Brexit: One Month Later
Let's rewind one month to London Technology Week (20-26th June) – a celebration of London’s digital sector with more than 250 events dotted around the capital. A week wherein technologists, entrepreneurs, developers and investors from all over the world flock to London to collaborate, share and inspire one another to drive Britain to the forefront of the world’s technology industry. Headlines read: “London Tech Week Celebrates Tech and Encourages Diversity”, “Londoners should be inspired by our diverse and global tech sector” and “Celebrating FinTech’s diversity at London Tech Week”.
Ironically, this was the exact same week that the European Union realized they failed to catch ‘em all. Sentiment among the tech community following Brexit was (almost) unanimously disappointed, shell-shocked and echoed one Londoners’ view that “This morning feels like that moment in Ghostbusters when the inspector shuts down the containment unit”.
TechCity conducted a survey that included 1,205 respondents working in tech in the week following BREXIT, 60% of whom were tech founders or CEOs at emerging startups with <10 employees. We were most interested in their sentiment surrounding hiring and retention plans, and how this might affect diversity. Here is a snapshot of the findings:
- 51% say they think that it will be more difficult to attract and retain the very best talent.
- 31% say they are likely to slow down hiring.
- 74% believe the business environment may get worse.
- 51% say they plan to raise capital outside the UK in the next year.
While there have been a number of positive indicators that the tech industry will be able to rise above Brexit and continue to innovate and change in spite of it: such as VC firms investing $200m in UK tech start-ups across 42 deals to date since the referendum as well as a wave of high profile acquisitions including that of ARM Holdings (by Japanese Softbank for £24.3bn), Magic Pony (by Twitter for £150m) and VocaLink (by Mastercard for £700m); the sentiment surrounding the foreign takeover of UK firms, particularly while the value of the pound has fallen is regarded as ‘sad’ news for tech firms in Britain; and London's status as the 'undisputed home of unicorns' in the EU is wavering.
There is no doubt that tech investors are choosing to play it safe by choosing options with less risk, better payback and lower transaction costs to reduce uncertainty in the midst of great uncertainty and economic turmoil. The 'wait and see' approach is already evident in recent figures by KPMG and BC Insights which suggests that despite the deal activity mentioned above, the volume of deals is 'down eight% on the previous quarter and 15% on last year. Those deals were valued at $729m - down 43% on the previous quarter and 46% on the same quarter last year and hitting a five-quarter low'. Tech firms that have come out stronger than others in the short-term include those that are already diversified, able to sponsor, operate in dollars (><) or algo-driven hedge funds that took positions on the outcome (e.g. shorting the pound).
Britain’s tech sector, whose contribution to the UK economy represents 6% of GDP, has not come this far without Europe, and will struggle to grow at the rate at which it has in the last 5 years without the support of its European allies.
The full effect of Brexit on the UK’s tech industry is still uncertain, but it is this uncertainty that has the ability to cripple its potential to be Europe’s digital epicenter. Not only will it (if it hasn’t already) affected Britain’s ability to recruit technical talent to meet current demand, but it will hinder the progress made in terms of supporting budding entrepreneurs looking to establish their offices in London; affect their ability to secure early-stage investment and reduce the richness of London’s 3,000-company strong start-up community. It has also caused uncertainty surrounding accessing the single market, cloud provisions to EU clients, regulatory passporting, and has in theory reduced the UK's ability to attain mass-market penetration at a pre-Brexit rate as scalable solutions become pricier.
In terms of office space, London’s technology footprint is verging on matching that of the finance industry. In fact, since 2008, the finance industry’s footprint has reduced by 8.14%; in contrast, the tech industry’s footprint has increased by 21.57% to date. As jobs are created in fintech, with much of the talent being sourced from the finance industry, it’s no surprise that London is ‘best placed globally to lead fintech innovation’ and is also home to Europe’s ‘hottest Fintech startups’ making up 24 of the Fintech50 companies to watch in 2015; which is attributable to both the close proximity of the finance and tech businesses in the capital as well as London’s reputation as a global trading hub. According to Gerard Grech, Chief Executive of TechCity UK, “Britain’s fintech players are estimated to be worth around £20bn in annual revenues collectively, with over £342m invested in 2014 alone.”
Now, following Brexit, Deutsche Bank, Credit Suisse and Nomura are among banks that have either announced or recently retrenched thousands of employees; JP Morgan’s CEO Jamie Dimon warns that jobs may be cut in the event of Brexit, and has put the relocation of their European headquarters on the cards. In light of the more than 10,000 jobs at risk at five of the major US banks with EU headquarters in Britain, we can certainly expect London’s fintech sector to be affected by the loss of proximity of finance and tech businesses in addition to London’s reputation as a global trading hub being tarnished.
In addition to this, and as far as international treaties stand, similar to collapse of the Safe Harbour provision - wherein US companies pretended to be European in order to store data on Europeans on US soil - tech start-ups that have stored personal data on Europeans in data centers housed on British soil will likely be pressured to move their data warehouses to Europe, increasing costs and putting data privacy at risk. This in addition to the being able to tap European talent pools will make the government’s role in ensuring that the tech industry is insulated from Brexit as much as possible vital if it is to remain competitive on a global scale as a European HQ for tech businesses and continue to attract FDI.
