Applications for the UK Government’s hotly anticipated £250m Future Fund are open, following several weeks of speculation and lobbying since the publication of the term sheet in April. Applications for funding hit a reported £453m on the first day, prompting speculation that the capacity of the Fund – which is run by the British Business Bank (BBB) would need to be promptly doubled and confounding predictions that uptake would only be modest since this is a relatively niche product.
It will be interesting to see whether the Fund’s capacity will indeed be increased, how the BBB will cope with the demand and how quickly funding will actually flow to the businesses that need it – a 21-day turnaround time has been indicated..
In the meantime, now that full details are available, it is worth reflecting on what the Future Fund is, and what it is not.
As we explained in our initial briefing, the Future Fund is a pool of taxpayers’ money which has been made available to provide bridging loans to early stage companies that are in between fundraisings. It is not available on a standalone basis (since it requires at least an equal amount of matched funding from other investors), and it cannot be used as part of an equity fundraising, so it is not available to companies raising for the first time and cannot be used alongside EIS or SEIS-qualifying money.
The Fund is aimed at companies which have raised angel, seed or VC money in the (recent) past and are finding it difficult to raise again in the current economic climate without being obliged to conduct a dilutive down-round, since it provides funds to – hopefully – tide those companies over until economic conditions, investor appetite and their equity valuations have had a chance to recover.
This structure aligns well with the priorities of venture capitalists and other investors so far during the crisis – that is, to shore up their portfolio companies and help them to survive until the hoped-for economic recovery. The Future Fund helps these investors to do so at a reduced cost to themselves, allowing them to conserve capital to be deployed another day.
Targeting VC-backed companies as the most likely concentration of quality innovative businesses is certainly a logical approach: VCs have been incredibly successful in sifting out and selecting the very best ideas and management teams, and they conduct rigorous due diligence processes and negotiations which ensure that only the very best businesses make it through. Those businesses should, in theory, be best place to survive the crisis and lead the innovation of the future, and the Government’s support for them is naturally welcome.
However, since the Government’s PR hailed the Future Fund as world-leading support for early-stage businesses without going into many of the details of the funding terms or eligibility criteria, it is understandable that parts of the start-up community were disappointed to learn either that the Fund would not be accessible to them, or that it would only be available on what are perceived to be aggressively investor-friendly terms.
Since the Fund’s eligibility criteria require applicant companies to have previously raised at least £250k in equity investment from external investors during the past five years, scores of start-ups without previous backing are immediately excluded. And the fact that the application for funding needs to be made by the lead “matching” external investor – not by the company – confirms that this is a product that is designed to top-up funding from other investors, not to provide a capital pool accessible to by startups and founders who do not have a ready pool of other investors.
Among those companies and investors who do meet the eligibility criteria, there has been concern that the terms of the Fund are too aggressively investor-friendly, and a review of the prescribed form convertible loan agreement – which it has been made clear is not up for negotiation – does little to dispel such concerns. It has undoubtedly been drafted from the perspective of a quasi-venture capital investor, with a view to ensuring a decent return on the taxpayer’s investment and an acceptable level of downside protection for the Government.
Particular terms for applicants to be aware of are as follows:
Early indications are that the Future Fund is well placed to serve those companies for which it is designed – and which are confident enough in their growth prospects that they can stomach the risk of incurring the 100% redemption premium and the potential complications to their future exit plans. However, in order for the Government to truly be able to claim to be providing additional, targeted support for all innovative startups during the crisis, a separate fund will be required, and soon.
If you are a startup or investor considering applying for Future Fund investment and would like to discuss this further, please contact any of the following members of our dedicated Growth Capital team.