"Scary though Brexit at first appears, London has been, and will remain, the capital of European startup technology," wrote my Inc.com colleague Paul Grossinger earlier this summer.

Unfortunately for the British capital, however, it appears venture capitalists might not entirely share his optimism.

According to new numbers from Dow Jones VentureSource and reported in the Financial Times, VC investment into Europe as a whole took a dive in the third quarter. European startups raised €2.1 billion (approximately $2.8 billion) from VC funds across 464 deals last quarter, down 32 percent from the quarter before and 29 percent compared to the same period in 2015.

British startups specifically also raised less cash. While they attracted $281.5 million in funds in the second quarter, they raised just $58.2 million in the third. Compare that to the $656.1 that flowed to British startups in the third quarters last year and you can see why many are starting to be concerned.

Is Brexit to blame?

There's no shortage of possible explanations for this slide in investment. This year has brought a chill in VC funding on this side of the Atlantic too, as investors corrected for previously over-exuberant valuations. Europe may just be weathering the same bumpy comedown to some degree.

Or, as as Harry Briggs, an investor at BGF Ventures, told the FT, the fall off last quarter may simply be a matter of "one or two huge deals skewing the market or announcements being delayed."

But as relevant as these other factors may be, given the recent turbulence in European politics and currency valuations, many involved in European startups aren't crossing Brexit off the list of potential suspects. The decline in VC money flowing into the region will "fuel concerns that uncertainty surrounding Britain's exit from the EU is damping investor enthusiasm for start-ups across the region," asserts the FT.

The chilling effects of uncertainty

The paper isn't the only commentator reporting that Brexit has startup watchers worried. When TechCrunch recently surveyed European founders and investors ahead of a conference in London, it found significant pessimism about the immediate future of that city's startup scene.

When asked to rate the prospects of various European startup hubs over the next few years, founders put London deep into negative territory (the British capital ended up with a "positivity score" of -4.8 versus +6.5 for Amsterdam and +4.7 for Berlin). Investors offered only a slightly less gloomy assessment, giving London a -1.6.

While the possibility of stricter controls on the migration of talent and other regulatory snarls were mentioned as major concerns by some respondents, it's clear from reading through the comments collected by TC that the fundamental problem is simple uncertainty.

"The most important issue is that we still have no idea what Brexit means or when it will happen. Two years of negotiations starting early next year. Until the outcome is clear one can't predict the effect on the economy or on the startup scene," said one investor summing up the situation.

Are you optimistic or pessimistic about the future of Britain's startups?

Published on: Oct 21, 2016