Brexit could be a huge setback for European startups

To understand why the recent Brexit vote is a gigantic step in the wrong direction for European startups, take a close look at Outfittery, a Berlin-based ecommerce company.

The Outfittery, founded in 2012 by Anna Alex and Julia Bösch to deliver a personalized fashion shopping experience, has raised more than $38 million in venture capital and has enjoyed steady growth. But the Outfittery has succeeded so far only by overcoming the dysfunctional elements of the European market — challenges that are well-known to just about every entrepreneur here.

Rather than scaling quickly to serve the 500 million residents of the European Union, the process for expanding to just eight countries has been laborious. Entering each new country means figuring out massive administrative challenges, including understanding different rules about taxes, creating separate bank accounts, and finding different delivery partners.

As a result, the company has kept most of its employees in Berlin. And when it delivers goods from its German warehouse, the tangle of regulations from different EU members means the Outfittery has to drive orders to the border, then offload them, and then place them on other trucks to take them to their final destination.

“It definitely is a huge challenge to internationalize,” said Alex. “We’re trying to be as fast as we can. But all of these things take time and energy.”

Despite having dropped borders in the physical world, Europe has ironically remained fractured in the digital realm, with its 28 member states retaining separate rules in many areas — like distribution of content and privacy, as well as ecommerce and finance. In addition to language and culture, this creates barriers to expansion that can frustrate both European startups and U.S. tech giants alike.

The EU knows this, and has proposed an ambitious plan to create a Digital Single Market to eliminate these barriers and, hopefully, to give their startups a boost. But just when the continent is trying to unify in the digital space, the United Kingdom has voted to step out, taking its 64 million residents and its bustling London tech scene with it.

And that’s going to make the already challenging task of Andrus Ansip, the EU minister in charge of the DSM proposal, even more daunting.

“A number of years ago, we opened the European borders,” he said. “In the online world, these borders still exist. We do not yet have a single, digital market in Europe. And in the 21st century, this is absurd. I am under no illusion that this will be an uphill struggle.”

Alas, that hill is about to get a whole lot steeper, thanks to the Brexit vote.

For years, entrepreneurs in Europe have argued that among the advantages held by Silicon Valley startups is the ability to grow rapidly across the single U.S. market, with its population of 308 million people. Certainly border restrictions don’t apply equally to all startups in Europe, where categories like video games aren’t limited in the same way by virtual borders.

But for many categories of startups, such as ecommerce, entrepreneurs believe that having a single, seamless market would level the playing field and allow them to compete better on a global stage.

To help those startups, the DSM includes proposals for reducing costs for ecommerce shipping, eliminating “geo-fencing” rules that require companies to offer different deals or prices in different countries, streamlining rules around privacy and data protection, and putting in place new telecom rules to create Europe-wide services.

While ambitious — and long overdue — these proposals were at least a move toward creating some common ground. Yet they were also, in reality, just first steps toward helping entrepreneurs. The list of roadblocks for startups is far longer than the issues addressed in the DSM.

Consider BlaBlaCar, one of France’s hottest startups, and the challenges it has faced since its founding in 2006. The Paris-based ridesharing company has raised more than $350 million and has expanded across much of Europe.

As cofounder Nicolas Brusson explained, each time BlaBlaCar wanted to enter a new country, it had to essentially create a new company within that country. The company needed to scout lawyers, accountants, and other local experts to help understand things such as local labor laws and social welfare programs.

And even once they managed to do that, there were other impediments, as it was nearly impossible to do things like offer stock options across borders. In the case of BlaBlaCar, a preferred strategy was to acquire a local competitor that had already navigated these challenges and then operate the company as more of a conglomerate than an integrated whole.

“It’s still super complex,” he said. “And that’s a degree of complexity that’s not going to go away.”

Zalando, the Berlin-based ecommerce giant, has dealt with some of these headaches by keeping almost all of their 10,000 employees in Germany. As Zalando co-CEO Rubin Ritter told me last year, even the country manager for France works from Berlin.

Of course, this avoids one type of problem. But recruiting people becomes more challenging if a company requires them to move to a different country. The free, cross-boarder movement helps in that regard, though if the UK leaves, that will cut off at least one significant flow of valuable tech labor.

Ritter does believe that more entrepreneurs in Europe think more ambitiously and find creative ways around some of these issues.

“I think it is possible today to build these companies,” he said. “But there are more steps that could be done to help.”

In fact, the EU had just taken another of those steps. It launched a “consultation” in March to hear from startups and entrepreneurs about what additional reforms could be undertaken to accelerate the European startup scene.

“Start-ups and scale-ups should exploit the full potential of the Single Market,” said EU vice president Jyrki Katainen, who is responsible for jobs, growth, investment, and competitiveness, in a statement at the time. “We want to collect, as much as possible, new ideas from stakeholders on how to improve the environment for innovative startups throughout their life cycle. We need to create the best conditions for European entrepreneurs to take risks, invest, grow, and become competitive on a global scale.”

Hopefully, these efforts to unify the European digital markets will push ahead. But with the UK pulling in the other direction, it means their ultimate impact, if they are successful, will be much more limited.

And entrepreneurs in London could find themselves stuck on the outside watching as their competitors in a truly united and simplified digital market on the continent race past them.