The government has announced a new scheme to help UK startups in need of financial support during the ongoing coronavirus pandemic. The package includes a £250 million Future Fund and an injection of £750 million for Innovate UK to distribute as grants and loans.
The headline Future Fund will provide startups with between £125,000 and £5 million in extra cash via a convertible loan from the British Business Bank, at a non-compounding 8% interest rate for a maximum term of three years. This type of loan means the debt will convert to equity at the startup’s next funding round, but the debt can be repaid in full in certain circumstances.
To qualify for the government-backed fund, startups must be able to secure an equal or greater amount of match funding from private investors, be an unlisted UK-registered company and have raised at least £250,000 in equity investment from third-party investors in the last five years, excluding angel investment. The funding must be used as working capital and cannot be used to pay off debt or make dividends or bonus payments.
Of the £750 million that has been provided to Innovate UK, £550 million is earmarked to fund R&D activity, and £200 million is aimed at helping existing Innovate UK members. The Treasury also says it is pushing HMRC to speed up the payment of tax credits.
The Treasury was forced to respond after its initial COVID-19 support package left many startups unable to access emergency funds because they had yet to turn a profit and didn’t qualify for rates relief, typically due to operating from shared office spaces.
Is it enough?
Initially set to run from May to September, some details are still unclear about how the mechanism for accessing the Future Fund will work, but the Treasury has published a partial term sheet.
Stephen Page, CEO of seed investor Startup Funding Club, has voiced concerns that the scheme doesn’t do enough for smaller firms.
“My concern with the way the government has structured the Future Fund is that it will not be the lifeline it purports to be to the plethora of truly early-stage startups that have not yet raised £250,000 in private funding to make them eligible,” he said. “It seems quite plausible that government co-investment will instead primarily benefit VCs as they lean on the Future Fund to help tide over their existing portfolio companies.
“What’s really needed is action to unblock the pipeline of angel investment for new companies.”
There are also concerns that the scheme could exacerbate an already large diversity gap when it comes to startup funding.
Check Warner, cofounder of Diversity VC, tweeted: “It’s critical that investors consider and encourage diversity when making these investments. Diverse founders are less likely to have funding already, less likely to have ‘warm introductions’ and therefore less likely to have access to this support. Investors must be proactive.”
Many of the country’s best-funded companies asked the chancellor for aid last week, but measures for larger scale-ups have not been announced.
Influential investor Robin Klein of LocalGlobe has warned that it would be a mistake to bail out startups with state money. “A bailout fund risks misdirecting much-needed capital to the wrong part of the economy. It also creates adverse selection in a healthy and growing ecosystem. The 27% of companies that do make it from seed to Series A are probably the least likely to seek government support,” he wrote for Sifted a few weeks ago.
Crunch time for startups
With payday fast approaching, this week could prove crunch time for small firms that are struggling as a result of COVID-19.
“I’m delighted to be able to break the news that we’ve managed to secure a vital lifeline for venture-backed startups up and down the country,”
Dom Hallas, Executive Director at industry body Coadec wrote in an email to members yesterday. “As you’ll know, we’ve been hounding Government Ministers, senior officials, civil servants and MPs for an equity-based financing solution since day one. With the UK entering another three weeks of full lockdown, access to cash could not have come sooner.”
Gerard Grech, chief executive at Tech Nation, welcomed the news: “Tech startups and scale-ups are crucial to the UK’s future growth, jobs and innovation. The £500 million Future Fund and £750 million for loans and grants for R&D for startups is a bold intervention, and although the full implementation details are to still be released, it is likely to give the sector a welcome boost in these unprecedented times.”