The government has announced a £500 million ‘Future Fund’ to invest in start-up businesses affected by the COVID-19 (COVID-19) pandemic.
The Fund, launched in May 2020, will provide unsecured government loans ranging from £125,000 to £5 million to UK-based unlisted companies, subject to at least equal match funding from private investors. The scheme will issue convertible loans that will convert to equity stakes, valued at a discount of at least 20%, in the next qualifying funding round. On sale or IPO, the loan will either convert to equity or be repaid at a 100% redemption premium – whichever provides the best return to lenders.
The funding will be delivered in partnership with the British Business Bank, at a minimum 8% annual interest rate to be paid on maturity of the loan (the rate will be higher if a higher rate is agreed between the company and the matched investors) over a maximum 36 month period.
The Chancellor has stated that the Fund may be a suitable option for businesses that rely on equity investment and are unable to access the Coronavirus Business Interruption Loan Scheme (CBILS).
To be eligible, businesses need to:
have a substantive economic presence in the UK
attract the equivalent match funding from third party private investors and institutions
have previously raised at least £250,000 in equity investment from private third party investors in the last five years.
This is the first announcement in respect of the Future Fund and, as such, the information is therefore reasonably high level. We expect to see more details of the scheme released prior to launch in the coming weeks.
We anticipate the Future Fund may be of interest to early-stage, high-growth businesses that are still loss-making, and hence unable to benefit from more traditional lending via schemes such as CBILS. However, given the uncertainty of the economic outlook and the depressed state of corporate valuations at the moment, business owners will need to think carefully before approaching external venture capital sources and private investors for match funding.
We remain hopeful that rules that may currently prevent or restrict further fundraising for businesses with existing EIS and VCT Investors will be relaxed in the coming weeks, thereby opening another door to potential investor support.
In addition, the government has also announced £750 million of targeted support for SMEs focusing on research and development. The funding will be available through the grants and loan scheme of Innovate UK, the national innovation agency. The first payments are expected to be made by mid-May.
For more information about the Future Fund, venture capital investment and other forms of business support, please contact John Needham.