Sector Watch: Why digital Britain will be another Brexit winner

    26 November 2016

    Start-ups departing for Berlin and Barcelona; brilliant ‘fintech’ firms left stranded outside the single market; games designers scratching their hipster beards as they ponder how to keep going if they can’t hire brainy European programmers. To listen to some of the more vivid commentaries in the wake of the recent referendum, one of the biggest losers from the decision to leave the EU would be the UK’s tech industry. Indeed, so confident was Berlin of the exodus of talent that it even opened a Camden office to help digital refugees relocate to the German capital.

    But the truth, contrary to expectations, is that digital Britain might well be a big winner from the decision to leave. Why? Because it gets very little out of the single market, it will benefit from smarter immigration, and it will be free from the constraints of an EU which has proved itself consistently hostile to tech innovation.

    The rise of digital Britain is not always fully appreciated. Just take a look at some of the figures. Of a total of 40 ‘unicorns’ across Europe — that is, those tech companies worth $1 billion or more — 17 were founded in the UK, including Zoopla, Funding Circle and Just Eat. No other European country came close: Sweden and Russia are in second place with five each, and Germany trails with just four. Eight more Brits joined the list in the past year alone. They are at the very top of the range, but behind them is a far larger cluster of start-ups, around London’s Silicon Roundabout and elsewhere. The UK now has more start-ups per capita than any other developed country, including the US.

    We’re also among the most voracious digital consumers in the world, seldom happier than when tapping ‘buy’ on our phones and tablets. According to Boston Consulting Group, our digital economy now represents 10 per cent of GDP, the highest share of any major economy. South Korea is second on 8 per cent, the US way behind on only 5 per cent. True, the American giants dominate the digital universe. But there is a huge domestic market for our own entrepreneurs.

    Most people in this sector were instinctive Remainers. So they may be pleasantly surprised by how well they do once we have actually left the EU. First, the much-vaunted single market doesn’t matter much to digital start-ups. If there’s one thing the internet has zero respect for, it is national frontiers. Most digital businesses are instantly addressing a global market, not a European one. So it makes no difference to an app company whether we’re in the single market or not. True, some fintech businesses may need permission to operate in Germany or France. But if they do, it is very simple to set up a virtual hub in, say, Estonia, which is already promoting its ‘e-resident companies’.

    Next, immigration. We still don’t know what post-Brexit immigration policy will look like. But the signals are that companies won’t have problems getting work visas for skilled staff. Global talent will almost certainly still be allowed in. But unlike building sites, digital ventures don’t need legions of relatively unskilled East European workers — who are more likely to be restricted. So tech companies should find it just as easy to get the people they need. And there could be a virtuous circle in which a booming UK digital sector becomes even more attractive to the world’s best.

    Finally, the sector will get the EU off its back. Brussels has long had a problem with disruptive web innovators, running endless investigations against the likes of Apple, Google and Amazon — while seeking to protect the slothful old European businesses whose models are threatened. Freed from that interference, the UK can be a regional hub for the world’s tech leaders.

    How can investors get in on this opportunity? There are already a clutch of successful quoted companies: take a look at Just Eat, Zoopla and Rightmove, or cyber-security firm Sophos. They’re not cheap but they’re still growing fast. There are also a number of technology funds that put money into fast-growing UK and international companies. Polar Capital Technology (tipped by Robin Andrews here in February) has a strong record in the sector. Other opportunities will come — with risks attached, of course — from investing directly through the crowd-funding platforms such as Seedrs.

    The UK is already a long way ahead of its soon-to-be former partners as a hub for internet start-ups. As Silicon Valley has already proved, once enough companies get started, a network of entrepreneurs, technologists and venture capitalists can combine to create a huge and potent industry which goes on breeding its own winners. We’re not quite there yet — but we’re a lot closer than anywhere else in Europe. Outside the EU, we can do even better.