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VCs respond to Brexit, talking advice, appetite and talent

The referendum decision for the UK to leave the EU has sent shockwaves through Silicon Roundabout. Whilst the message from UK investors is one of pragmatic optimism – “Don’t Panic, but…” – the UK startup ecosystem faces an uncertain future. Questions are being asked, risks assessed and due diligence toughening up.

Friday 1st July saw a concerned cross-section of the London startup scene gather at Wayra UK, an accelerator funded by Spanish multi-national Telefónica. Panels of entrepreneurs insisted that their innate resilience and canny resourcefulness would see them through the challenges that lie ahead, but it was when the investors took to the stage to give their assessments that the room really tuned in.

Four questions dominated discussions: what advice were they giving to their existing portfolio, what challenges did they foresee for early stage companies looking to raise in the near future, how will investor appetite be affected as a whole and what are the implications for attracting and retaining talent to UK based companies?

“With challenge comes opportunity.”

Lavinia Puglisi (Mustard Seed) stressed the importance of maintaining cash reserves and revisiting relationships with distributors and suppliers. “There’s a lot of uncertainty in the market and it’s crucial to safeguard your relationships and to establish agreements. It may also be worth thinking about switching to local suppliers if your existing partnerships are European.”

Elena Mustatea (Atomico) echoed the importance of staying liquid, and encouraged companies to think about raising funding earlier than perhaps they’d anticipated. “Cash preservation is very important, as is fundraising. If a company is saying that they can wait another year of runway before raising, we would suggest that they consider fundraising earlier to maintain cash coffers of at least 18-24 months. There is also likely to be more debt funding if companies want to build stronger coffers of capital on top of equity.”

Elena also underscored the importance of an international sales strategy that takes currency fluctuations into account. “Try as far as possible to get US denominated sales. Expanding into Asia and the United States, rather than into Europe or elsewhere in the UK where the currency will continue to fluctuate, is a good strategy.”

So what of investor appetite? Are we likely to see less foreign investment into UK startups, or more?

Itxaso del Palacio (Lepe Partners) noted the double-edged sword of a weakened pound. “International investments coming to the UK are definitely going to slow down. On the other hand, there is a lot of talk amongst large tech companies in the US, who are looking to acquire smaller companies internationally, about coming to the UK to negotiate better prices for acquisitions. This is welcome news to many businesses who are looking to exit, and despite the lower prices this activity will certainly bring liquidity to the market and confidence for other investors.”

Elena Mustatea noted the advantage held by US denominated funds, and suggested that the weakened pound and existing UK exposure of such funds wouldn’t indicate much change in investor appetite in the near future. “In the short term European based US denominated funds have a good vantage point from which to invest in the UK, and will have to deploy money in the next couple of years. Considering that 40-45% of Europe’s deal activity for startups is based in the UK, I think that we’ll continue to see strong investment.”

As for talent, Wayra UK Director Gary Stewart expressed concern that Brexit would put off European talent from coming to the UK whilst their medium-term residence status remains uncertain. Whilst the sentiment wasn’t shared by Itxaso del Palacio, who felt that the UK still offered a compelling proposition for the European talent pool, Elena Mustatea considered how the true impact on access to talent wouldn’t be known until the UK government decides on their migrant policy and entry criteria.

“I think there are two scenarios here, depending on the way the regulation goes. The hope is that the UK and European countries will strike deals that allow for continued mobility of people, including pragmatic integration policies for skilled people. Our job in the tech community is to push for the creation of some sort of standard to define a skilled startup person, as opposed to another field. If, however, the UK opts to initiate a points based system, talent will be required comply with regulations like having a Masters degree from a top 50 university, as well as other criteria. This second scenario will likely attract more people from the US, Australia and so forth.” In the former situation, the UK talent pool wouldn’t so much run dry as it would be displaced by people of nationalities which have an easier time of adhering to the entry criteria.

Relocation was discussed as a serious option within 3-5 years. “One strategy for existing companies in the medium to long term will be to relocate tech teams to cities where they can access EU talent, which is much more extensive than the UK on its own, particularly in eastern Europe,” Elena noted.

As for early stage businesses gearing up for a funding round, they’re likely to face tougher due diligence from VCs. Entrepreneurs can expect a renewed focus on fundamentals, and shouldn’t rely on selling a grand idea to the detriment of demonstrating a robust financial plan, a clear path to profitability, evidence that you’ve thought about the impact of currency fluctuations if the business is exposed to international markets, and a plan for prioritising US or Euro denominated sales where applicable.

By Will Reynolds 

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