Brexit, Bots, and Mass Migration: What European Businesses Can Expect in 2018

London is still the center of entrepreneurship in Europe, but it may not be for long.

Last year, more than $19 billion was invested in E.U. startups, up from $14.4 billion in 2016, according to the "State of European Tech" report from the London-based venture capital firm Atomico. And while the lion's share of that ($5.4 billion) still went to the U.K., Germany and France were close behind, with the latter challenging the U.K. for the total number of deals closed. Meanwhile, with the advent of the U.K.'s break from the European Union, or "Brexit," capital continues to flow into lesser-known cities including Amsterdam, Munich, Vienna and Barcelona, as more than 21 percent of founders moved to another country--particularly, to Central or Eastern Europe--to launch their businesses, the report found.

Back in the U.K., access to foreign talent is understandably top of mind. As many as one in four British companies are setting up offices in continental Europe, according to recently published data from Silicon Valley Bank.

"What's happening in Europe right now is similar to what you are seeing in the U.S., with Silicon Valley realizing it's not the center of technology anymore," says the Paris-based investor and serial entrepreneur Romain Lavault, referring to major corporations' growing interest in middle-tier U.S. cities like Los Angeles, Austin, and Chicago. (Amazon, for instance, is considering placing its second headquarters in one of these cities.) "Now, there is a more de-centralized startup ecosystem in Europe," adds Lavault, who is an investor with the E.U.-focused venture capital firm Partech Ventures.

While this doesn't bode well for the U.K. and its startups, existing European startup hubs including Paris, Berlin and Stockholm are poised to benefit. Here are three other top trends for European businesses in 2018.

1. Economic tailwinds

In 2018, macro-economic factors could help E.U. entrepreneurs to grow their bottom lines. Earlier this month, the E.U. bloc raised its forecasts for economic growth, insisting that it would see its fastest expansion since the end of the global economic crisis. The overall economy is projected to expand by 2 percent in 2018.

Meanwhile, the relative strength of the European startup ecosystem has been bolstered by a series of recent exits, including the Finnish mobile game developer Rovio, which went public at a €896 million ($1 billion) valuation last September, as well as HelloFresh, the German e-commerce meal subscription business that raised €320 million ($396 million) in its November public offering. Still, it's worth noting that there were significantly fewer exits last year than in 2016--550, compared with 700 the previous year, according to Tech.eu data. 

This year, some analysts are suggesting that public offerings will outpace 2017, according to a Bloomberg report. Music streaming service Spotify is likely to be a bright spot, as it plans to go public in a direct listing on the NYSE sometime before the end of the first quarter. That could herald more E.U. IPOs in 2018, including the Dutch payments processor Adyen and Symphogen, a biopharmaceutical firm based in Denmark. 

Of course, to truly compete with the U.S. and Asia, Europe needs more (and importantly, bigger) startup exits in the near future, with those entrepreneurs then reinvesting in their local business communities. "It's still rare to sell your company for more than $200 million in Europe," explains Partech's Lavault, suggesting that larger companies have historically been reticent to acquire startups.

2. Artificial intelligence, Amazon 2.0

Some sectors are expected to surge in 2018. In particular, analysts are bullish on artificial intelligence and so-called "deep" technology, including the U.K.-based semiconductor maker Graphcore, which recently raised $50 million in funding to take on stalwarts Nvidia and Intel. Meanwhile, the electric jet startup Lillium, based in Munich, raised $90 million in Series B funding for its so-called "flying taxi" last September. "There's a growing deep tech resurgence [as] academic institutions are beginning to commercialize their ideas," says Mattias Ljungman, co-founder of Atomico, nodding to schools such as University College London and the Swiss Federal Institute of Technology in Zurich.

Meanwhile, Paddy Cosgrave, the Irish entrepreneur and founder of the international technology conference WebSummit, notes that more than 80,000 artificial intelligence startups applied to his network's incubator in 2017--a record share.

