If Britain votes to leave the European Union, many in the nation’s technology industry fear it could have a ruinous impact. General opinion polls may be split, but the tech sector overwhelmingly opposes a “Brexit.”
In one poll, a staggering 87% of respondents opposed Britain leaving the European Union.
The industry’s fears are numerous., according to a range of CEOs and lawyers surveyed by Business Insider. It will make it harder to recruit and keep the best talent. It could put international companies off coming to Britain. It may make it more difficult for startups to raise capital.
Perversely, given Brexiteers’ attacks on “EU red tape,” it could make British tech businesses subject to even more regulation.
Even so, despite the tech industry’s protestations, the Leave camp could still win the day. So if Britain votes to leave the European Union, what happens next?
British businesses might be subjected to two regulatory regimes
Let’s start with data, the lifeblood of the tech industry. Every startup relies on it — and the laws that govern its movement — for everything from information on customers and users to confidential employee records. Even if you don’t deal with data on a day-to-day, it definitely affects what you do.
The way data is handled in Britain is tightly bound up in European regulation, with the GDPR (General Data Protection Regulation), a new EU-wide regulatory regime, coming into force in 2018.
Remember: If Britain votes to leave the EU, it won’t happen instantly. It will take years of negotiation before it finally, officially severs ties.
So the big question is whether a post-Brexit Britain will simply choose to adopt a regulatory framework for data that mirrors the GDPR — or creates a radical new scheme of its own.
“Either nothing will change in relation to the data compliance environment in the UK” — or everything will, says Simon Morrissey, the head of data and privacy at Lewis Silkin.
First, the easy option: Adopting a version of the GDPR. This would make things much easier for businesses looking to operate in both Britain and the EU — and as a consumer, it means that nothing meaningful would change.
“The Commission would then issue an adequacy decision to ensure that personal data could be transferred from the EU to the UK,” Sue Foster, a privacy lawyer at Mintz Levin, explains. “Switzerland has essentially conformed its data protection laws to the EU’s, which is why personal data can flow freely between Switzerland and the EU.”
But this option may prove unattractive to Eurosceptics, because Britain would still effectively be following European law, and some of the most visible evidence of Europe’s “meddling” with the internet would remain in place.
For example: The right to be forgotten stipulates that European citizens have the right to have certain irrelevant or outdated information about them removed from the results of search engines like Google. It has been highly controversial, with Europe accused by critics of trying to “censor” the internet.
The right to be forgotten stems from a 2014 ruling by the European Court of Justice, but it is being codified in the GDPR — meaning that if Britain adopts laws that mirror the EU regulation, it will remain in place in the country. Britain will no longer be in Europe, but its citizens’ internet will continue to be “censored,” just as if it had voted to remain.
The alternative is that Britain creates a new legal framework for how businesses can handle data — but this would create new headaches for the tech industry. Having two separate regulatory regimes in Britain and Europe would double the number of hoops that British businesses have to jump through to operate on the Continent (and vice versa), increasing the financial burden on them.
Morrissey predicts that most businesses would naturally choose to conform their operations to the most onerous regulatory regime — and if this is Europe’s GDPR, it would mean British businesses would still be effectively forced to operate in accordance with European law, despite leaving the EU.
The third option is that Britain takes an á la carte approach to the GDPR — picking some bits, and rejecting others. But doing so — like rejecting it altogether — would open the door to Europe deciding that Britain’s data protections aren’t adequate.
If this is the case, it could force companies looking to transfer personal data between Europe and Britain to jump through extra hoops to safeguard it, or even — and this is the nuclear option — demand a halt to data flows altogether.
Could businesses just ignore European law? (No.)
British businesses could choose to simply flout the GDPR and any additional restrictions placed on their handling on Europeans’ data by Europe — but only if they had no desire to ever open offices in the European Union.
“Where a business is located outside the EU and has no physical presence in the EU but is caught by the GDPR (e.g. it is monitoring individuals located in the EU) then such a business is required to appoint a local representative in the country that has the closest connection to such processing,” Morrissey explains.
“Whilst it is not completely clear, a regulator could then take enforcement action against the local representative … However, there is a ‘gap’ in the enforcement regime which is that there is no current understanding of how the EU would enforce against a UK business that did not appoint a local representative!”
For most startups and tech businesses, which typically look to eventually open offices in major markets in which they operate, this just wouldn’t be an option.
In short: Unless Britain voluntarily chose to adopt EU regulation post-Brexit, it could actually increase the amount of regulation that British businesses face.
And facing a separate regulatory regime, EU-based businesses with limited resources may well put off operating in Britain in favour of other European markets — harming British consumers.
Businesses will also face extra problems around intellectual property.
Businesses will face extra hurdles around intellectual property if Britain votes for Brexit — and unlike data protection issues, these cannot be avoided by simply mirroring European legislation.
The rights to trademarks and designs are maintained in single Europe-wide registries, and plans are underway to create a similar registry for patents, the European Unitary Patent. A European hardware startup just needs to register its design as its intellectual property in Luxembourg, and it will be protected across the EU, from Lithuania to London.
If Britain leaves the European Union, this will cease to be the case — creating more hurdles for British businesses to jump through to protect their intellectual property in Europe (and vice versa for European businesses). Even if Britain exactly mirrored the EU’s legislation, there would still be two sets of registries.
Could Britain opt-in to the European Unitary Patent once it comes into force? It’s “very unlikely,” explains Arty Rajendra, the head of the tech and media practice of intellectual property consultancy Rouse.
