State Aid for Start-ups: UK government launches Future Fund

On 18 May 2020, the government launched its £250 million 'Future Fund', a key initiative to support the UK economy during the COVID-19 pandemic.

The fund is open for applications until the end of September 2020. The fund is being administered by the British Business Bank. 

What is the Future Fund scheme?

The fund provides government co-investment from £125,000 up to £5 million to match private investment in high-growth UK companies. Particular focus is being placed on supporting UK start-ups, which may not yet be making profit.

The scheme aims to encourage private investors (particularly venture capital funds and angel investors) to invest capital during a period of high market risk and volatility. France and Germany have implemented similar schemes.

How does the future fund differ from existing support?
Innovative, early-stage, growth-driven businesses are often unappealing to lenders because they are either not revenue generating or not profitable as they reinvest all earnings back into their growth. These businesses also tend to have intangible assets (such as intellectual property) which, while valuable, can be unattractive to lenders as collateral.

Investors in these kinds of business (often high net worth angel investors and venture capital funds) expect these businesses to focus their money on accelerating growth as quickly as possible (rather than taking profit). The economic uncertainty created by the COVID-19 pandemic has made it even harder for these businesses to find investment. The Future Fund has been launched by the UK government specifically to address this funding gap.

What does the Future Fund offer?

• 3-year government convertible loan of between £125,000 and £5 million
• Must match at least equal funding from private investors – all investing on the same terms as the government
• Minimum 8 percent (non-compounding) interest
• Loan cannot be repaid early at the option of the company but repayment in full in certain circumstances: sale, IPO or on maturity of loan – with 100% repayment premium
• Automatically converts into equity stake upon certain triggers (e.g. company raising a further round of funding or an investor exiting the business) at a 20% discount to the funding round price
• Restrictions on what loans can be used for – e.g. not for repayment of existing shareholder loans, not for payment of dividends and bonus/discretionary payments
• ‘Most favoured nation’ rule means government loan terms are upgraded to match any better terms offered to investors on later loans
• Government has certain rights to transfer its loans to third parties

Which companies are eligible?

• UK-incorporated limited companies (which must the be the parent company if part of a group)
• Incorporated on or before 31 December 2019
• Must have raised at least £250,000 in equity investment from third-party investors in the last 5 years
• No shares traded on a regulated market, multilateral trading facility or other listing venue
• At least one of the following applies:
  • at least half of employees are UK-based; or
  • at least half of revenues are from UK sales

Why these limits?

The government is clear that the Future Fund is a loan scheme, not a grant scheme. The eligibility criteria aim to ensure that recipient companies have already been vetted by private investors, who have taken on risk and who are likely to help the company with its growth, financing and sales strategies. This reduces the risk that the government takes on through co-investment.

How do I apply?

Investors, rather than companies, must apply for the scheme (although companies must approve the terms). A lead investor must invest at least £12,500, although there is no minimum investment amount for other investors.

Private investors apply through the British Business Bank, which has further guidance for companies and investors on its website here.

Criticisms

The scheme has attracted two key criticisms.

Firstly, the eligibility requirements may mean that investment goes to more established start-ups that already have substantial funding. The benefit for the taxpayer is that such companies have something of a track record and have already been already vetted by investors. However, very small and more diverse companies may lose out. Some have questioned how much benefit women-led and BAME-led start-ups will derive from Future Fund investment.

Secondly, Future Fund co-investment does not meet SEIS and EIS requirements, meaning that investment does not have the investor tax advantages that might otherwise be available on early-stage equity funding. However, there are still some big advantages for investors, such as a 20% discounted conversion price, interest and a 100% redemption penalty. This scheme also means that private investors only take on half the risk for twice the investment value.

Going, going, gone

The scheme is only open for applications until 30 September 2020 and the total investment pot is limited to £250 million. So if you want to take up the offer – be prepared to move quickly.