Very few facts are known about what Brexit will really mean and what the real effects of withdrawing from the EU will be on the UK tech start up scene. Or at least that was so until recently. Actions taken by the EIF (European Investment Fund) in the last month show that it has essentially ceased taking applications from the UK. This is a massive blow to what has been a UK success story – the UK tech start up hubs. Not only the EIF but it also appears that EIB may well follow suit. This will all depend on the outcome of those negotiations. However, as we head to the polls to vote for the inevitable Tory Government (per the polls at time of writing – usual health warnings apply), signals from May’s team are getting increasingly belligerent; a little like her necklaces. A very hard Brexit, or no deal at all, seems increasingly possible.

Away from the politics, most of the world’s centres of tech innovation have been successfully developed as the result of government funding - from Silicon Valley to London to Israel. The risk and expense in this type of investment has meant it was only ever going to be government that was willing or even able to take it on. The EIF was set up in 1994 and has been the cornerstone investor in many tech funds. According to their own figures, they now supply 1 euro in every 4 that the UK funds raise. Not only that, the fact that a fund has their backing has enabled many to fill their objectives from the private sector – something that most probably would not have happened without it. It’s a stamp of approval. Funding tech start-ups privately is very high risk and you do not have to look far to find failures in the equity crowdfunding world. Satago, whilst it is still trading, has already collapsed once and ditched all of its equity crowdfunding shareholders, as it was bought in a pre-pack deal. Investors lost over £1m.

So, what are the practical outcomes of losing the EIF funding? Well, for the UK, not good. The EIF makes up more than a third of the input into the UK’s investment venture funds and has done so since 2011. The EIF is Europe’s single largest source of venture funding. It is a mixture of state and private finance and has been Europe’s version of the America’s Small Business Investment Company – a Federally backed VC outfit that provided funding for some of the US’s recent tech successes. The EIF normally takes on the role of a lead investor, often putting up to 40% into a fund. According to the EIF’s own figures, they have funded a total of EU23bn into UK venture funds between 2011 and 2015. They had supported over 27,000 UK SME’s up to the end of 2015. One of their success stories has been Skype.

Likewise, the EIB, European Investment Bank, will surely follow as the success of the UK tech sector gets sucked out of the UK and most probably over to Berlin – a trend that is already being witnessed. Whilst the EIB offers a mix of long term loan and equity finance, it is still an important source that will simply not be available when the UK leaves the EU.

So, what will fill the gap?

Clearly the investment from VCs and platforms offering alternative sources of capital will not be able to act as the sole bridge. What the EIF does so well is create momentum in the fund being raised. Raising for these funds is not easy and it often transpires that investors will only commit funds once the target has been reached. There is some hope that the BBB, British Business Bank, will take the strain but this seems optimistic – certainly in the short term. The BBB was only created in 2014, it has stricter government controls than its European version, which restrict its ability to fund, and it does not have the kudos of the EIF or its experience. They may be to cobble together some compromise deal between the EIF and the BBB so that both have access to each other’s funding. The Chancellor has promised a £400m boost for the BBB. However, this is tiny in comparison with what is required and, whilst received well back in October 2016, this was before Article 50 was signed and before it became apparent that both the EIF and EIB would cease funding operations in the UK.

Sources quoted by Business Insider show just how much these tech funds rely on the EIF. A fund being raised by Seedcamp, which helps seed corn investments, was told by the EIF that their application’s due diligence process would now be ‘indefinite’, post the article 50 signing. Other firms reportedly similarly affected are Dawn Capital, Hoxton Venture and Episode 1 Ventures.

This shift in funding may have two important side effects.

Firstly, it does seem increasingly likely that new tech successes will drift away from London and head to new centres on the continent, where access to the all-important funding will be available. This will diminish London as a major global tech hub. Apart from the very obvious disaster this will be for the growth of Britain’s new economy, the trickle down effect will have far reaching consequences for a whole raft of service industries that have grown up around these tech hubs. It seems impossible to see a situation where the EIF is unable to deal with firms or funds in the UK and for those firms and funds not to see the obvious benefits of moving back into the EIF’s sphere.

Secondly, it will exacerbate the already very poor record UK firms have for selling out in their early growth stages, instead of reaching maturity in the UK. The sales are almost always to overseas companies and one specified reason for Hammond’s £400m injection into the BBB last October was to stem this trend. A lack of funding will inevitably increase it.

The EU recently announced a new Euro 400m fund which will be used to instigate a new EU fund of funds for investment in venture capital. This is clearly an open challenge to the UK if it chooses to leave the EU with no deal or a hard deal. The structures are already in place in the EU and have been for long enough to allow a seamless handover. The UK structures or the BBB are new, underfunded and with little in terms of reputation. It takes time to build this up and it is time the UK does not have. The BBB was never intended to do the job the EIF does, so ramping it up as a replacement will not be easy. Possible, yes, but not easy.

The House of Commons Business, Energy and Industrial Strategy produced a report last Octoberⁱ on the UK’s SME finance situation. This report acknowledges the importance of the EIF for the reasons given in this post. They come to the following rather bland conclusion on the EIF –

The European Investment Bank has provided millions of euro into funds that underpin finance for businesses in the UK. Following the result of the referendum on the UK’s membership of the European Union, there are concerns that this source of finance might not be available in the future. There is a risk that structures in place to assist SME finance will have considerable shortfalls in their resources without the value of these funds. We recommend that the Government identifies the size of current European Investment Bank contribution in the UK economy, the timetable for current commitments, and make a clear statement on Government plans to ensure that the current level of funding will not be reduced.

This was pre-Article 50 being triggered and the resultant EIF actions - so I see it as too little, too late.

Of course, none of this was ever mentioned last year when we all went to the polls and voted to leave the EU. In fact, to be fair, it very rarely gets mentioned even now.