The UK Government has announced plans for a new “Future Fund” designed to top up funding raised by early stage UK companies during the Covid-19 crisis by providing unsecured convertible loans subject to matched funding from private investors. The Future Fund is part of a total of up to £1.25bn in new funding for technology, life sciences and other fast growing companies announced by the Chancellor Rishi Sunak.
The announcement responds to considerable pressure from the tech and start-up ecosystems, whose members have pointed out that innovative, high-growth, early-stage companies, who will shape the economy of the future, have been excluded from the previous turnover-based business support schemes.
The Future Fund follows the examples set by other countries, in particular France and Germany, which have announced start-up focused relief funding of up to €4bn and up to €2bn respectively.
With a total cap of £250m (or £500m once matching funds from the private sector are included), the Future Fund is not quite on the same scale as its French and German counterparts; nevertheless, it has been cautiously welcomed within the startup and investor communities.
The fund will be administered by the British Business Bank (BBB), which is also responsible for the Coronavirus Business Interruption Loan Scheme or CBILS. Applications will open in May 2020 and will initially be open until the end of September 2020, at which point the scheme will be reviewed. No indication has yet been given as to how quickly applications are likely to be processed but the administrative effort should not be underestimated.
The Future Fund represents a significant opportunity for growth companies and their investors, as well as for the Government, which will have the opportunity to become a significant shareholder in a large number of early stage companies with huge prospects. Nevertheless, the devil is (as always) in the detail and potential applicants should ensure that they fully understand the terms before committing.
The Government has published an initial, indicative term sheet for Future Fund loans, a copy of which is available here.
The term sheet is highly commercial in nature and closely resembles term sheets for many VC-backed bridging funding structures, including warranties, covenants and governance rights. In other words, the Government is conscious of looking after taxpayers’ money and this is not a free lunch!
The term sheet describes the loans as “bridge funding”, since they are designed to convert into equity on the next major equity funding round of the company.
Key terms include the following:
Points to watch for
Potential applicants should be particularly aware of the following:
The Future Fund is an exciting and welcome development, which should increase the amount of money which growth companies are able to raise from their investors.
In addition, the fund may help to unlock capital from investors who might otherwise be wary of funding too high a proportion of a funding round.
It is interesting to see the Government targeting equity stakes in growth companies and it will be fascinating to see how this unfolds once those companies look to exit.
This is not a charitable initiative, nor will it be a one-size-fits-all solution. It is therefore vital that, before proceeding, potential applicants fully understand the terms and carefully model their ability to repay the funding and the dilutive effect of conversion on their cap tables.
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