Theresa May

Tech entrepreneurs have expressed fears that British startups could be seriously damaged by a loss of funding from the European Investment Fund (EIF) following Britain’s vote to leave the European Union.

It was reported over the weekend that at least four British venture capital firms have been affected by a freeze of money from the EIF, which has committed almost £2bn to UK-based venture capital firms in the past. Two sources told Business Insider the EIF is no longer sending funds to any firm who applied, or was in the process of applying, after Britain voted ‘leave’ in June of last year.

Paul Sullivan, who founded digital marketing startup Modadaweb, predicts a “significant slowdown” in tech investment through venture capital avenues as a result of the funding freeze.

“[British] tech startups seeking funding may have to relocate to get easier access to funds, creating a poor position for London,” he added.

James Mackonochie, co-founder of FinTech firm OFF3R, which allows entrepreneurs to compare investment opportunities, was similarly pessimistic, describing the loss of EIF funding as “hugely worrying for UK-based early stage business”.

“The very reason that we have such a dominant FinTech industry in this country,” he said, “is down to support and investment from schemes like EIF.”

The UK’s tech startup ecosystem may even “cease to exist” after EIF money falls away, according to Ethar Alali, CEO of Manchester-based engineering startup Axelisys.

Russ Shaw, from Tech London Advocates, said British tech will need to raise its game after the loss of EIF funding, and look beyond Europe, to the US, China, and India.

The loss of EIF money, he said, will hurt newly-emerging tech sectors the most, with verticals like HealthTech and CleanTech likely to see the biggest damages. Longer-established sectors like FinTech, Artificial Intelligence, and Virtual Reality, Shaw said – which have already demonstrated a strong business model – will remain better protected.

Filling the funding gap

Many tech entrepreneurs remain sceptical about the Conservative Party’s manifesto pledge to “repatriate” EIF funds to the British Business Bank, and thus make up for any shortfall in funding.

Simon Murdoch, managing partner at Episode 1 Ventures – one of the venture capital firms directly affected by the EIF freeze – told Business Insider there is “zero chance” of the UK government filling the funding gap. The UK’s contributions to the European Investment Bank will be spent on the UK-EU divorce bill instead, he said, describing the Tories as living in “cloud cuckoo land”.

OFF3R’s James Mackonochie said the “un-costed” Tory pledge will “do little to assuage nervousness” among tech startups.

“I just can’t see how the Tories can pledge to make up the shortfall given huge investments that they will need to commit elsewhere, such as agriculture, scientific research, and of course the divorce bill itself.”

Russ Shaw, of Tech London Advocates, added: “If [the Conservatives] say in their manifesto that they’re going to do it, I believe they’re going to do it. And if it’s in the manifesto and it doesn’t happen, we will hold them to task. I think they understand that they’re going to have to step up, but we’ll be watching closely to make sure that happens.”