Robert P. Mollen, Counsel at Fried, Frank, Harris, Shriver & Jacobson (London) LLP
An American colleague in London, after reading my blog on surprises for startups expanding to Europe http://bit.ly/EuropeSurprises, suggested I write why US startups should consider the United Kingdom as their first port of call for international expansion.
The UK has been my home for the last 26 years, so a little home turf boosterism is not amiss. Additionally, the noise around Brexit has probably obscured why the UK still makes sense as a great choice for European expansion (not just for US startups, by the way).
I’ve written parts of this before, in blogs about London vs Berlin http://bit.ly/BrexitBerlinLondon and why London is not the new Silicon Valley http://bit.ly/NoNewSiliconValley, but I’ve never pulled it all together.
So what is so special about the UK?
London is a global city without comparators (not even New York City). There are large and highly—educated communities of most nationalities here, and, advantageously for Americans, everybody speaks English (although perhaps not English as we know it ….). Consequently, in terms of US startups that are proposing to expand into Europe, the Middle East, and possibly even Africa, there is no other city where one can find the necessary startup talent to facilitate expansion not only into the UK itself, but also into those other places.
And with apologies to the Silicon Valley, New York and Boston, London also has the most international startup community on the planet. A substantial percentage of the startups here have founder teams that include non-UK nationals. Many of their members initially came to the UK to study, and chose to stay. Furthermore, the UK government programs that support startups do not discriminate based on nationality – the only requirement is that the companies have a permanent establishment in the UK.
As you would expect, a substantial startup support network has grown up around this community, including accelerators and mentors, shared workspace providers, start-up focused professionals, and, last but not least, investors. While Europe continues to trail the US significantly in venture capital, there are more venture capital firms with operations in the UK (even those not headquartered here) than anywhere else in Europe.
Furthermore, many of the large corporations that are potential European customers for US startups have substantial operations here, even if those presences may not always be their European headquarters. Consequently, from a marketing perspective, it may be easier to establish connections with these potential customers in the UK than in other major European cities. In certain business sectors, such as financial services and advertising, few cities compare to London.
There is, however, one major downside to London, which is shared with many desirable international cities – it is expensive to live and operate here (although London still compares favorably with the Silicon Valley and even New York).
Legal and Tax Environment
The legal and tax environment in the UK is business friendly. It is easier to set up and administer a company, and hire and fire employees, than just about anywhere else in Europe, with the possible exceptions of Ireland and, perhaps, Estonia.
Taxes are low by European standards, particularly employment and social taxes that are particularly relevant so startups. The benefits of the UK tax regime also remain relevant as the company grows, with a corporation tax rate of 17%, and the UK is a favourable location for a European holding company. Given the UK’s network of tax treaties, this is not likely to change as a result of Brexit (at least not in the short to medium term).
Employees based in the UK can also benefit from tax-favorable programs relating to their equity grants. In particular, US early stage startups that wish to issue options to their UK employees can utilize Enterprise Management Incentive (EMI) options, and other programs become relevant as the company grows.
Finally, for fintech companies, there is no better place on earth to develop a fintech business. The primary regulator for most fintech companies, the Financial Conduct Authority (FCA), is startup friendly, and is willing to meet with startups and discuss relevant compliance. Additionally, the FCA runs a regulatory “sandbox” where fintech startups can test their models in a real world environment before incurring substantial regulatory experience.
Governmental Support for Startups
While other European countries have made significant efforts to support startups, few have done so as effectively as the UK, while minimizing business interference.
On the tax side, the Seed Enterprise Investment Scheme (SEIS) and Enterprise Investment Scheme (EIS) provide substantial tax benefits to UK taxpayers that invest in startups, and these schemes are open to non-UK startups that have a permanent establishment in the UK.
On the trade side, the Department for International Trade (with offices around the world), London & Partners, Scottish Enterprise and other relevant organizations provide effective assistance to companies based here that are seeking to expand internationally, and provide that support to UK-based subsidiaries of non-UK companies as well as to home-grown companies. The UK has several hundred years of experience in supporting trade and the expansion of companies outside the UK, and I have yet to see a country that does it better. This is particularly important in moving into difficult markets, and startups have commented to me, for example, how important a role DIT played in helping them to enter China.
The UK has always been a significant center for invention. Indeed, if it has had a failing (which continues, to some extent), it has been its ability to commercialize its innovations. While I think the UK is getting better at commercialization, the key point for US startups is the quality of the tech resource here. WhyCambridge, Oxford, the London universities and science and technology universities and programs through the UK provide key tech resource, and the students coming out of those programs, particularly at PhD level, are from all over the world and very international in outlook. Additionally, companies in the UK also have access to lower cost tech resources elsewhere, particularly in southern, central and eastern Europe, and some startup CTO’s here commute to back offices at such locations while being fully integrated with the main UK-based teams.
Notwithstanding the noise around Brexit, the UK is still a logical jumping off point for US startups when they first venture outside of the United States, at least if they are looking to Europe rather than Asia. It is also a logical destination for non-US startups looking to expand in Europe. While Brexit may introduce some new challenges, particularly as it relates to the continued movement of European talent to the UK, the fundamental advantages of the UK for US startups remain in place.
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This discussion is not intended to provide legal advice, and no legal or business decision should be based on its contents. If you have any questions or comments, feel free to contact [email protected].
You will find a listing of Bob’s weekly startup blogs on US and international expansion and early stage financing here: http://bit.ly/StartupGuidesIndex