The UK's vote to leave the EU has thrown a shadow of uncertainty over Europe's VC and startup ecosystem, in which the UK is a lynchpin.

The UK has held a pivotal position in European venture capital as a hub for both investors and startups, and that’s particularly true in categories where it has  been strong, including fintech, games, and biotech.

The decision by UK voters to leave the European Union will have significant ripple effects on the VC landscape both in Europe and beyond.

Here are the top concerns and likely impacts, according to early views we rounded up from investors, founders, corporate execs, government studies, and analysts.

European vs. UK funding and deals

But first for context, here’s what the relative weight of the UK is in terms of overall investment in VC-backed companies in Europe. The UK drives a significant share of activity and dollar funding, so any major change in the UK’s relative weight in this picture would mean a significant shakeup.

In the last couple of quarters, one-third of deals to VC-backed companies in Europe have gone to startups in the UK.

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In terms of dollar funding, the proportions are roughly similar. In Q1’16, UK-based VC-backed companies drew $1.3B in funding, while companies elsewhere in Europe drew $2.2B.

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VC funds, LPs, and talent

Here are the main worries hanging over London and the UK’s privileged place in the European tech and VC scenes.

LP drawdown? There’s already concern that institutional investors who fund VC as limited partners will refrain from funding UK-based VC moving forward. One of the more significant investors in VC funds in Europe is the EU-backed European Investment Fund — which makes “cornerstone investments” in VC funds — and it would be expected to pull away from UK-based VC.

“Our greater concern is the ability for venture capital to attract institutional money. The biggest investor in venture capital in Europe is the EIF, and if they scale back investment, that could have an extraordinarily cataclysmic effect on the industry,” said Tim Levene a founder of London-based VC firm Augmentum Capital, to CNBC.

The EIF itself expressed “regret” at the vote and while it said it would not change its activities for now, it also made clear that big changes could be on the horizon.

“EIF will actively engage with the European Investment Bank and relevant European institutions to define the EIF’s activity in the UK as part of the broader discussions to determine the future relationship of the UK with Europe and European bodies.”

Similar concerns apply to foreign investors and sovereign wealth funds who may look askance at UK-based funds given the economic and regulatory uncertainty, said Hussein Kanji of Hoxton Ventures.

“The number one problem is uncertainty,” said Hussein Kanji, partner at London-based venture capital firm Hoxton Ventures. ”This is effectively going through a divorce and you don’t know what is going to happen to the kid. If you’re a kid and a parent gets divorced you don’t know what’s going on.”

Talent Exodus? The free movement of workers between the UK and the EU arguably made London into the top tech startup talent pool in all of Europe. The decision to leave the EU may cause a brain drain that could hamstring innovation in London.

Fred Destin, partner at venture capital firm Accel, whose investments include food delivery company Deliveroo, said his main worry was the ability of companies to recruit talent. The “fluidity, speed and simplicity” of finding people from across the EU was a big advantage. He added that the leave campaign’s proposal to introduce an Australian-style points system was too laborious and slow for small companies.

The idea that UK-based software talent was suddenly poachable was popular. Here’s a UK-based reporter for Buzzfeed:

 

Keep calm, carry on: All that said, some voices are being raised to argue that the sky is not falling. London’s intense interrelatedness with the rest of the EU’s startup and VC ecosystems will mean that little will change in the next few years.

”Nothing changes for at least two years,” investor and Seedcamp founder Saul Klein said to Business Insider. “We have an amazing opportunity to make connections within Europe the best for everyone.”

London’s status as a fintech hub

London could fade as a fintech hub: The category most under threat is arguably London’s thriving fintech scene. As part of the EU, London’s advantages where clear: the status of London as a preeminent global finance hub, the abundance of European talent, and the uniformity of regulations that allowed London-based companies to easily roll out products Europe-wide. But now?

With the Brexit, all the comparative advantages are thrown at least partly into question. These are takeaways compiled by the FT on a Brexit impact report that had been together by London Fintech Week.

FTtake2

 

Opportunity for other fintech hubs: Other aspiring fintech hubs some of which are already using tax breaks to lure fintech startups — including Frankfurt, Amsterdam, Dublin, Switzerland, and New York — could see more investment and entrepreneurship shift in their direction as London’s advantages are eroded. Just as one example, the low-tax city of Zug in German-speaking Switzerland is already known as a haven for cryptocurrency startups and Switzerland has been aggressively courting fintech companies.

Germany’s  startup ecosystem is expecting to benefit.

“We expect a significant decrease in new incorporations in London in favour of Berlin, as well as an influx of successful London startups,” said Christoph Gerlinger, CEO of German Startups Group. “The Brexit is good news for the German startup scene. This will be particularly true of the especially dynamic fintech sector.”

Morgan Mullooly, at Accenture’s Centre for Innovation, tweeted about the opportunity for Dublin, where tax advantages and the presence of major payments corporations such as Visa already give it a leg up:

 

Financial services incumbents may ditch London: Already, major financial institutions such as Morgan Stanley and JP Morgan have announced they are considering a relocation of investment banking and other key groups to Frankfurt, Paris, and Dublin. That may happen even before the so-called Article 50 process is begun by the UK (a multi-year process whereby the exit from the EU would be negotiated). Shifts such as these would hack away at London’s preeminence as a financial center overall, with negative knock-on effects for fintech.

