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Government expands Future Fund eligibility criteria

The Future Fund will now be accessible to startups that have previously taken part in accelerator programmes, but early-stage firms continue to struggle

Changes to the government’s Future Fund eligibility criteria mean startups and loss-making companies that participated in accelerators will be now able to apply for investment through the scheme.

The £250m Future Fund, which was announced 20 April and launched in May, provides loans to UK-based companies ranging from £125,000 to £5m, subject to at least equal match funding from private investors.

Investment through the scheme comes in the form of a convertible loan note, giving the UK government equity shares in the enterprise when the funding converts.

Before the changes were introduced, enterprises had to be an unlisted UK registered company and have raised at least £250,000 in equity investment from private, third-party investors in the past five years to be eligible for the loans.

Now, UK companies that have participated in accelerator programmes and were required, as part of that programme, to have parent companies outside of the UK will be able to apply for investment.

However, companies will still be required to meet the ‘substantive economic presence’ tests, whereby half or more employees are UK-based and/or half or more revenues are from UK sales.

“Our decision to relax this rule recognises the importance of many of the UK’s most cutting-edge startups as we bounce back from coronavirus,” said business secretary Alok Sharma.

“Accelerator programmes, such as TechStars or Y-Combinator, give businesses access to finance, mentorship and expert networks. Participants in accelerator programmes are often required to set up a non-UK parent company to participate, which means some did not meet the Future Fund criteria of having a UK parent company when it opened for applications in May.”

He added that more funding has been made available due to the popularity of the Future Fund, and that the “scale of the scheme will be kept under review”.

HM Treasury claims that, to date, more than 320 early-stage, high-growth firms have so far benefited from £320.6m of support through the fund.

“The popularity of the government’s Future Fund in only its first month of operation shows that the UK’s fastest-growing startups still require ongoing financial support to survive the coming months,” said Ritam Gandhi, founder and director of London-based digital agency Studio Graphene.

“It is promising to see steps being taken to broaden the pool of early-stage businesses eligible for support, as well as increases to the funding on offer.

“Yet I still believe the Future Fund fails to hit the mark. Many businesses who have been severely affected by the pandemic have been left without recourse, either as a result of being unable to quality for other government-backed schemes… or due to difficulties securing a loan from high street banks.

“The Future Fund, in theory, was introduced as an alternative to these schemes and aimed to plug some of these gaps. However, it continues to preclude struggling companies from accessing the help they need.”

Startups out in the cold

In April, Computer Weekly revealed 83% of the UK’s roughly 30,000 startups were ineligible for Future Fund loans as, according to figures from Dealroom.co, which regularly prepares data on the UK tech sector for the government’s Digital Economy Council, only 5,000 startups have raised £250,000 or more in the past five years.

While the government separately pledged £750mn of targeted support for the most research and development (R&D) intensive small and medium-sized enterprises (SMEs), which is available through Innovate UK’s grants and loan scheme, it has also only reached a small number of firms.

“Innovate UK, the national innovation agency, will accelerate up to £200m of grant and loan payments for its 2,500 existing Innovate UK customers on an opt-in basis,” said HM Treasury when announcing the pledge.

HM Treasury was unable to say how many more startups would be eligible under the expanded criteria when asked by Computer Weekly.

early-stage firms in particular have struggled, with industry research showing only £52mn of over £1bn in investment, or 5%, has gone to these companies between the start of lockdown on 23 March and 21 May.

Changes to the Future Fund since its initial announcement have also limited how much money early-stage startups can access.

For example, companies that have previously raised investment through the Enterprise Investment Scheme (EIS) or the Seed Enterprise Investment Scheme (SEIS), which offer tax advantages to individual startup investors, will be ineligible – despite many early-stage companies relying on these schemes to secure funding from investors.

“Crucially, while designed to support the country’s startups, the funding is not compliant with the Enterprise Investment Scheme, otherwise known as EIS. The lack of tax relief means that VCs, rather than investors, are better positioned to co-invest in early-stage businesses,” added Gandhi.

“The Future Fund thus takes the form of a VC offering which freezes out private investors and, by extent, the majority of entrepreneurs in the early stages of building a business.

“The government must rethink its approach and ensure that support schemes are designed to help all innovative startups to survive this challenging period – not just those that already have a high valuation.

“As the economy gradually re-opens, we cannot risk alienating the UK’s most promising entrepreneurs and forcing them to re-enter the economy without a sufficient recovery plan.”

Read more about government support

  • Confidence levels among the UK’s technology startups have declined dramatically since the onset of the Covid-19 coronavirus pandemic, according to quarterly survey results.
  • Intelligence agency GCHQ has launched the Innovation Co-Lab, a mentorship scheme to help 10 to 15 innovative small to medium-sized enterprises (SMEs) kick-start their growth and improve their use of data science, artificial intelligence (AI) and machine learning.
  • The CBI has called on the government to take a strategic, ambitious and expeditious approach to its policy decisions and long-term strategies to support the innovation economy.
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