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Investors shun UK tech startups amid fears Brexit Britain 'closing itself off'

Tom Belger
Finance and policy reporter
Investment in UK startups is stalling. Photo: Neil Godwin/Future Publishing via Getty Images

More investors are shunning UK tech startups because they think Britain is “closing itself off” through Brexit, a spokesman for the tech industry has warned.

Giles Derrington, head of Brexit policy at the techUK trade body, said a no-deal Brexit would threaten Britain’s reputation as the “obvious global hub” for tech investment outside the US.

Boris Johnson and Jeremy Hunt, the two remaining candidates in the race to be next Conservative leader and UK prime minister, have both talked up their willingness to lead Britain out of the EU without a deal.

Derrington said at a Westminster select committee hearing on Wednesday: “Lots of people who work in tech are very internationally minded. What we are seeing, rightly or wrongly, is the reputation that the UK is somehow closing itself off from the rest of the world.”

READ MORE: No-deal Brexit could spark ‘flurry of profit warnings’ from UK firms

He claimed the “reputational damage” was already affecting recruitment in a sector suffering from skills shortages.

He also said the number of venture capital deals in Britain had plummeted in the first three months of 2019, with a recent KPMG report revealing a 57% drop in successful deals.

Jeremy Hunt takes a selfie with supporters. Photo: Press Association

The figures showed the overall value of deals held steady at more than £1.19bn ($1.56 billion) compared to the previous year, despite the dramatic drop in transactions.

Derrington said Britain still had the highest venture capital funding in Europe, but said it was down 20% on two years ago whereas investment in second-place Germany was up 30%. “The gap is closing,” he told MPs.

Derrington said more established firms were still attracting funding, but warned newer, more innovative but riskier startups were losing out as Brexit uncertainty deterred investment.

He said such firms could end up moving and growing in France, the Netherlands or other countries instead, with Britain feeling the consequences later down the line.

Venture capital funds were already “splitting the difference” by investing in other countries as well as the UK, he added.

READ MORE: London now has more fintech unicorns than San Francisco

Just four years ago, “you didn’t bother to look anywhere else” but the UK if you were investing in tech outside the US, according to Derrington.

But he said firms and investors were now increasingly considering other countries, aware they could face different data protection rules and financial regulation in the UK to the rest of the EU.

Other governments abroad have begun making “quite good offers,” including “strong” pro-tech arguments and policies in France, according to Derrington.

The KPMG report also showed UK tech firms were ploughing through their backlogs of work offering digital services at the fastest rate since 2011, which could suggest a slowdown in new orders.

READ MORE: No-deal Brexit means more bureaucracy for electrical manufacturers

But he suggested UK tech still had a bright future, adding: “Tech is still a growing sector, the UK is still a very good place for tech companies and therefore there will still be tech investment.

“The question is the scale and level of that investment compared to what it would have been.”

The UK tech spokesman also said his membership, which includes more than 900 firms, were most worried about a no-deal Brexit’s impact on other sectors, and its knock-on effects.

A catastrophic hit to UK car manufacturing from new delays or tariffs could spill over into a steep drop in spending with Britain’s digital advertising firms, he said.