E-commerce could be another winner. As Amazon continues to expand globally, a number of E.U. competitors have emerged to take on the e-commerce giant in niche categories, including the U.K. specialty furniture maker Made.com. The London-based company generated nearly £100 million ($139 million) in sales--and turned a profit for the first tim--in 2016. Another firm to watch: Na-Kd. The Swedish  fashion retailer last month raised $45 million in Series B funding, and plans to use the cash to expand further across the Eurozone. (Lavault's Partech was a lead investor in the round.) 

3. U.S. brain drain

What may help the E.U. in the months to come is a different sort of "Trump Bump," whereby American entrepreneurs increasingly look to places such as Canada, France and Germany as potential locations to launch their businesses. "We've never seen so many resumes from Silicon Valley entrepreneurs who want to relocate to the E.U.," says Lavault, attributing the change to the controversial U.S. President. Indeed, a growing number of business owners are now taking advantage of programs such as the French Tech Visa, which allows entrepreneurs, engineers and investors to set up in France at a low cost.

Meanwhile, as Trump trims back on legal immigration--and the H-1B visa program, in particular--some entrepreneurs have responded by setting up operations in Canada, where a recently-introduced visa program lets foreigners obtain work visas in as little as two weeks.

There's also the possibility that Brexit won't happen after all, suggests Cosgrave. "All of the moons are aligning to stop this from happening, and get us to a second referendum," the entrepreneur tells Inc. Indeed, a second referendum is feasible--although it would require the support of British Parliament and would need to be proposed by a coalition backed by conservative lawmakers. In other words, even as Theresa May endeavors to negotiate the terms of divorce, it's still a long shot. 

Amid Leaked Brexit Document Hoopla, U.K. Startups Shift Operations to Europe

A leaked document from the U.K. government suggests that Brexit could hurt the local economy no matter what, according to a BuzzFeed News report this week, but that's something many startups have long suspected. In fact, a growing number of companies across the nation are planning to launch elsewhere in Europe, new data finds. 

On Tuesday, Silicon Valley Bank released its annual U.K. Startup Outlook report, drawing on interviews with more than 1,000 companies in the U.S. and abroad. The banking giant found that roughly one in four British firms are planning to launch outside of the U.K. in 2018, up from one in five last year, out of fear that Brexit could negatively impact the bottom line.

At the same time, the memo obtained by BuzzFeed revealed that the U.K. government's own research predicts that national income will decline by as much as 8 percent in the event that Britain leaves the E.U. without a set trade deal. That estimate further assumes that the U.S. and the U.K. will negotiate a trade deal--a scenario that is far from certain. 

"This is a colossal act of economic self-harm, written down clearly, in black and white," said Eloise Todd, head of the anti-Brexit organization Best for Britain, in a statement regarding the leak. "We are reading about an economy facing the abyss," she added. The memo also found that national income would be 5 percent lower under a free trade agreement with the European Union, and still 2 percent lower in the case of a "soft" Brexit option, including single market membership over a 15-year period. It's worth noting, however, that the analysis does not consider the kind of bespoke trade agreement with the E.U. that Theresa May has said she plans to negotiate in the coming months--one that is "deep and special."

It's not only the prospect of a weak trade agreement--which could lead to increased tariffs for manufacturers that import, and companies that otherwise do business across the E.U.--that has startups drawing contingency plans. As part of the current system, U.K. companies can easily hire foreign workers within the rest of the E.U. zone, but that could all change after Brexit. Thus, access to talent is top of mind for business leaders like Neal Slateford, whose Bath, England-based adult toy retailer could suffer in the event that it is unable to hire multi-lingual customer service staff. "We find it very easy to grow our business by recruiting people from [the rest of] Europe," Slateford previously told Inc. Overall, 82 percent of business leaders say that access to talent is the most important policy issue facing the U.K., according to the Silicon Valley Bank report.

The report carried a silver lining. Brexit notwithstanding, overall business confidence is up across the region, with half of founders surveyed insisting that 2018 will be better than the previous year. More entrepreneurs are convinced that the damage Brexit will cause can be mitigated--or, ultimately, that the drama of it all will blow over. That's echoed by the fact that investment in U.K. startups peaked in 2017, with startups raising $7.7 billion in total, according to Dealroom data.