Brexit dents UK’s technology dreams

Britain has one third of Europe’s start-up employees and has attracted billions of euros in investment in the past five years. But a falling sterling and labour restrictions threaten its technology aspirations.

Brent Hoberman, the co-founder and former chief executive of Lastminute.com, is among leading UK-based technology entrepreneurs and investors who have called upon the UK government to ensure the movemShow more

LONDON // British technology investors and companies are alarmed that the UK’s dominance of the European tech scene is threatened by the country’s vote to leave the European Union.

Last week, in-depth research into European tech talent by leading investor Balderton Capital revealed that London remains the favoured city for skilled tech workers looking for jobs outside the country of their birth.

But nine leading UK-based technology entrepreneurs and investors, including Skype co-founder Niklas Zennstrom and Lastminute.com’s Brent Hoberman, put their names to an open letter urging the UK government to act to ensure a continued flow of skilled migrants after Britain leaves the EU.

Andres Castano is typical of the highly skilled techies and entrepreneurs who work in London’s thriving tech sector.

He was born in Colombia where he built a technology company in his 20s. Before he was 25, he had sold it and decided to come to London to work and study.

“I saw the huge potential for starting another business here,” he said. “I like the culture here and the fact that people come here from everywhere. I call it my home now.”

But Mr Castano’s drive to start a business put him in a tricky position. Without the sponsorship of an employer, he and his Colombian wife, who he met in London, would have to leave.

Fortunately, he has been able to secure a tech visa for exceptional talent but the UK’s decision to leave the EU raises many worrying questions about the country’s ability to fill its tech vacancies with overseas workers.

The UK’s success in tech is not in doubt. About a third (31 per cent to be precise) of employees in European start-ups work in the UK, with Paris employing 19 per cent of all start-up workers and Berlin 18 per cent, according to Balderton Capital’s extensive research.

Niklas Zennstrom, chief executive officer and founding partner of Atomico UK Partners. Patrick T Fallon / Bloomberg

The sector has attracted €8.9 billion (Dh34.6bn) of investment in the past five years, far ahead of Germany and France.

In recent years, the UK has produced about half of Europe’s so-called unicorns – companies with US$1bn in sales.

When Saudi Arabia’s sovereign wealth fund and Japan’s Softbank launched a £100bn (Dh461.89bn) fund to invest in tech over the next five years, they chose to base their offices in London.

But Britain’s ranking in Europe’s tech sector could be threatened by new restrictions on hiring EU staff. Berlin, Paris, Dublin, Amsterdam and Stockholm are all seeking to lure tech workers away in a bid to knock the UK off the no 1 spot.

Part of the problem is that the tech workforce is highly mobile. In the UK, in particular, more than a fifth of all tech workers are thought to be born overseas. According to Balderton's report, The European Talent Landscape, 42 per cent of new tech start-ups in the UK last year had at least one foreign founder. In the US, just 22 per cent of founders come from other countries.

The Balderton Capital partner James Wise is concerned that the UK’s attraction could quickly fade, as Brexit becomes a reality.

“London in particular has benefited significantly from migration, with over 40 per cent of the tech companies founded last year having at least one non-native founder. But the relative weakness of the pound since the referendum vote, together with developer’s willingness to be mobile could reduce the relative advantage the capital enjoys without proper policy support post-Brexit,” Mr Wise says.

Employers right across Europe say that finding skilled staff is getting tougher and that it can take up to five months to hire the software engineers they need to turn start-up businesses into growing tech companies that could potentially challenge the best firms in Europe and the US.

Balderton’s research reveals that there are about as many software engineers employed in London, Paris and Berlin as there are in Silicon Valley (515,000 versus 564,000).

High concentrations of developers can also be found in Dublin, Amsterdam and Stockholm.

However, developers are particularly mobile, with about a third in the UK changing their jobs regularly, compared with a quarter in Germany.

Wide pay disparities for tech jobs also exist across Europe, encouraging the most successful workers to gravitate towards the highest paying countries. The UK pays some of the highest average salaries in Europe, with software engineers earning on average $100,000 a year compared to German software engineers who get on average $82,000.

Switzerland is the best paid country for workers in start-ups, with average salaries of $90,524.

Gerard Grech, the chief executive of Tech City UK, the body that aims to accelerate the tech industry, says: “Britain’s digital industries are expanding at an extraordinary pace, creating jobs and contributing some £161bn in turnover to the economy.

“If tech communities were no longer able to recruit workers from the 27 EU countries, or from other states, many businesses would see their growth slow down. Government measures in recent years to encourage founders and entrepreneurs to invest in the UK would be wasted.

“This is particularly important outside London, where the digital sector can provide much needed economic growth in areas with declining opportunities for young people.”

One issue that has already occurred has been a shift in salary advantages as a result of the pound’s decline in value since the Brexit vote in June. For example, the average engineering salary in the UK used to stand at $70,500, whereas it’s now more likely to be $58,168, slightly less than the equivalent in Germany of $58,176.

The visa system that helped Mr Castano will also have to change, Mr Wise says: “The Tier 2 visa system is going to have to change, but it’s going to have to change at some scale. We conservatively estimate there’s about 41,000 hires made of non-natives into the UK start-up ecosystem each year, and right now there’s 20,000 Tier 2 visas for every industry.”

Balderton’s research also reveals that the nature of tech entrepreneurs is changing, with almost half having previously worked in a start-up or a tech company.

This explains why governments are so keen to attract big tech companies such as Google, Facebook and Microsoft to their shores, as they effectively provide the training and inspiration for the next generation of start-up founders and employees.

Increasingly people join start-ups from big tech companies or consultancies, rather than business school or investment banks. The leading companies across Europe from which people joined start-ups were IBM, Nokia, Microsoft, Accenture and Google.

Start-ups also learn from big tech about how to approach recruitment.

Graham Cooke, the chief executive of Qubit, whose clients include Emirates and Top Shop, says he learnt a lot from Google’s hiring process.

“Google did hiring really well, so we learnt a lot about how to hire effectively and how to create a good process. That has led us to have a pretty good success rate. Cultural fit is a major part of our hiring process.”

Hiring also changes as the company grows and raises more funds. Mr Cooke says: “At the early phase, you need to find people who are very flexible, and open to taking risks. People who can deal with the fact that you are going to change direction. If you hire a specialist too early, you will find these people may not see how to do that, and they might challenge the founders’ vision. This can be quite tough, and I’ve seen companies fail because they have brought in specialists too early.”

The problem of freedom of movement after Brexit affects many industries. But Balderton’s research suggest that it will not take more for London to lose its current appeal to many potential skilled workers.

And if the talent stops flowing to the UK, it will not be long before the money for future investments slows down as well.

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