As Britain appears to be heading into a recession with “business activity slumping at the fastest rate since the height of the global financial crisis in early 2009” according to Chris Williamson, chief economist at Markit; and the pound trading at 31-year lows against the dollar, it is important to remember who this would impact the most: i.e. the youth. Research by the Centre for European Reform on the long-term impact of recessions on varying social groups suggests that graduates (those young, less-skilled and inexperienced) will be most affected, financially and physiologically. Should the class of 2017 enter the job market during a recession, they will find it harder to find jobs (one report suggests 49% of employers will reduce graduate intake in the wake of Brexit), the number of jobs graduates have access to will be limited to a smaller pool, and choice of work will also be limited. They will also earn less than those graduates whom entered the market in a buoyant economy; and the differential will persist for years to come.
While more than 25% of employers said that the effects of not being able to freely hire EU graduates would surge recruitment of British graduates to make up the shortfall, British graduates are still not protected from the impact of Brexit as employers confirm they predict to see a loss of graduate jobs in the UK (including British graduates and even if they were able to tap into European talent pools).
The prospect of UK’s tech industry losing access to the single market is unappealing, however London Mayor Sadiq Khan and VC partner at Passion Capital, Eileen Burbidge, have continued to maintain that London will do all it can to “welcome the best talent from around the world”. In light of Softbank’s takeover of ARM and commitment to double ARM’s 4,000 strong headcount in the next 5 years (and having received the government’s blessing in less than 24 hours despite Theresa May pledging to impose tighter government oversight for acquisitions of British firms deemed as ‘strategically important’) there is reason to believe that the government will do all they can to ensure that the impact on the UK’s ability to recruit tech talent from European countries is limited.
In agreement with the theme of majority of London Technology Week’s events, it is clear that the most significant threat among start-ups in the capital are those surrounding the hiring and retention of non-UK technologists.
We engaged in qualitative analysis with consultants at Campbell North, specialist IT recruitment firm whom have been touching base with their network of European software engineers, quantitative traders and data scientists to assess their sentiment and response to Brexit. It was no surprise to hear that a number of candidates currently interviewing from outside of Europe to work in the capital were skeptical of their imminent move for reasons including: VISA complexity and increased transaction costs; reduced mobility (e.g. friends and family visiting/vice versa) and a lack of confidence in the British economy following the exit. Many engineers are seeing the move as an indicator that they are not wanted in the UK; and a sign of civil unrest.
Britain’s tech sector is already waging a war: here we refer to this as ‘the war for tech talent’ in trying to meet the 765,000 gap between demand for digitally skilled workers wherein tech firms have armed themselves with a literal squadron of recruiters (both internal and agencies) and have flooded money into recruiting software and marketing/PR efforts to attract the numbers (and quality) they need in order to continue to grow and compete with a rising number of businesses turning digital and a stagnating number of students studying IT at undergraduate level. For emphasis, I will repeat the latter part of that sentence: the number of first year students pursuing computer science at university is neither increasing nor declining, and accounts for less than 5% of enrolments at university; of which, less than 15% are women (14.7% in 2014/15).
To make matters worse, we are still struggling to bounce back from the decade following the dotcom crash, which saw a decline of students enrolling in computer science as high as 23.3% (compared to a 26.9% increase in enrolment in STEM degrees over the same period). Even without Brexit, the UK is struggling to see the volume of digital talent (particularly in specialized skill-sets i.e. software engineers, data scientists, quantitative traders) they would need to sustain growth; let alone a solid pipeline of home-grown talent which is fundamentally the root cause of the digital skills deficit.
EU undergrads at UK universities are twice as likely to pursue a PhD (two-thirds in STEM subjects), nearly 50% more likely to obtain a first-class degree (even in STEM subjects) and consistently outperform their British peers graduating from the same universities. Beyond this, they go on to earn 9% more than their British peers on average, even only 6 months after graduating. The impact EU students have on the UK economy is incredibly positive; and although they only make up about 5% of the undergraduate population; one wonders whether the UK’s top universities for computer science (i.e. Cambridge, Oxford, St Andrews) will maintain their status on an international scale should the UK become a less attractive place to study.
“The business imperative of equality and diversity has never been stronger nor the need greater.” - Alison Platt, CMG, Divisional Managing Director, Europe and North America for Bupa, and Chair of Opportunity Now
Brexit is not only poised to affect the influx of experienced and graduate workers, the pipeline of future technologists available and the long-term access to talent it is going to affect tech firms’ ability to achieve a diverse workforce and foster innovation: to the point that these firms' workforce are unrepresentative of UK’s demographic and incapable of reaping the rewards that come along with diversity. This is the part where Brexit becomes very relevant to SheCanCode’s mission. As a result of Brexit, companies are going to struggle to retain or hire diverse workforces with primarily home-grown talent. By inspiring, encouraging and equipping more women, black and other ethnic minorities to enter technology as a career, and break down the barriers that are preventing them from being retained within the IT sector, we stand to position ourselves in the tech industry as an incredibly resilient sector and enjoy long-term growth despite the uncertainty in the short-term. Let's not lose momentum.
If you want to join the SheCanCode movement, click this link and see how you can play a part in the solution.