“The current legislation is worded that in order to take part in this Unitary Patent you have to be an EU member state. What would be needed is a change in that legislation — and obviously the political will of the rest of the European Union to say ‘yeah, please come join our club’ … some politicians have been quoted as saying ‘it’s not going to happen.'”
The businesses hurt most by these additional post-Brexit hurdles will be small startups with limited resources, Rajendra says. “Those rights will have to be reregistered in the UK, which is an initial cost that most big companies will just swallow but smaller companies, it will be a pain for them.”
Entrepreneurs are scared that recruitment will take a hit.
Britain’s tech scene — especially London’s — is pretty multicultural, and startup founders worry that leaving the European Union will make it much harder to hire the best employees.
TransferWise, a buzzy money transfer startup based between London and its founders’ native Estonia, has been a loud voice in the UK tech scene against Brexit. Britain would be “crazy to leave the EU,” CEO Taavet Hinrikus told Business Insider via email.
“The EU means free movement of talent, and in a market where it’s competitive to hire great people this flow of talent within Europe makes recruitment a lot easier. We have 40+ nationalities working together at TransferWise: to grow an international business you need an international team and access to the best talent in the world.”
Ed Cooke, CEO of language-learning app Memrise, is similarly vocal.”We’re very pro-Britain staying in the European Union,” he said. “It’s the first political issue of my lifetime I’ve felt this strongly about, because I would hardly have a team left [if Britain left].”
Memrise has 17 different nationalities working for the company, which is based in East London, Cooke said, “and a lot of diversity within the team so that’s something we proactively look for sometimes.”
Writing for The Telegraph, venture capitalist Haakon Overli even predicts a “brain drain” in the event of a Brexit. “The prospect of a new ‘brain drain’ is a very real one in the event of Brexit,” he argues. “Nor can we expect to continue to attract talented people from overseas to our shores — they are likely to find other locations much more attractive, with the US being a huge draw.”
Brexiteers counter that leaving the European Union would free Britain up to admit the best overseas talent. Many, like Tory MP Michael Gove, advocate an Australian-style “points” system. But withdrawing from Europe’s area of free movement would undeniably throw up hurdles to Europeans who might be looking to join or establish startups in London.
And Britain has a pretty desultory record when it comes to issuing tech sector visas: Between 2014 and 2015, government organisation Tech City UK was tasked with issuing 200 visas to tech workers looking to move to the UK — but it only managed seven.
It may also damage the venture capital industry in Britain.
Today’s startups are largely reliant on venture capital in their early stages — periodically selling off equity to professional venture capital firms in return for investment that can turbo-charge their growth. There are concerns that leaving the European Union could also harm this line of credit for the tech sector.
“The European Investment Fund [a Luxembourg agency that provides financing to small and medium businesses] is the largest investor by a mile in UK venture capital firms,” private equity firm Better Capital founder Jon Moulton told The Financial Times. “It would probably stop investing in the UK.”
“In the event of a ‘leave’ vote, we could find ourselves with a considerably less rich and diverse startup ecosystem, where we no longer attract the best entrepreneurs to start up, and from the investor perspective, with reduced dealflow,” wrote early stage investor Nic Brisbourne in an op-ed for Tech.eu. He asks rhetorically: “And equally, would Brexit also make it harder for UK investors to invest across Europe, thus limiting the flow of UK capital into EU startups?”
Haakon Overli, founder of VC fund Dawn, attacked the “uncertainty” that Brexit would bring in an article in The Telegraph. This will spook investors, he argues, making them less likely to invest in Britain — on top of the problems that being in an isolated market would cause British startups. Here’s the relevant section (emphasis ours):
The reality is that it may be a decade or more before venture capitalists considering investing in the UK have any clarity over what environment they will be operating within. That would spell disaster for UK businesses looking for risk capital for two main reasons.
Firstly, very few start-ups can become large enough in the UK alone. In fact, many entrepreneurs — a large proportion from abroad — base their companies in the UK for the excellent and longstanding trade and cultural links with mainland Europe, the US and Asia.
Also, US start-ups with European pretensions overwhelmingly choose the UK as their first port of call. Suddenly being at the “back of the queue”, with uncertainty about the future trading environment will kill this enormous advantage in one stroke.
The tech sector is almost unanimous in its opposition to Brexit.
The British tech sector is pretty uniformly against Britain leaving the European Union.
In the study of 3,000 senior members of the UK tech scene, 87% opposed Brexit, with just 3% actively supporting it.
Not a single major one of the major players in the country is openly pro-Brexit. The Guardian asked the UK’s 14 current “unicorns” — pre-IPO startups worth $1 billion or more — for their stance on the issue, and five were against Britain leaving, and the others neutral or declining to comment.
“We’re a global business that operates across four European markets, so a successful, well-functioning Europe is crucial to a business like ours and we believe this is best achieved by remaining part of the EU,” lending company Funding Circle said.
Property site Zoopla told The Guardian: “Whilst the EU is by no means a perfect union, we believe that Great Britain is better in than out. We have benefited from access to both capital and talent as part of the EU and leaving would create both economic and political uncertainty, which could have a material impact on our currency, borrowing rates, house prices and wider consumer prices.”
In short: People in the tech industry fear that it will increase the regulatory burden facing British startups looking to do businesses in Europe, make it harder to hire and retain talent, and make Britain look less attractive to foreign businesses (from Europe and elsewhere) looking to expand.
“Those of us who want to Leave believe Britain’s best days lie ahead,” Michael Gove MP says, “that our country has tremendous untapped potential which independence would unleash and our institutions, values and people would make an even more positive difference to the world if we’re unshackled from the past.”
Whatever the truth of the matter, if Britain votes to leave the European Union on June 23, its tech sector won’t be celebrating.