The widely anticipated Future Fund will issue convertible loans between £125,000 to £5m to innovative companies that are facing financing difficulties due to the Covid-19 outbreak. These loans will have to be matched by private investors.
These loans will be for three years and will be charged at an interest rate of 8 per cent.
Crucially, the government could end up owning half of some of Britain’s fastest-growing tech businesses. Future Fund loans may convert to equity at a discount of at least 20 per cent when companies undergo their next funding round.
This scheme will launch in May 2020, which may be too late for some start-ups reliant on investors to survive. Investment through government tax schemes such as the Enterprise Investment Scheme has dropped by 70 per cent this year.
Chancellor Rishi Sunak has charged British Business Bank with delivering the Future Fund.
The government is committing an initial £250m in funding towards the scheme and the scale of the fund will be kept under review.
The news will go some way to allaying tech start-up fears that they were being forgotten during this pandemic. A recent poll conducted by Studio Graphene found that 69 per cent of UK tech start-ups did not have faith in the government’s ability to support the private sector during the pandemic.
However, Mark Brownridge, director general of the Enterprise Investment Scheme Association, warned that private investors are simply too nervous to invest on the current terms available to them and need more advantageous tax treatment rather just than matching funding, on what would appear to be much better terms for the government.
Brownridge said: “Positioning the additional support as a convertible loan, carrying an 8 per cent interest rate and a 20 per cent discount on conversion, all in favour of the government, will be of very little encouragement for private investors to invest alongside. We need to be focusing on encouraging new investors, and the only way to do that is through more advantageous tax treatment for them, which is what the EISA, along with other investment funds, has been lobbying for.”
What if I haven’t previously raised £250,000?
Because the scheme is only open to start-ups that have raised at least £250,000 over the past five years, Stephen Page, CEO of start-up investor SFC, says the Future Fund ignores true start-ups.
Page 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. That’s fine as far as it goes, but matching by definition requires investors to be putting up money, and at the very early stage this has dramatically dried up in the current climate — both for individual companies and for the smaller funds that rely on risk-based investment from angels and high-net-worth individuals.”
Can I raise my share of investment through EIS or SEIS?
According to SeedLegals, not you can not. Future Fund is not currently SEIS/EIS compatible, so you’ll need to find VC investors (they mostly don’t get SEIS/EIS) or persuade angel investors to forego SEIS/EIS for this round and (because of the way SEIS/EIS works) for all future investment that they make in your company.
Who can apply for the Future Fund?
A start-up is eligible for the Future Fund providing:
- your business is based in the UK
- your business can attract the equivalent match funding from third party private investors and institutions
- your business has previously raised at least £250,000 in equity investment from third party investors in the last five years
Full eligibility criteria will be published in due course.
Step-by-step guide to applying and getting money from Future Fund
The Future Fund will launch in May and will run until September 2020.
According to SeedLegals, the step-by-step guide to applying to the Future Fund are likely to be as follows:
- Self-check that you qualifyGo out and find investors
- You’ll need to get investor consent (if you had investor consent provisions in your last round), do a shareholder resolution and a board resolution to get permission from your existing investors and shareholders to enter into the scheme
- Download the Future Fund Convertible Note from the gov.uk site when it is published in May
- Fill in all the requested details, including details of all the investors and their investments
- Do KYC (Know Your Investor) and AML (Anti Money Laundering) checks on your investors
- All your investors will need to sign the Convertible Note
- Email the signed Convertible Note, together with any requested shareholder approvals, to a Future Fund email address
- A Future Fund inspector will check that your company qualifies (perhaps by e.g. checking that your Companies House filings show that you’ve raised more than £250,000 previously), that all the investors and their investments are legitimate, that all the investors have signed, etc
- Future Fund will email you back saying you’re cleared to proceed, attaching or mailing the government-signed agreement
- Your investors send their funds to your company bank account
- Send Future Fund a copy of your bank statements or other proof that funds have been received from all the investors
- The government wires its funds to you
The important thing to note is that the government and all your new investors will sign the same, single Convertible Note document.
£750m for research and development
Small businesses focusing on research and development will also benefit from £750m of grants and loans.
The £750m of targeted support for the most R&D intensive small and medium-size businesses will be available through Innovate UK’s grants and loan scheme.
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. An extra £550m 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.