Our quick take on the Future Fund
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The Government’s announcement of support for ambitious, innovative companies this morning is a step in the right direction. However, based on our analysis, and from anecdotes across the ecosystem about the limited support available to fast growing and highly innovative loss-making businesses, we don’t believe that these measures go far enough.
- A “Future Fund” providing convertible loan funding, matched to that provided by private investors, to companies that have raised over £250k in equity investment over the past five years (see full details here); and
- A series of measures delivered through Innovate UK designed to increase and speed up delivery of the organisation’s grant and loan funding to small and medium sized businesses.
At the time of writing it’s unclear exactly what is being provided under the Innovate UK strand, so we can’t comment in details – but it is worth noting a substantial proportion of the headline amount is merely a commitment to speed up the delivery of existing grant and loan funds.
Much more detail has been released about the Future Fund. It’s certainly an interesting innovation and will be useful to some businesses, but it has a few significant downsides which limit its usefulness for the majority of startups and scaleups.
Firstly, the requirement for matched private sector funding will, we believe, make it difficult to access for most firms. Investors are already wary of putting money into ambitious companies in return for equity right now – see the collapse in deal numbers we’ve seen over the past few weeks. We’re also skeptical whether there’s much investor appetite to provide cash now in return for debt, and potentially receive an unknown level of equity later upon conversion. If you’re an investor, why not just negotiate hard on terms and take a large, known, equity stake today? The capital leverage is useful, but equity gives you control.
From the company’s point of view things are also difficult. Indeed, there are three big issues lurking in the details:
Firstly, the requirement to have previously raised £250k from investors is probably fair for this kind of vehicle, but it does mean that only 7,629 companies are actually eligible to apply. That’s just 27% of the 28,499 ambitious companies we track.
Secondly, an unnoticed aspect of the scheme is that loan repayment comes with a 100% premium – i.e. you have to pay back double what you borrowed, plus interest, to avoid conversion. We think this has been put in place to ensure the Government “sees some upside” even when loans don’t convert. But 100% is, quite frankly, extortionate, being as it is on top of an 8%+ interest rate. It’s unlikely any company will have the cash on hand to make this repayment.
Finally, the terms allow the Government to sell packages of these loans to funds. This means that a company taking a loan under this scheme has no idea who will end up being the shareholder on conversion. In extremis, they could end up having an investor they dislike or even a competitor’s investment fund on their cap table.
Overall, the scheme is promising. It’s still better taking one of these loans than being out of business. But, as always, the devil is very much in the detail. We’d suggest the following changes:
Reduce the minimum historic equity raise to £100k. That’s still a substantial enough hurdle for due diligence purposes whilst allowing another 2,302 of the most promising seed stage companies to participate.
Reduce the redemption premium to 20%. That’s still substantial upside for the Government for those who do repay whilst not being usury.
Give companies a reasonable veto over to whom these loans can be sold on. Companies have a right to some control over who ends up on their cap table.
Last, but by no means least, there is confusion today over whether the private investor capital lent alongside the government would qualify for EIS relief. We assume the intention is for it to be so – the Government should clarify this ASAP.
If you’d like to learn more about how COVID-19 is impacting on the UK’s ambitious companies and read our own proposals of how the Government should assist then download our report.
Toby Austin
Co-founder and CEO
Henry Whorwood
Head of Research and Consultancy
Have you seen our COVID-19 Business Impact report?
This report determines the impact of the coronavirus pandemic on the UK’s high-growth ecosystem, from particularly vulnerable areas to those likely to see a positive impact.
