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UK government announces ‘Future Fund’ to support startups during Covid-19

The startup rescue package includes public-private match funding, which will give the government shares in the enterprises, as well as targeted research and development support

The British government has unveiled plans for a “Future Fund” to ensure startups and loss-making companies receive enough investment to remain afloat during the Covid-19 coronavirus pandemic.

The £250mn government fund is set to launch in May, and will provide loans to UK-based companies ranging from £125,000 to £5m, subject to at least equal match funding from private investors. Delivered in partnership with the British Business Bank, the government has said it will keep the £250mn pot “under review”, suggesting more money could be committed in the future.

To be eligible for loans under the new scheme, the ‘headline terms’ published by the government on Monday 20 April state that a business must be an unlisted UK registered company and have raised at least £250,000 in equity investment from private, third party investors in the last five years.

Investment through the scheme will come in the form of a convertible loan note, giving the UK government equity shares in the enterprise when the funding converts. In the case of a sale, initial public offering or loan maturity, there is also the option for a “redemption premium,” whereby the company can repay 100% of the government’s principal bridge funding.

Interest on the loans is set at 8% per annum, and will be payable after a three-year term. On top of the Future Fund, the government is separately pledging £750mn of  targeted support for the most research and development (R&D) intensive small and medium-size firms, which will be available through Innovate UK’s grants and loan scheme.

“Innovate UK, the national innovation agency, will accelerate up to £200 million of grant and loan payments for its 2,500 existing Innovate UK customers on an opt-in basis,” said HM Treasury. “An extra £550 million will also be made available to increase support for existing customers and £175,000 of support will be offered to around 1,200 firms not currently in receipt of Innovate UK funding. The first payments will be made by mid-May.”

In total, when you include matched funding from the private sector, the new package means £1.25bn is being funneled towards supporting startups.

Tech sector reactions

The announcement of a “startup rescue package” comes as pressure has been mounting on the government to take action.

Chancellor Rishi Sunak’s Coronavirus Business Interruption Loans Scheme (CBILS), which was first announced on 17 March, did little to help startups, and even after an extension on 6 April, which removed the need for companies to prove they were unable to get loans on commercial terms, the liquidity needs of startups were not being met.

Many tech industry bodies and groups, which have been calling for an public-private equity based co-investment strategy, are now welcoming the announcement.

“Britain is the start-up capital of Europe and this package is a signal of intent that the Government will make sure it remains so in the future,” said Dom Hallas, executive director of campaign group The Coalition for a Digital Economy (Coadec). “We’re delighted to see the Government has stepped up and provided the kind of support package that our startup ecosystem so desperately needed. This support will help early-stage innovators survive the crisis and thrive after it.”

Gerard Grech, chief executive of UK-based entrepreneurial network Tech Nation, agreed the government package would provide a welcome boost to the UK’s tech sector.

“How to target the money effectively should be the next priority. Start-ups and scale-ups vary in their financial structuring and their regional location. It will be important to get the balance just right, across the UK and also across the different models of investments, from angel invested companies to VC-funded firms,” he said.

“The UK’s tech sector has achieved a huge amount in the past 10 years. In 2019, a staggering 33% of all European tech investment was in the UK – the third-highest in the world. We must keep building on this success story.”

Read more about coronavirus and startups

These sentiments are being echoed by startups themselves too. Cristina Vila, founder and CEO of software management platform Cledara, told Computer Weekly that the best way to finance startups, particularly when you want to act quickly and minimize cost, is through convertible notes.

“For startups affected by the current situation this would be the most efficient and effective support the UK government could offer. Unlike the debt based relief packages offered to other industries, this method would give the UK taxpayer a share of the upside of the value that they help create,” she said.

However, while the funding scheme is welcome, some big questions remain unanswered according to Andrew Roughan, managing director of coworking and innovation space company Plexal.

“Early stage companies can be risky investments for taxpayer money and the Treasury will face a monumental challenge when it comes to making sure funding goes to startups likely to succeed. Government funding could also impact the valuations of startups, which could leave prior or minority shareholders disadvantaged,” he said.

“The problem for startups is one of timing. There are thousands of small businesses across the country that need investment now. Simply put, time is running out. Innovate UK and the British Business Bank are highly commendable and capable organisations, but they were not built with this task in mind. We have to ask what support they will need to enable them to get funds to startups quickly enough – and at scale.

“This is a move in the right direction but entrepreneurs who are fast approaching a cliff-edge need confidence that this scheme will enable their survival.”

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