- It’s become harder for tech startup investors to raise money for their funds in the wake of Brexit.
- That’s partly because of the two years of economic uncertainty that followed the vote.
- Two British startup investors, Ali Mitchell and Ben Tompkins, told Business Insider how Brexit stymied their plans to launch a European fund.
- They say the UK’s burgeoning tech industry will adapt, but will be poorer for the uncertainty and dropoff in international talent.
It’s been more than two years since the UK voted to leave the European Union in June 2016.
The outcome horrified a large proportion of the UK’s community of entrepreneurs, investors, and executives, many of whom have thrived thanks to strong links with Europe.
For investors, one of the most serious post-Brexit threats was the potential loss of a major backer, the European Investment Fund (EIF).
A chunk of the money that is invested into startups via venture capital comes from government institutions, as well as entities such as insurance firms and pension funds. In Europe, a large slug of venture funding – around 10% – comes from the EIF, which is ultimately controlled by the European Investment Bank.
The EIF is what is known as a “cornerstone” investor, meaning it will commit to providing a substantial chunk of a new fund. During the long and arduous process of raising a new fund, the EIF’s involvement can act as a catalyst to persuade smaller investors to buy in.
Fund managers’ worst fears came to pass when they discovered the EIF had quietly hit pause on investing in British funds after the 2016 vote.
The Treasury responded to the threat, promising an additional £400 million to the EIF’s UK equivalent, the British Business Bank. It took a year to happen, but theoretically, it would mean funds struggling to raise cash would be able to “close”, or complete. Except for one new fund.
Singular Ventures was a new UK-headquartered fund aiming to take European startups to the US
In late 2015, Alastair Mitchell was letting go of the reins at his enterprise software startup Huddle. A British entrepreneur who had moved to San Francisco to take Huddle international, Mitchell decided to hand the CEO role to a veteran executive, and was thinking about his options.
He felt he had another startup in him, but also felt he could offer advice to European startups trying to expand into the US, just as Huddle had.
“Could I combine the two and start my own fund? That’s how Singular Ventures was born,” Mitchell told Business Insider in an interview.
Enter Ben Tompkins, a venture capitalist at Eden Ventures who had invested in Huddle’s seed round. “I was Ali’s first investor,” Tompkins said. “He had great experience of being an entrepreneur and CEO, and had gone to the US.
“I had experience of being a banker and an investor. We came together and said let’s combine forces… [let’s] try and raise a fund to focus on early-stage European software companies. I would be in London, and Ali would be in San Francisco.”
Michael Stephanblome, an investor at Eight Roads, is also listed as a one-time partner in the fund in British financial filings.
Tompkins characterised Singular Ventures as being the third fund for Eden Ventures but with some young blood on board. To that end, the fund was rebranded and the trio approached many of Eden’s backers, and the European Investment Fund.
“We knew founders wanted it, we knew the market needed it, and we knew Europe as an overall market was starting to produce some amazing startups,” Mitchell said. “All was looking good pre-Brexit.”
Unfortunately, they were pitching the EIF just as the organisation hit pause on UK funds. There was a double killer in that, at the time, no one actually understood what was happening in the immediate aftermath of the referendum. The EIF appeared to be giving mixed messages to investors, fund managers told Business Insider at the time.
It wasn’t just technology either. Energy, manufacturing, and car companies all warned that uncertainty was bad for investment and business.
According to Mitchell, the EIF wasn’t the only investor with doubts. “None of the funds were sure – it could have been the EIF, or local funds, or commercial and pension funds. No one was sure,” he said.
Tompkins added: “You had some investors interested in a UK-only structure, some in a European structure, but frankly we couldn’t pull it off where we could find investors [interested] in a pan-European fund based out of London.”
The uncertainty, the pair said, meant they couldn’t continue to raise funds.
“We were determined to ride it out and believed in our thesis,” said Mitchell. “But no one [was] in a position to do anything for 18 months. That was tragic. And although it will come good, two years is a long time in startup land.”
Several funds struggled to finalise their funds after Brexit
Neither Tompkins or Mitchell were willing to criticise the EIF, saying that as a mostly state-funded organisation it was natural to be cautious. “They were in a difficult place of trying to please all people all the time,” Mitchell said. “I would characterise [post-Brexit funding] as a political football.”
Business Insider has contacted the EIF for comment. At the time, the organisation claimed it wasn’t pulling out of the UK but that it did need to carry out more due diligence on British investments.
Singular wasn’t the only venture capital outfit affected, although it appears to be the only one actually driven out of business. Sources told Business Insider last year that early-stage firms Dawn Capital, Episode 1, Seedcamp, Hoxton Ventures, and Crane Ventures were all impacted by the EIF’s decision to pause. Dawn, Episode 1, and Seedcamp did eventually successfully close their funds.
Mitchell calculated that it has taken about 18 months for the UK to get its act together, in terms of filling the EIF gap. The British Business Bank is starting to invest in some venture capital funds but, Tompkins said, it’s not yet “up to full speed.”
Brexit will have a long-term impact on talent
Both Mitchell and Tompkins remain in venture capital and are optimistic.
Mitchell joined EQT Ventures, a pan-European fund mostly staffed up by former entrepreneurs. Like Mitchell’s original vision, EQT helps European firms launch in the US, and vice versa. “It is everything that I as a founder believe has been missing in the investor and startup community,” he said.
But, like many others in the industry, Mitchell remains hugely disappointed by the outcome of the vote and believes it will dim some of London’s shine as a startup and talent hub.
“All constituents in the business community are… saying ‘This is crazy, we have to move back to a previous situation where talent and money can move freely,'” he said. “It’s to no one’s benefit to move to an insular, closed market.”
Tompkins, meanwhile, joined another venture capital firm, Draper Esprit, as a partner. Ultimately, Tomkins thinks the EIF’s reduced influence over British venture capital might encourage new models for venture capital. Draper Esprit, for example, raised money by going public in 2016, and reported a profit after tax of £65.3 million in the year to 31 March.
“[Draper] had had the uncertainty as well, but they found a way forward which was to take the company public and use that as a way to make money,” Tompkins said. “Two years ago, people would have said that’s a brave thing to do.”
Ultimately, Tomkins said he has no regrets. “Life’s too short to cry over Brexit.”
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