Brexit Wounds : Can London's Start-Ups Survive Article 50 Unscathed?
- Tom Buxton
- Feb 2, 2017
- 5 min read
It was the end of a gruelling nine months of fundraising. Against all the odds, entrepreneur Alexander Eid had somehow succeeded in raising the capital needed to turn his idea for a new London property start-up into a reality.
Now the road seemed clear for Eid to develop his business into the “on-demand renter’s service” he had envisioned. The aim was for his staff to provide personal advice to London renters via emails and phone-calls, before taking them on tours of their desired properties.
But timing is everything and as fate would have it, the launch of Homie UK last June coincided with the UK’s vote to leave the European Union. The decision had experts predicting future economic uncertainty for Britain, and the pound quickly nosedived to its lowest value in over 160 years.
Walking through the chandelier-lit reception of Kensington’s Vicarage House and into Homie UK’s offices, it would be easy to assume these tumultuous events barely affected them. Each wall proudly displays the Homie UK logo, each whiteboard teems with marketing ideas, and at each computer sits one of Eid’s intrepid team of ‘Homies’, developing software to analyse market research or calling clients to arrange tours of available properties.
But speaking exclusively to London Unlocked, Eid reveals that he anticipated choppy waters ahead from the moment the result was announced. He says the referendum ushered in a dramatic change in the climate for – and potential future of – London property start-ups.
“There’s been a 60 per cent reduction in property sales over the past year, and that’s a substantial amount,” he says pensively, looking down at his cluttered wooden desk.
“I’d like to think that the rental industry is recession-proof, but you’re going to have fewer people thinking about staying in the UK and a lot of people thinking about leaving the UK.”
“There’s also the Chancellor’s recent ban on letting fees, which will affect us as the lettings industry goes downhill because we subsidise our service by agreeing income from agents.”
But the struggle of London’s fledgling start-ups, like Homie UK, has been echoed across the country since Brexit was announced.
The Office for National Statistics (ONS) and Company House’s data reveals that although the number of businesses registered in the third quarter of 2016 rose by nearly 5 per cent compared to the third quarter of 2015, the number of businesses dissolved during that timeframe also increased by over 3,000 from 99,126 to 102,681.
Alexander Eid first thought up Homie UK in 2015, a year in which over 200,000 new businesses were formed in London. But had the idea come to him after the EU referendum result, he ruefully admits that he “would definitely have thought twice” about pursuing it.
He wouldn’t have been alone, either. Corporate luxuries entrepreneur Tash Khan founded ecommerce start-up Ecomnova in 2012. The business sells flowers, wines and other goods after obtaining prices for these products from their international growers.
Since its launch, Ecomnova has developed its own in-house brands like Appleyard London and Blossoming Gifts, and last year they sold more than 10 million flowers.
But Khan says the EU referendum’s aftermath has had a “big impact” on his London-based start-up and on the wider flower industry, to the point where he thinks that starting such a business post-Brexit would be “very tough”.
“Most of our flowers come from nations that use euros or US dollars. The pound has gone through change and product cost prices have gone up practically overnight since Theresa May discussed a ‘hard Brexit’.
“I think in the current climate it would be very difficult to start up now. If you’re buying products or materials from overseas, it’s going to be a lot tougher and more expensive. The consumer doesn’t want to pay any more either, and it’s different for businesses like us with a large turn-over than it is for those just starting out.”
So concerning have developments like these been for some entrepreneurs, the prospect of relocating their business from London to other major European cities is more attractive.
The most prominently reported cases have come from the fintech sector. These businesses develop existing tools offered by banks – like apps and websites – further in order to offer an improved service to customers.
At last July’s London Fintech Week, Berlin senator Cornelia Yzer claimed that over 100 such start-ups had approached her about moving to Germany’s capital city since the UK voted to leave the EU.
Meanwhile by November last year the Financial Times reported that investors had pulled funding from 30 UK-based fintech companies, prompting others to consider moving abroad.
