit, a new deal on data protection is needed otherwise those data flows could be disrupted or even stopped, with predictably chaotic consequences.

Market access

The UK has traditionally traded extensively with Europe, and access to European markets is crucial, it’s a two-way trade. Although many startups are still moving forward with their plans for Europe, loss of Single Market access could be damaging, so startups need to be looking at other parts of the world, which might be more financially viable.

Across the tech industry the picture is mixed. Those tech companies that mostly deal with US customers or suppliers are largely unaffected by Brexit, and if a mooted UK-US trade deal happens these companies may even see significant benefits. However, uncertainty on both demand and supply side is currently impacting many startups.

What can tech startups do?

The key to surviving the Brexit haze is flexibility and contingency planning as new rules are created. In the current uncertainty it can be difficult to plan, but that’s exactly what you need to do. It’s the act of planning, rather than the plan itself, which is the key. Robust, well-thought out business plans, showing that you’ve calculated upside and downside scenarios, will be crucial.

Whilst it can seem that every time you hear the news or open a newspaper, there’s more reason not to act, the fact is that if you have an innovative idea, the experience to see it through and the ability to make a robust business case for it, the UK remains one of the world’s most favourable environments for start-ups.

So what should a startup tech company be doing right now, with only a little information to guide them? It appears the advice, in classic British style, is a modified version of keep ‘calm and carry on’.

On one hand, startups are probably the most equipped to navigate whatever is yet to come, being adaptable, innovative, and nimble in their mindset. Every day brings with it a new challenge that small business owners never thought they would have to deal with.

On the other hand, entrepreneurs often have the least amount of experience and resources. Then there’s the emotional side of it. I have heard many entrepreneurs talking about the uncertainty of Brexit and saying they don’t need an additional gamble at the moment.

So here are some thoughts on how to navigate the future, pending our exit in March.

1. Understand your runway, and create a clear plan

The place to start is your current plan – and don’t create one of those fake plans aimed at investors, that won’t help you, craft a plan for YOU with realistic assumptions and meaningful goals.

Make a decision based on cash runway and velocity. Make decisions based on a new plan, not based on the plan you had before. This is probably the toughest thing you’d need to do as a founder, but there are times where you need to do it. Do it sooner rather than later, do it with respect, and ensure there is a balance of optimism and realism – hope is not a strategy.

2. Financial targets – be scrappy

First is the cash in the bank, and the second is the cash you expect to get from your customers. How certain are you in your revenue forecasts? Look at the number of customers, pricing, volumes you know are confirmed, and you sales funnel, pipeline and lead conversion times.

In general, switch into a scrappy mode, embrace that mentality. Review your costs – what can you cut? There is always extra stuff. Just get into the mode of cutting things that aren’t critical – activities that don’t add value to customers.

3. Review your hiring

Review your hiring plan. This is easy to control in times of uncertainty and whilst it means that you will grow slower, and the current team will have to do more work, it keeps fixed costs and demand on management time on hold.

Whilst I’m an advocate of continuous recruitment in terms of always being active in the market rather than seeking to hire for a specific role at a specific time, taking a three-month recruitment sabbatical at times of heightened uncertainty takes the pressure off making what are high-risk decisions.

4. Get customers faster and for longer

This may sound odd, because why wouldn’t you close customers faster anyway? The point is, think about friction points, anything that slows down your sales? Think about offering a price incentive for an annual payment versus monthly payments, and offer different price structures for longer contracts.

“‘Uncertainty’ and ‘opportunity’ are the two words I most closely associate with Brexit. However, on the back of uncertainty rides opportunity, which is where genuine entrepreneurs thrive. Now is not the time to hunker down on innovation, build rapport and relationships with new and existing customers alike with renewed zest.

Next steps…

At Disney, the shared understanding is that ‘nothing hurts the mouse’ – risk assessment and management is a key leadership focus, and so it should be for startups.

Precisely quantifying Brexit vulnerability is impossible, but that doesn’t mean you can’t reduce uncertainty. The goal is to develop ways of understanding key drivers and possibilities so that surprises aren’t so surprising. You have to hedge your bets, don’t put all your eggs in one basket and reduce decision making on the fly – take steps to minimise potential damage long before a crisis unfolds.

Many of the details of the policy and regulatory issues remain very unclear, but recent endorsements from tech giants Apple, Google and Facebook demonstrated that the UK is still an attractive location for tech business.

So, be steadfast in your resolve. Don’t take a wait-and-see approach, relying on being nimble to respond to however Brexit turns out, waiting for Brexit isn’t an option. Look at the four potential levers highlighted above – runway, finances, hiring and customers – and start making your plans today.

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