Government eyes taking equity stakes in tech start-ups

Treasury considering making convertible loans to start-ups with scheme to be managed by Business Growth Fund

The government is considering various rescue packages to help Britain’s tech sector start-ups excluded from business rescue schemes announced so far.

Although government has lauded the UK’s tech sector as the spearhead of Britain’s new economy – Boris Johnson wrote the foreword to Tech Nation trumpeting UK tech investment report last year – banks are refusing to offer state-guaranteed loans to loss-making start-ups.

Yet France has announced a €4bn (£3.5bn) start-up bailout fund – called a liquidity plan – to help French start-ups stricken by the coronavirus crisis.

One idea being considered is the government offering loans to start-ups, which could either be repaid by businesses after the crisis or turned into equity stakes in tech start-ups owned by the state. Venture capital would have to match whatever the government invests, according to the Financial Times, to prove commercial viability and also keep within EU state aid rules, which ban direct state intervention.

See also: Why government needs to boost EIS tax relief to 80% to save our start-ups

It would be similar to 3i, then called the Industrial and Commercial Finance Corporation, the government scheme launched after the Second World War to help regenerate the economy.

Business Growth Fund, the state accelerator fund for growth businesses, is being eyed to manage the convertible loan scheme and subsequent state equity investment in tech start-ups.

BGF was launched in 2011, having raised £2.5bn from five banks – Barclays, HSBC, Lloyds, RBS and Standard Chartered – as part of the government’s efforts to boost funding for small businesses after the financial crisis.

Another suggestion is that government agency InnovateUK, which supports innovative businesses, could manage the scheme, in much the same way that British Business Bank is managing the Coronavirus Business Loan Interruption Scheme.

The Sunday Telegraph reported that the government has separately approached a City figure about leading a “bailout taskforce” that would inject funds into struggling medium-sized high-street businesses in return for equity stakes.

And venture capitalist Foresight Ventures has proposed another £5bn private-sector-run fund to the Treasury to help businesses emerge from the coronavirus crisis. The Foresight Ventures proposal also dubs itself the “new 3i”, which helped small and medium-sized businesses after the Second World War which could not raise equity on the stock market.

Save our start-ups

Meanwhile, a campaign to “save our start-ups” will be launched this week to help thousands of promising young businesses that do not qualify for existing schemes. Its backers, including co-founder Brent Hoberman, wrote to Boris Johnson this weekend, calling on the government to provide an “equity-based liquidity package suitable to save start-ups at risk”.

Although chancellor Rishi Sunak is understood to be sympathetic to the plight of start-ups, no decision has been made on the final shape of any government support.

This fresh government thinking comes as the Centre for Economics and Business Research has said shutting down the economy will reduce Britain’s gross domestic product by one third, as social restrictions prevent most businesses from functioning. The coronavirus lockdown will cost the economy £2.4bn a day for as long as it lasts.

Further reading

Venture capitalist calls for £1bn start-up bailout fund

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Tim Adler

Tim Adler is group editor of Small Business, Growth Business and Information Age. He is a former commissioning editor at the Daily Telegraph, who has written for the Financial Times, The Times and the...

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