From IT to fintech, early signs point to Dublin and Berlin startup growth as VC investments slow in London

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London isn’t exactly closed for business following the Brexit vote, but an investment slowdown was visible in the second quarter as investors waited to hear what would happen with the referendum. Some are quoting a rounded figure of $200 million in venture deals announced since the result as proof that there is nothing to worry about. But those announcements reflect deals that were likely six or more months in the making, merely being announced in the first month of the third financial quarter.

In fact, $200 million is well short of the flurry of announcements made in the same period last year, which was about $338 million according to the Financial Times. According to the quarterly Venture Pulse report co-published by CB Insights and KPMG last week, there were only 104 VC deals in Q2 worth $729 million in the UK (most of whose tech ecosystem sits in London), down 40% from the previous three months’ 114 deals and $1.274 billion. Why? CB and KPMG say the culprit was indisputably Brexit anxiety.

“Many VC investors held back from making investments, taking a ‘wait and see’ approach prior to the vote. The outcome of the referendum caused brief havoc in the public markets, although we are starting to see some stabilization with the recognition that any separation process will take years to complete,” the report said. And how those investors modify their sentiments depends on when they know what will be with the exact parameters of Britain’s economic relationship with the EU.

“The sooner we know we can retain free access to the markets, the sooner we know the tech ecosystem can retain (which is reliant on) taking tech talent from mainland Europe, the sooner we get these answers the better,” Head of KPMG Tech Growth at KPMG in the UK Patrick Imbach told Geektime. “As long as they’re on the table, certain companies will get more scrutiny from investors.”

UK VC investment activity over the last five quarters (Source - Venture Pulse, Q2'16, Global Analysis of Venture Funding, KPMG International and CB Insights (data provided by CB Insights) July 19th, 2016.)
UK VC investment activity over the last five quarters (Source – Venture Pulse, Q2’16, Global Analysis of Venture Funding, KPMG International and CB Insights (data provided by CB Insights) July 19, 2016).

The UK’s investment scene has indisputably slowed down. In all likelihood, that is because of Brexit, to the detriment of the UK tech scene and to the benefit of others. Germany saw a dip in the number of deals over the same two quarters, but the size of investment boomed, from $394 million in Q1 to $492 million in Q2. This could be the birth pangs of Berlin overtaking London for startup stewardship, but there is still some ways to go before the UK finally walks out the EU’s doors.

German VC deals dipped, but their value jumped, bwteen the first two quarters of 2016 (image, Venture Pulse Q2 Report by CB Insights and KPMG)
German VC deals dipped, but their value jumped between the first two quarters of 2016 (image, Source: Venture Pulse, Q2’16, Global Analysis of Venture Funding, KPMG International and CB Insights (data provided by CB Insights) July 19, 2016).

Fintech flight to Berlin and Dublin?

Dublin Sunrise (CC BY 2.0 Miguel Mendez via Wikimedia Commons)
Dublin Sunrise (CC BY 2.0 Miguel Mendez via Wikimedia Commons)

The UK’s biggest tech vertical, fintech, is also the most vulnerable to uncertainties thanks to now ambiguous or unknown changes in regulations. Imbach suggested that the level of regulations and internationalist bend of fintech left it somewhat exposed: “They’re particularly impacted by access to the single market. For the moment, you have passporting rights to do business across the European Union. If these regulating passporting rights are removed, this would be a challenge in particular for fintech businesses. People may look for other centers where local rules apply across the EU. The obvious one would probably be Dublin, maybe Berlin.”

Why Dublin? Why not Berlin? The answer happens also to be London’s main strength through the Brexit storm: English. Amsterdam, Stockholm and especially Berlin might have strong English-speaking skills in their respective ecosystems, but it can’t approach a native English-speaking country like the UK. That gives Ireland an advantage if they can detour some London-bound venture capital and startup traffic.

But sans Brexit, “The UK has a strong backbone for businesses with diverse resources, perhaps the second biggest market in the EU,” Imbach emphasized, adding a number of incentives like tax breaks and a plethora of native resources make talk about London’s collapse as a startup center — as an economic hub in general — exaggerated.

Berlin’s Senator for Economics, Technology and Research Cornelia Yzer, has been the most vocal advocate for Berlin and doomsayer for London in this context since the vote. Presenting at London Fintech Week 2016 a few days ago, she claimed to have spoken to over 100 companies interested in moving their operations to Berlin.

Brandenburg Gate lit up during Berlin's 2012 Festival of Lights. Photo credit: SA 3.0 Lotse via Wikimedia Commons
Brandenburg Gate lit up during Berlin’s 2012 Festival of Lights. Photo credit: CC BY SA 3.0 Lotse via Wikimedia Commons

To be fair, that also makes it sound like she’s taking advantage of current events to be more effective at her job, a point that Imbach reiterated, saying Dublin and Berlin are “playing the marketing card right now.”

Some are optimistic that this could actually mean more foreign investment.

“The UK must continue to be an attractive location for foreign companies and the weaker pound should mean that foreign investors are keener than ever on UK startups,” Tech City UK CEO Gerard Getch said a couple weeks ago, reflecting survey results that showed 51% of UK entrepreneurs would see investment from abroad in the coming year. That being said, confidence in the local startup scene has dipped. Tech City UK, a government-backed tech and startup promotion body, surveyed more than a 1,000 people in the two weeks after the vote to get a sense of the mood on the street. A majority 51% think it will be harder to recruit foreign talent and 31% said that it would likely slow down hiring as a result.

That doesn’t seem like much of a change though, as 53% of London funding rounds included only local investors according to the 2015 Startup Compass ecosystem ranking. That might indicate startups haven’t yet recalibrated, or might not plan to, following Brexit.

Either way, uncertainty can breed caution as much as it can pessimism. Numbers for absolute Berlin investments are down just like in London, which might also owe to other, general economic trends and mean Brexit’s influence may still be overstated. London’s economy, especially in fintech and in terms of networks with science research institutions across the UK, mean the framework for the tech economy can only be weakened so much in the wake of Brexit.

“We’re [still] seeing investments which is a good sign,” said Imbach. “With uncertainties, views should be more balanced. I feel sometimes there are features of UK and London that have not changed and will not change. I think some stuff I have read is probably a bit too negative. Difficult to see how this will pan out until negotiations.”

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