Fintech startups look askance at UK market: Number26, a Germany-based bank startup, has already announced that it will scale back its plans to focus on the UK market in favor of expanding on the continent and EU-member countries.

“It’s more likely for us now to focus on other markets. The U.K. market is still interesting, but … it’s not clear how regulation will play out or if we are willing to take the additional cost in entering the market,” said Valentin Stalf, founder and CEO of Number26.

Biotech

Similar concerns over regulatory uncertainty are hitting biotech, as after Brexit drugs would perhaps be regulated differently in the UK and in EU countries.

 “This does throw up some issues,” said Steven Bates, CEO of the U.K. biotech trade group the BIA.

  • Eric Pol

    http://www.eif.org/what_we_do/news/2016/eif_on_uk_referendum.htm
    Reading between lines, consequences for VC scene and start-ups in the UK following brexit seem sadly obvious as far as the European Investment Fund is concerned.

  • http://neoschronos.com Neos Chronos

    Kudos to the author(s), your article is most likely the first serious analysis on the topic we have seen.

  • ChannelSixtyNine69

    It would be fantasy on England’s part if they think it will be “Business As Usual”. European capital will drain out as the English economy will be seen to be too isolated and risky. Particularly if England has difficulty in establishing trade agreements. It is difficult to find a more ridiculous decision in modern times, by a nation’s electorate than this one. If you are a professional in Britain, leaving whilst you can and becoming a citizen of another European country is the only sensible option.

  • maxbaxter

    It would make sense to look at Norway and Switzerland and ask… how come none of these apocalyptic events are not taking place in these countries.

  • maxbaxter

    How is it serious when it does not consider some obvious benefits or leaving EU? I am not saying there are no negatives, but the question which ones are stronger?

  • maxbaxter

    Brexit by no means mean lack of economic integration with continental Europe. Europe needs economic ties with UK just as UK needs Europe. Plus UK is now free to join US and Canada in a trade pact… fast.

  • http://neoschronos.com Neos Chronos

    Every extensive analysis with detailed facts is serious. We would be very much interested in the obvious benefits you mention i.e. how you believe Brexit positively impacts Europe’s VC Ecosystem. Please do share.

  • maxbaxter

    You may want to read up on the regulatory burden of the EU directives.
    Or inability of the block to develop a trade pact with US.
    Or sheer cost of the participation that results in extra taxation and slows down economic growth.
    The point is not really that you were wrong you were just half right… But from the bubble you live in its hard to see.

  • maxbaxter

    All conjectures.

  • http://neoschronos.com Neos Chronos

    Between 2011 and 2015, the European Investement Fund committed 2.3 billion euros ($2.5 billion) to some 144 U.K.-based venture firms. That amounts to about 37 percent of all venture funding raised in the U.K. during those years,
    according to data from Invest Europe, the trade association for European VC firms.

    You claimed to know of obvious benefits of Brexit to Europe’s VC Ecosystem. Unfortunately, you delivered generic statements, with no qualification and quantification. This is a serious topic that will affect generations. You need to provide evidence.

    1. Which EU directives put a burden on Europes’ VC Ecosystem? How? Please share references, with quantifiable details on the impact.

    2. How has the lack of a trade pact affected Europe’s VC ecosystem. Please share testimonials, studies, numbers.

    3. Which extra taxation are you referring to? Which laws have been passed in the UK – because of the EU – that impact European VC firms and slowed down their economic growth?

  • maxbaxter

    What makes you think that FDI in UK will stop? Because you want them to?
    Do companies invest in Switzerland and Norway?
    Are you saying that free trade with US and Canada (and perhaps Mexico) will not increase FDI in UK?
    Are you saying that EU regulations have no impact investment decisions?
    Did you ever live or do business in Europe?

  • http://neoschronos.com Neos Chronos

    You claimed to know of obvious benefits of Brexit to Europe’s VC Ecosystem: that got us interested. After being asked twice you have delivered generic statements but no substance. You proved in a remarkable way that this article is most likely the first serious analysis on the topic we have seen. Have a nice day.

  • maxbaxter

    Did you just come to realize they you have no answer to my questions and decided to throw a fit?

  • http://000fff.org/ Thomas Petersen

    EU represents only 16% of all trade and this number is declining. The EU has no financial center beside the UK and thats not going to change.

    EU is killing not fostering startups. If anything startups thrive where there is complexity because it means there are problems to solve.

    The EU is politically trying to solve a lot of problems but they have nothing but technocratic reasons to do so. I.e. they aren’t actually very good at allocating resources to the right problems because they have no feedback mechanism allowing for a better insight into what are the EU citizens problems.

    If anything the EU should stop trying to solve politically what can be solved through technology and via startups.

    The UK’s fintech sector is going to be intact and most probably boosted because it’s not EU that makes UK’s fintec successful it’s the world.

    Technology does and can make up for any legislative complexity and it’s going to foster a whole new slew of startups.

    So the UK is going to benefit greatly for this and can now make trade deals that benefit the UK while continuing to do fintec without any problems what so ever.

  • Nour

    There are nos such things as Europe’s Financial hub in Norway or Switzerland. The conséquences and effects of an Euroexit are thus significantly different.

  • maxbaxter

    This is almost amusing.
    What do you know about Switzerland?