Risk & Economy » Brexit » What are start-up companies doing to prepare for Brexit?

What are start-up companies doing to prepare for Brexit?

Start-ups are having to wait and react rather than take the lead, says Dr Robert A. Phillips,  a senior lecturer in entrepreneurship at Alliance Manchester Business School, University of Manchester.

The ongoing uncertainty around Brexit – whether it is happening or not, what kind of Brexit it will be, and the size of its impact – is causing worry amongst UK based companies. This concern is particularly felt amongst start-ups who are busy enough simply surviving without having to think about the many scenarios which could adversely affect their businesses.

According to the most recent Global Entrepreneurship Monitor (GEM) figures, total early stage entrepreneurial activity in the UK is higher (at 9% of the population) than our main European rivals such as Germany, France and Spain (approximately 6% each) and Italy (4%). Around a quarter of these UK start-ups are considered to have a high degree of internationalisation (defined as more than 25% of sales to international customers). For these businesses, a painful Brexit could be very damaging indeed.

It is generally accepted that the biggest issues for UK based companies as a result of Brexit will be trade (obtaining supplies and selling products) to and from the EU. Rules and regulations could become more complex, the availability of funding more difficult to source, and data sharing between UK and EU countries will decrease.

The hiring of staff – at both ends of the salary spectrum – is also a concern, particularly for highly skilled staff such as scientists and IT specialists and also unskilled labour such as farm workers.

A weak sterling during Brexit which will be costly for importers, foreign workers in UK (making jobs here unattractive), and British tourists travelling abroad. However, a weak pound could be good for exporters, tourists to the UK and investors buying into UK businesses.

Large established organisations that have more ability to pay for specialist business advice and have the experience in how their business and their markets operate, have more flexibility in how they can prepare for an uncertain future. Larger companies can also stockpile raw materials in case of a pause in supply while new regulations are understood and complied with.

Some increasing of cash reserves can be done to lessen the chance of any cash flow problems during the first uncertain weeks of Brexit and allow refocusing of business in non-EU countries if necessary.

Impact of relocating

To get around potential issues of trade regulations and data sharing, some companies can also try to service EU countries from bases within the EU. For example, big banks that operate internationally have set up headquarters in the EU to allow seamless trading regardless of Brexit. This could have knock on effect for start-ups. A prime example is the burgeoning Fintech start-up scene in the UK.

Some companies have even increased their prices in anticipation of currency fluctuations causing increased costs – for example, there are some suggestions that food could increase in cost by 20% post Brexit.

Unfortunately for start-ups, they are often not able to plan ahead like this.

Without the time and money to perform detailed projections, stockpiling raw materials and products (3 months inventory is what many companies are planning for) can be hard if you work to a “just in time” way of operating or have unpredictable demand. And in any case for a start-up, cash flow might not permit this tying up of start-up capital in raw materials.

Uncertainty is likely to impact on new start-up businesses more. Potential customers during uncertain times are likely to stick to what they know and not take a risk on a new product or service – especially a disruptive technology which will change the way they operate.

The knock-on effect of low consumer spending for start-ups would mean they have less cash for organic growth and indirectly less money that venture capitalists and banks potentially might have available to provide investment. This could be important if companies are looking to refocus their business in the US or elsewhere to make up for loss of business in the EU.

In addition, companies that start-ups rely on such as courier companies, IT services and cleaners may have additional costs such as recruitment costs, which could be passed on in higher prices.

However, the GEM UK report in 2017 (after 23rd June 2016 EU referendum) showed little difference in people’s attitude to start-ups, or confidence in themselves and likely opportunities to start a business.

One of the reasons for this is that it is generally thought the UK is a good place for start-ups due to less red tape. A European Commission Report in 2017 found that, apart from Slovakia (which was free), the UK was the cheapest and quickest country to start a business in the EU.

Funding issues

It’s also believed that the UK is a hub for start-ups because of the availability of funding with well-developed venture capital markets, the biggest angel investment networks in Europe and high skill base in the workforce. The motivations for UK founders tend to be for reasons of innovation and improvement rather than reasons of necessity that you might get elsewhere in the world (such as Angola which has an entrepreneurial activity rate of 41% according to the last World GEM report, mainly due to economic necessity for the founders) meaning many people are choosing to start a business despite the opportunity for regular employment.

Start-ups founders seem to agree that Brexit has not been handled well by all parties involved. The UK government, however, is likely to treat start-ups as a priority.

A large percentage of future economic growth is expected to be from innovative start-ups, which means there is a big incentive for the government to put in place funding and other measures to provide an environment for start-ups to thrive. Initiatives such as the Enterprise Investment Scheme and Seed Enterprise Investment Scheme will continue and already the Tier 1 Entrepreneur Visa (recently renamed start-up visa) schemes to allow those from outside the EU to start a business here has been revamped to encourage more high risk but high growth businesses.

It would be expected that money freed up from EU budget contributions would be diverted to fill the funding gap. Also, alternative finance such as crowdfunding (the UK is the third highest in the world in terms of value and number of transactions according to Statista), which has recently overtaken equity investments as the biggest source of start-up capital in the UK, is expected to continue at pace which would be accessible for start-ups.

Whilst the 25-34-year-old age group, which have the highest percentage of start-ups, were anti-Brexit, some have said there could be a big opportunity to look at large economies outside of Europe for business.

In any kind of recession, weaker star-ups will be pruned out, but start-ups have more help and support in the UK than ever before. Activities such as the growth in accelerators (data suggests between 160-180 currently active in the UK) are boosting survival rates considerably, with Beauhurst suggesting that those start-ups who have been through an accelerator programme will raise 44% more funding from investors on average than those who have not.

Free movement may make finding the best skilled workers from around the world more difficult if they are from the EU. But treating EU citizens like those from the rest of the world for hiring purposes will open up more opportunities for skilled graduates from populous nations such as China, India, Canada and the US to work in the UK.

Obviously, there are quite a lot of unknowns – to what extent will British people show a patriotic side by buying more from UK companies, and how much lost EU trade could be switched to markets like China by enterprising start-ups? But at the moment, frustratingly, entrepreneurial start-up companies are having to do what they are not used to – waiting and reacting rather than taking the lead with action.



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