UK voters have chosen, after months of campaigning by both sides, and over 40 years of membership, to exit the European Union. What should small, growth companies—like Lehigh Technologies, of which I serve as CEO—expect?
First, a few caveats. One: The challenges that Lehigh and thousands of other growth companies face after this game-changing referendum are inconsequential compared to what the United Kingdom and the other European countries must grapple with. Two: As a Brit, I am saddened by the outcome of the referendum and believe the country has voted for a future with less opportunity for its young people at home and abroad.
Over the course of thirty years working in leadership roles in a range of global organizations, I’ve seen a number of shocks change business as usual—from working in Germany during the collapse of the Soviet Union and the toppling of the Berlin Wall in the early 90s to being responsible for the Latin American region during the currency crisis in 2002. After many months studying Brexit, I believe the major short term issues for growth companies working in Europe will be fourfold: increased uncertainty, funding challenges, shifting customer focus and stagnant GDP growth.
The Brexit has cast a broad shadow of uncertainty - the future status of the UK and the already enfeebled economies of the Eurozone, as well as the broader impact on the world’s economy. Whenever uncertainty rules, many important drivers of growth come to a standstill. Companies put major decisions on capital investment on hold, push back adoption of new technology and postpone new product launches. All of these impact decision makers’ perception of risk, and typically the larger the company the more risk averse it behaves. Companies such as Lehigh Technologies, which are providing new products that can lower cost and improve the environmental footprint for our customers and targeting large multinational customers in Europe, are precisely the companies most concerned by Brexit.
As for funding, whenever uncertainty prevails investors prioritize safety over return. Investment funds sit on their money rather than invest, as that beats making a losing bet and provides a comforting message to their investors. Yet funding is the life-blood of early-stage companies, which need high-risk capital that is looking to change the way the world works and deliver high returns at the same time. In Europe, where high-risk capital is already scarce compared to the US, Brexit will reduce funding even further and negatively impact start-up companies in all sectors. Funding within the UK for technology clusters such as Cambridge will be even harder to acquire.
In turbulent times, growth companies must also take a fresh look at their customer focus. It’s time to refocus on customers that are less impacted by Brexit, such as those with little exposure to the UK or with most of their sales in the core EU countries rather than a UK multinational that relies on the EU as its major export market. Lehigh Technologies focuses on reaching markets that rely on a strong and robust manufacturing base, suggesting our focus should be the core EU countries including those of Eastern Europe.
It’s impossible to ignore that GDP growth, already anemic in the Eurozone, will likely decline. Many economists are forecasting a recession, not just due to Brexit but also related to anti-establishment sentiment in many countries and a more general inability to stimulate growth. This will lead to further retrenchment by large and small companies, in many ways reminiscent of the lost decade(s) seen in Japan. Without GDP growth, consumer spending does not increase, which further reduces innovation and investment in a vicious cycle.
If there is one bright spot in this depressing situation it is the quest for technologies, products and policies that can combat climate change. The strategies for CO2 reduction needed to meet the COP-21 targets will remain a high priority for governments and companies. Products that help reduce CO2 impact by using recycled or renewable material will be attractive to customers, especially if they come at a lower cost than traditional materials.
Bringing new technologies to established markets has never been easy. It takes time, technical expertise and capital. In today’s Europe, post the Brexit referendum, it will be even more challenging. However, nobody working in a growth company signed up for easy.