UK tech funding strong in the face of Brexit, for now

A weak pound under Brexit uncertainty is attracting foreign investment in UK tech. But that might just be a short-term benefit.
22 August 2019

Is British tech ready for Brexit? Source: Shutterstock

Despite the looming possibility of a no-deal Brexit in October this year, the UK tech economy surpassed the US for foreign investment in the first seven months of this year.

Tech firms in Britain sealed £5.5 billion (US$6.7 billion) in overseas funding this year, according to research for the UK government’s Department of Digital, Culture, Media, and Sports by Tech Nation and Dealroom. The sum amounts to more than that of the whole of 2018.

Ironically, it may partly be the uncertainty around the UK’s departure from the European Union which has driven that spend. A weaker pound is drawing in investors to the UK tech sector, which remains a European leader.

Brexit & trade wars

Investment has largely come from US and Asian firms. These regions injected US$3.7 billion in the first seven months of the year, compared to US$2.9 billion last year.

Meanwhile, the US-China trade war has rechannelled investment from these regions to other opportunities. At the same time, UK firms are seeking investment from Asian companies in order to gain access to the Asian market, Singapore venture capital firm told the BBC.

Japan’s Softbank was a key investor, contributing to a US$800 million investment in UK loan company Greensill, and joining Singapore’s Clermont Group in a US$400 million investment in the digital bank for SMEs, OakNorth Bank.

In 2016, Softbank’s £24.3 billion (US$29.5 billion) purchase of ARM, a UK chip-maker, was made in the wake of the European referendum amidst weak sterling.

US tech giant Amazon, of course, was a key investor in Deliveroo’s latest funding round, which amounted to US$575 million.

The tech sector is somewhat of an anomaly, however. Overall foreign direct investment (FDI) in the UK is falling— reaching a ‘six-year low’— resulting from the lack of clarity over the terms of the UK’s EU withdrawal agreement. The British Chamber of Commerce has said that this uncertainty is expected to “suffocate” investment activity in the short term.

“The plummeting value of sterling has had some upsides. Despite the continuing uncertainty and drama around Brexit, UK tech is booming,” said Frances Doherty, a partner at international law firm Dorsey & Whitney and one of London’s preeminent tech industry lawyers, to TechHQ.

“However this increase is somewhat powered by the weak pound and must be seen against another announcement by the UK government this week: that free movement will end on 1 November in the event that the UK leaves the EU without a deal on 31 October.

“The thriving tech industry in the UK is powered by international talent and already, companies are finding it hard to recruit the people they need,” Doherty said.

Au Revoir, Auf Wiedersehen

The UK’s world-leading fintech industry employs 60,000 people and is worth US$9.3 billion to the UK’s economy. A LinkedIn Workforce report, based on a survey of 600 UK hiring and recruiting managers, revealed that 20 percent of graduates with the required tech skills for this sector originated from countries in the European Union.

The supply of qualified graduates from the European Union, particularly from France and Germany, has already shown a significant decline since the Brexit vote in June 2016, the report said.

UK tech companies, therefore, face a staff shortage risk in the event of a no-deal Brexit, where they are unable to recruit the skilled professionals at a rate which offsets a lack of foreign talent in-flow.

In this scenario, firms headquartered in the UK could look to move operations to European hubs with access to wider available talent pools, such as Dublin, which would provide a gateway into other markets on the continent.

Nonetheless, the orchestrators of the most recent research remained airy: “These fantastic figures show the confidence overseas investors have in UK tech with investment flows from the US and Asia at an all-time high,” said Nicky Morgan, Secretary of State for Digital, Culture, Media and Sport.

“We have a longstanding reputation for innovation and the statistics endorse our reputation as one of the best places in the world to start and grow a digital business.”