​London's tech startups are booming, but their biggest challenge is just around the corner

The UK -- and London in particular -- continues to be the top European hub for tech investment and innovation, even if the clouds are gathering on the horizon.

According to figures from London & Partners, the capital's tech firms accounted for over 80 percent of all venture capital money invested into the UK since the country voted to leave the European Union. Despite fears that investment would collapse after the leave vote, UK tech companies have received over £5 billion in VC funding since June 2016. That's more than France (£1.55bn), Germany (£2.15bn) and Sweden (£644m) combined. Most of that (£4 billion) has gone to tech firms in London -- well ahead of Paris (£1.14bn), Berlin (£814m) and Stockholm (£542m).

Ahead of London Tech Week, when the capital aims to show off its prowess in everything from artificial intelligence to 5G, the city's mayor Sadiq Khan said: "London is the undisputed tech capital of Europe and today's figures offer further proof that London remains a leading global tech hub for investors."

All very impressive, and it's also worth remembering that the benefits from that tech boom stretch further than developers and entrepreneurs. The area of London affected by tech-driven growth has changed hugely in the last decade. Some might mourn the loss of some of the older, grubbier, Shoreditch that's now being replaced with hipster hangouts, but that digitally-fuelled gentrification has brought plenty of new jobs for non-techies too. Nor should the tech economy be considered to be some geeky and irrelevant subculture; these are exactly the sorts of high-skill, high-wage jobs that every city and region is desperate to attract. There is a global battle for these jobs, and right now London is doing well.

London has many advantages, of course. A shared language has made it the first port for US tech companies looking to grow into Europe, as has its position as English-speaking but also part of the European Union. London's long-standing role as a financial hub has given its fin-tech start-ups access to customers and know-how. And the city's long history and status as one of the world's most open, multi-cultural and diverse capitals has made it somewhere that millions are proud to call home.

However, those advantages are under threat.

The Brexit effect

"London's tech sector is an important source of jobs and growth for the city's economy, and it is vital that we continue to ensure that we can attract the very best talent and investment from all over the world in the aftermath of Brexit," says Khan.

This will be the last London Tech Week before Brexit happens on 29 March 2019. Businesses don't like uncertainly, and that has been the main ingredient of Brexit up to now. What's pretty certain, though, is there are few immediate benefits for tech businesses -- either in the capital or elsewhere -- that will result from the UK leaving the European Union.

There are some short-term headaches, for sure.

The EU has already decided to exclude the UK from the Galileo satellite navigation system, a project in which UK space tech companies had been expected to play a major role. There are concerns that UK firms will be shut out of other European initiatives too.

UK companies could also find it harder both to attract the talent they need and actually get them into the country, depending on the harshness of the post-Brexit immigration policy. If the UK becomes less welcoming to foreign workers, companies will struggle to find the staff they need to be competitive, which could make them consider relocating.

Longer term, the effect of the UK's exit from the European Digital Single market remains to be seen. This aims to remove barriers to consumers and businesses using and selling digital services across Europe, thereby growing the digital economy across the trading bloc. Another Brexit-related worry is the prospect of European cities such as Frankfurt mounting a challenge London as a financial centre, which may weaken its fin-tech status.

A recent report from the Institute for Public Policy Research think-tank said that startups had three concerns about Brexit: "first, the uncertainty it has generated around the retention and recruitment of people; second, the possibility of regulatory divergence; and third, future access to finance." Elsewhere the report notes: "There is no doubt that Brexit is having an effect on morale across the London tech startup scene, and it isn't hard to find stories of companies choosing to locate or expand elsewhere, or tech experts leaving the UK."

London isn't alone in trying to build a startup culture. Most big cities want to lure tech startups that can bring much-needed high-value jobs. Berlin and Paris are also mentioned as up-and-coming European hubs too.

In reality both of these cities remain well behind London, although Paris is rapidly gaining credibility, funding and developers. The French capital is wooing young firms with funding and support, as well as sprucing up the environment -- recognising that entrepreneurs don't just work in these cities, but also have to live in them.

To succeed beyond Brexit, London's tech startups will have to change. To look to new markets for customers and investment. To find new ways of securing those vital skills -- perhaps by investing in training rather than simply buying talent from abroad. Such moves may actually make the UK's tech ecosystem more sustainable and broad-based in the long-term, assuming the short term shocks don't do too much damage (such initiatives could, of course, have been pursued without the need for Brexit).

As the IPPR report notes, "a community whose raison d'être is innovation and change is exactly where optimism and a tolerance of ambiguity are found." Similarly, the government at local and national level needs to encourage the confidence, investment and certainty that these businesses need.

Entrepreneurs are used to managing risk and finding opportunities where others see challenges. Few of London's tech entrepreneurs will have voted for Brexit: but the way London's startups deal with the transition now facing them may provide a roadmap for the rest of the country.

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