The Future Fund – a handout or a handoff?

Sara Ager our CEO shares her thoughts and findings on the Government’s Future Fund – discussing how the scheme is going to achieve what was intended and support the ideas.

The UK Government’s announcement for start-ups last week [https://www.gov.uk/guidance/future-fund] was a welcome one and pretty much unprecedented. Like other protections rapidly devised to address the economic fallout of COVID-19, the Future Fund, although positive, does not come without complexity and the potential to create confusion. The principle underpinning the Future Fund is that the Government will underwrite the scheme, working in partnership with the British Business Bank, and will issue convertible loans to eligible companies i.e. those facing financial difficulty including possible failure caused by the outbreak. The loans would be convertible on sale or expiration.

The Government has set aside a total of £250,000,000 for the scheme (although say that this will be subject to review) and the scheme will be kept open until the end of September 2020. Seemingly, the fund is open to any unlisted UK-registered company that has raised at least £250,000 in aggregate from private third-party investors,  offering eligible companies a loan that matches that which has already been invested.

The starting point for funding is £125,000 and the maximum which will be lent is £5,000,000.

For me this means that the Fund itself is designed to operate contrary to free market economics and to the traditional way private equity (PE) has operated up to now: PE is renowned only for backing the strongest.

It remains to be seen however, exactly how the Fund will operate in its detailed structure and mechanics. Available capital, although significant, is limited, and according to some commentators will barely scratch the surface of the need. In their comprehensive review of the deal [https://seedlegals.com/resources/the-governments-future-fund-wont-help-uk-startups/], which is well worth a read, SeedLegals have estimated that it will benefit perhaps 5% of all start-ups that need funding. Worryingly it is not completely clear as to how funds will be allocated and distributed. One assumes this will be a “first come, first served” basis, and that  may mean the strongest do not, in fact, survive – it will be a question of the quickest off the mark and not survival of the fittest!

Whether or not the Fund offers enough comfort for investors to continue operating in the space is also unclear.  GreenKite’s soundings in our networks indicate many remain cautious, and are continuing to either pull out of funding rounds,  and or are delaying decisions: the requirement for matched funding will make access difficult for many.

What about those next-generation start-ups, those who have not managed to secure any investment, and/or are at pre-revenue stage? Does the Fund offer anything for them? Regretfully it is probably too late. Fledgling firms who are trading already are knocking on the doors of potential purchasers, series A raises are being put on hold, and as cash forecasts are being pulled together, key employees are being furloughed and business advisors stood down. It is not just the start-up who is impacted but the whole ecosystem that has sprung up to support them that will need re-building.

The intention was always for the Government to put in place a scheme which really helped the sector to survive this period of uncertainty. And it could just have been the speed by which the fund was put in place, or perhaps it was the people who feed into its design and structuring but frankly, some of the terms attached to loans, are just terrible. How can it be right that after 3 years, the start-up is required to repay 2x the loan value to investors and only 1x loan value to the taxpayer? And if there is no means of paying the cash back, just 36 months on from where we are now, for the firm to face liquidation? Clearly, not in the best interests of the start-up, taxpayer or the Government.

The loan terms offer little or no control for the start-up, affording the Government the right to sell and transfer any share it holds in the company to anyone else they chose. At least when managing a raise there is a period of courtship between the company and the investor such that each gets to understand the other’s appetite and profile. The Fund provides none of these niceties, no debate or means to (re)negotiate the terms of the loan – it is a take it or leave it scenario heavily weighted in favour of investors.

So there’s much as yet unanswered, but if the Fund is anything like the other emergency packages introduced by the Government, over the next couple of weeks there will be a series of refinements in both eligibility criteria and terms. This scheme was never intended to support business models and initiatives without merit, its aim was to protect the IP of the future. There remains the need from all us involved within the community and wider ecosystem to come together to do what we can to support the credible companies that we all know are out there. Whatever the ‘new normal’ will be, it won’t happen by accident and we’ll need all the talents we can muster.