As if the U.K. didn't have enough to worry about. Heading into the 2017 World Economic Forum this week, Britain faces a new threat to its vitality: a so-called "hard Brexit."

Prime Minister Theresa May signaled on Tuesday that the U.K. would likely face difficulty as it prepared to begin its two-year transition out of the European Union, starting in March. In a speech, she noted the U.K. would not seek membership in the EU's single market. The U.K., she added, wouldn't be "half-in, half-out" of the EU.

In other words, if British businesses were hoping to maintain access to the EU's single market in spite of the U.K.'s move to break ties, they're in for a rude awakening. May has described her leanings in similar commentary, which recently spurred a rout in the pound sterling. Last week, its value against the U.S. dollar dropped to its lowest level since Britons first voted in a June referendum to exit the European Union.

To be sure, Britain's hard Brexit is just one of many topics the biggest names in economics and other global elites will discuss this week. Yet it should be top of mind for entrepreneurs -- particularly those with customers in Europe and other business interests.

"It's possible that European startups are overestimating the direct effects of Brexit," notes Stephen Roper, a professor of enterprise at the Warwick Business School in Coventry, England, and the director of the U.K.'s national small-business research center. Still, Roper anticipates that Brexit is nevertheless "changing the landscape of opportunities" for both EU and U.K. startups.

Here's a look at the other factors that will affect how the economy will shape up for European startups in the new year.

Riding High

Europe boasts several "unicorn" companies, including Spotify, Deliveroo, Farfetch, and MindMaze, which each raised more than $100 million last year. Meanwhile, 2016 saw the biggest European tech acquisition of all time, when Qualcomm paid a massive $47 billion for NXP, a Netherlands-based semiconductor manufacturer. (The move allows Qualcomm, a U.S. telecommunications company, to move away from its core business of manufacturing chips for smartphones.)

Other American companies saw promise in the EU, too, with Facebook acquiring Masquerade, a Belarus-based selfie app, in March, and Twitter paying $150 million for Magic Pony, the U.K.-based machine-learning platform, in June. More recently, Tesla acquired Grohmann Engineering, a German automated manufacturer, to fuel production of its electric cars. The company has ambitious plans to produce 500,000 cars per year by 2018.

Risk Aversion Reigns

European startups continue to face setbacks, however. A major one is that the culture tends to be more risk-averse, and venture capitalists are wary to invest in new or creative business models. "Entrepreneurship is perceived as riskier, and there's more of a stigma to failure in Europe than there is here," explains Geoffrey Heal, a British expatriate and professor of social enterprise at Columbia Business School. "There's status associated with being a senior executive at a big company that doesn't come with working in a startup," he adds.

It doesn't help that many companies also struggled to grow and raise new funds last year. Consider that SoundCloud, the Berlin-based music streaming service, failed to negotiate a sale to Spotify, according to a Bloomberg Businessweek report, because neither party could agree on a price. The company only recently introduced a paid feature, which critics note has been slow to generate sales. Meanwhile, the Brussels-based restaurant delivery startup Take Eat Easy closed up shop last July, when it ran out of money and couldn't raise a third funding round.

"Macro-Level Uncertainty"

In 2017, all eyes will be on London, Paris, Berlin, and Munich -- the top European cities for tech startups according to recent data from CBRE, a global real estate research firm. Meanwhile, Sweden remains the largest producer of billion-dollar companies after Silicon Valley, with Stockholm accounting for some 22,000 tech companies.

The future of European entrepreneurship is a question mark, however, as several political time bombs have yet to detonate. It's unclear whether Greece will renegotiate a debt relief package with the EU, for example. Meanwhile, France, Germany, and the Netherlands will hold federal elections in 2017, and some argue that the surprise victory of President-elect Donald Trump in the U.S. could signal a similar win for far-right candidates abroad, including Marine Le Pen of France and Geert Wilders in the Netherlands.

"The big issue is the macro-level uncertainty about where the EU is going politically and economically," says Columbia Business School's Heal. In the coming months, he expects that this uncertainty will slow down startup investment and innovation. "It's not necessarily negative, but it has to make people think," he says.

Published on: Jan 17, 2017