- The number of US enterprise software startups expanding to Europe has collapsed 60% in the wake of the UK's Brexit vote, according to a survey by Frontline Ventures.
- Although Brexit primarily impacts the UK, the research suggests some US founders were "spooked" by the vote out of expanding to the continent at all.
- The fund surveyed some 185 companies about their previous and potential expansions to Europe.
- "Our research shows that US companies make a lot of mistakes before expanding to Europe," Stephen McIntyre, partner at Frontline Ventures, told Business Insider in an interview. "There has been a real Brexit impact in recent years and we expect a short-to-medium term contraction in new expansion due to COVID-19."
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In 2016, a small majority of voters in Britain opted to leave its political and economic partnership with the European Union, cutting off trade and travel links which had been in place for decades in the process.
One curious side-effect in the years since is a dropoff in fast-growing US enterprise software companies moving to the UK, and Europe more generally.
Frontline Ventures, a San Francisco and London-based VC fund, has surveyed some 185 companies about their previous and potential expansions to Europe with data across a 15-year period.
The fund's findings indicate that that the number of US software-as-a-service startups expanding to Europe has dropped by 60% following Britain's vote to leave the European Union in 2016, which can be seen in the below chart.
Frontline's report implies that the UK was likely the first country of choice for US software firms looking to expand to Europe. With the nation now synonymous with Brexit, founders appear to be backing away from any expansion onto the continent.
Frontline's research also found that while fewer companies were moving to the continent, those that already have had doubled down on hiring. You can see the figures below:
"This highlights a worrying dichotomy: companies that were already in Europe weren't much affected by Brexit; those that had not yet landed allowed themselves to be badly affected by postponing indefinitely," the report said. "What should have been a temporary blip in landings became a prolonged drop. It's likely that CEOs in the US, reading Brexit headlines from afar got spooked and stayed spooked."
Sacrificing European revenue
It's a big loss for fast-growing software companies and for European cities.
Frontline's research estimates that well-run enterprise software companies should derive between 25-35% of their global revenue from Europe by the time they go public. Frontline cites examples ranging from Dropbox, Zendesk, Slack, and Cloudflare to demonstrate this. That's a huge amount of lost potential revenue for the companies that don't expand.
"Our research shows that US companies make a lot of mistakes before expanding to Europe," Stephen McIntyre, partner at Frontline Ventures, told Business Insider. "There has been a real Brexit impact in recent years and we expect a short-to-medium term contraction in new expansion due to COVID-19."
Many of those mistakes are avoidable, with the most pressing consideration being the first senior hire a company makes in Europe, with Frontline's research suggesting that 50% of companies get this wrong. The fund's research suggested that general managers hired in Europe often leave less than two years after joining.
Despite Brexit uncertainty, London remains the premier destination for US software companies expanding to Europe, with McIntyre citing the city's deep availability of technical talent.
Dublin and Amsterdam are resoundingly the next two most popular choices and have made small gains into London's massive lead in the wake of the Brexit vote.
These three cities maintain considerable leads over European capitals like Berlin, Paris, and Lisbon. 15 years ago 50% of US expansions to Europe started with London, Dublin, or Amsterdam. As of 2019 that figure is 80%.
"The impact of COVID-19 could see a slowdown in expansion in the short term, but one benefit may be improvements in workforce distribution and remote working practices," McIntyre added. "Getting engineering talent in San Francisco is already a choke point for businesses and we see a lot of product and engineering team expansions into Europe."
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