One such business that made the bold leap to Berlin was MBJ, a web development company formerly based in Kensington that now operates primarily from the German capital’s skyscraper-laden technological metropolis, Potsdamer Platz.
MBJ’s CEO and co-founder Julian Baladurage says that this expansion beyond London had admittedly been in the works long before the EU referendum result was confirmed.
“We announced our expansion to Berlin last March and offered it to the whole team, mainly because my business partner and I both live in Germany, and there’s a pretty high demand for our product in nearby regions like Austria and Switzerland.”
But it’s impossible to miss the regret in Baladurage’s voice as he describes his reaction to the “quite shocking” Brexit news last June, not to mention the “big implications” it came to have for his business’ international game-plan.
“We initially were looking at February or March 2017 for the move and hiring more staff in London in the meantime. But just three or four days after the vote, we saw that some of our investors for our London crowdfunding campaign were already getting scared off by the news and wondering how we would cope outside the European Union.”
This prompted MBJ to “move the plan forward”. By July eight staff members had moved to Berlin, and the focus shifted to expanding the team there further, rather than in London as originally planned.
“We’ve still got people working on sales and design in London,” Baladurage stresses, “But Berlin is pretty attractive with the massive support and subsidies they give start-ups looking to hire innovative talent.”
But Douglas Williams, president of the Centre for Economics and Business Research, says we shouldn’t assume the Brexit vote was the sole cause of London businesses relocating outside of the UK.
“Trying to attribute a business decision to a single reason is a dangerous thing to do. I think it’s cost-driven more than anything else – Brexit will be an element of the decision but costs of living and business maintenance in London are a big factor.”
He then gives a surprising chuckle, before putting a remarkably light-hearted spin on the situation: “If the economy continues to be weakened by Brexit then if anything, that might help some start-ups as the cost of living in London would be cheaper.”
But with start-ups like Homie UK, Ecomnova and MBJ still feeling the brunt of the referendum’s aftershock, do Londoners looking to launch their own business now face a bigger challenge than before?
Not necessarily. Based on his work at LSE’s Centre for Economic Policy, Richard Davies believes the true struggle lies not so much in starting a business today as it does for those looking to grow their enterprise.
He says: “A lot of businesses don’t start off by exporting products. They start off on a very local basis as a microbusiness of around 10 people, so I don’t think it’s going to be harder to start a business in London.
“What will be different is the number of businesses able to expand to a medium size of 200 or more staff by exporting. That’s a bad thing for the British economy given how few medium-sized businesses we have in the UK right now.”
But Homie UK’s Alexander Eid still has plenty of hope for London’s budding companies like his beyond the triggering of Article 50 this month. Not only does he suggest ways in which Brexit could eventually strengthen start-up businesses (see box-out), he also thinks that London as a city will keep providing for its entrepreneurs.
“If you compare us to everywhere else, few places offer the same schemes that we as a city do or are as forward-thinking in terms of stimulating the economy from the ground up for small and medium-type businesses,” he says.
The capital’s Enterprise Investment Scheme, for example, gives investors tax breaks of 60 – 70 per cent in case the start-up fails. “Schemes like those are still huge incentives for people to put their money into start-ups,” he says, “And outside the UK, few places can compete with them.”
Claims like these might reassure Londoners planning to embark on their own entrepreneurial journeys this year, but with Brexit on the horizon, the challenge is only just beginning.
Sidebar 1:
Despite his fears about the future, Homie UK’s Alexander Eid thinks that Britain’s EU departure could still have benefits for London start-ups, particularly in his sector. “On the rental side,” he says, “The industry sentiment is that because of Brexit, you have more stock on the market because less people are buying property. I think it will be better for London businesses like ours, because finding rented properties will become more important.” Investment management business CentreSquare recently claimed that the value of London’s commercial real estate had dropped by 15 per cent since last June’s vote, so perhaps Eid’s prediction will be proved right.
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