A government harbour in the COVID-19 tempest

Amid the current pandemic, the economy is taking a brutal hit, and as fledgling businesses, startups have a particularly fierce challenge to keep afloat. To try and help companies that aren’t eligible for existing relief schemes during this time, such as the CBILS loan, the government has announced a £1.25bn fund to try and help these companies - including startups - survive.

But how do actual startups feel about this announcement? Gus Bartholomew, Co-founder of SupplyCompass, product development and production management platform for fashion SMEs - said: “The announcement of the Future Fund has demonstrated how much the government values the London startup ecosystem. Its great news for ambitious startups like us, as it provides greater certainty in being able to secure the funds we need, to help us scale.

“For all qualifying startups this greater certainty on funding in the short to medium term means we can continue to invest in growth, which will help stimulate the economy quicker as we emerge out of COVID-19.”

James Flint, Co-founder and CEO of Hospify also commented: "This looks like a great initiative and we have been discussing whether we should avail ourselves of the scheme over here at Hospify. We are however still trying to get some clarity around the equity match-funding that needs to be provided.

“Does this need to be in place at the time of the loan, or is there a time-frame for putting it in place? And if the latter, how is that time-frame to be policed and adjudicated? We'll be getting in touch with the Treasury in the next day or two to seek clarification on this, as I suspect will quite a few other businesses, as these conditions will make all the difference regarding the scheme's practicality."

Sian Winfield, Director and Founder of CoStartup & Go said: "It is great that action is being taken, however, I wonder how useful it is if the remit for access is that the company must have raised £250,00 privately in the first 5 years.

"What about all those in between for example those that haven’t raised any capital and where people are working part time to work on their startup and then that role disappears? Perhaps something it would be good to have something for those at this stage / pre funding as well."

So how does it work?

In brief, the government package, The Future Fund, has agreed to match up to £250m of private investment in smaller, not yet profitable businesses, a lifeline for startups, which often aren’t profitable for the first few years of life; one of the things which has excluded them from other government rescue plans for business. The rest of the government support is coming from Innovate UK, an already established scheme which provides grants for smaller firms working in R&D.

Nigel Botterill, Founder of the Entrepreneurs Circle, offered his reaction to the government’s announcement: "As an entrepreneur I welcome this latest announcement. The economic shock to the economy from this crisis is going to be massive and any help for embryonic startups has to be welcomed. Some of these acorns of today will become the commercial oak trees of tomorrow and the government is right to intervene."

However, sadly not all startups will be eligible. One of the restrictions is that in order to access the scheme, is that the company must have privately raised at least £25,000 in the last five years. Also, the company must match the funds offered by the government with an equal amount of private investment. Finally, the business has to repay the government, otherwise the government claims an ownership stake in the company.

There is also some concern that if the process to receive this money becomes stifled by complex bureaucracy, then the money might come too slowly for some companies in this difficult time.

With the package being offered, the loans are given by The British Business Bank, but the government acts as guarantor to 80% of the loan; however, there is some concern that banks are being reticent - and therefore slow - in issuing the loans, because they would be left to cover the last 20% of losses if a company failed to repay.

Because of this slow-moving process, many companies that should be eligible, are still finding themselves in danger, which has in turn put some strain on the treasury to increase the government guarantee to 100% of the loan.

Tax and advisory firm, Blick Rothenberg has some concerns that innovative technology businesses might struggle to access the fund because of this requirement for private investment. David Hough, a Partner at the firm, explained: “Companies need to obtain funding from private investors and have a history of raising finance from third parties in order for the Government to match the amount raised under the terms of the Future Fund. For many private investors, themselves feeling the impact of economic uncertainty, they may be feeling that now is not necessarily the right time to take on additional risk.”

Suggesting a better fix, Hough suggested: “In order to incentivise investment from private individuals, the Government should look to expand existing tax reliefs, such as the Seed Enterprise Investment Scheme (‘SEIS’). “

Commenting on why supporting young businesses is so important, Russell Dalgleish, Chair, Scottish Business Network, said: “The government's announcement of a £1.25bn package to support innovation must be welcomed by all. Innovation is at the core of value creation, job creation and critically competitive advantage for countries as much as companies. As we work together to create a new, post COVID-19 crisis world, we must be prepared to do things differently and to learn from what has happened this year. Entrepreneurs will be at the forefront of this new future hence the need for this support.”

Lauren Stewart Tack, CEO & Founder of Invigorate Platform, gave us some deeper analysis on the pros and cons of what is being offered: “There has been some commentary regarding businesses with less than £250k investment to date and how this scheme is not appropriate for other private investors like angels who take advantage of SEIS/EIS schemes. There is also criticism that the Future Fund is not broad enough and was designed to save VCs existing investments. 

“If you look at it from the government's perspective, there is no support package that will cover all businesses. The BBB already supports a number of VCs acting as their LPs, so letting these businesses fail will mean further taxpayers' money lost. 

“I can also see the government's rationale, many private investors have been through rigorous due diligence processes to qualify investment as it's very difficult to draw the line between businesses that have been self-funded or perhaps angel funded in relatively smaller amounts, in essence, not yet proven.

“The one area that has been overlooked is the diversity question, many of the more established startups to date are in predominantly male-led businesses and as we know less than five percent of VC funding to date has gone into female-funded businesses. Many smaller businesses that won't qualify for these schemes are run by underrepresented founders and begs the question whether it will put the ecosystem a couple of steps backwards with regards to the little progress we've seen to date. Without existing, established networks these underrepresented founders will struggle further.”