The £500m Future Fund issues convertible loans between £125,000 to £5m to innovative companies that are facing financing difficulties due to the Covid-19 outbreak.
These loans have to be matched by private investors.
These loans are for three years and are charged at an interest rate of 8 per cent.
Crucially, the government could end up owning half of some of Britain’s fastest-growing tech businesses. Future Fund loans may convert to equity at a discount of at least 20 per cent when companies undergo their next funding round.
What if I haven’t previously raised £250,000?
Because the scheme is only open to start-ups that have raised at least £250,000 over the past five years, Stephen Page, CEO of start-up investor SFC, says the Future Fund ignores true start-ups.
Page says: “It seems quite plausible that government co-investment will instead primarily benefit VCs as they lean on the Future Fund to help tide over their existing portfolio companies. That’s fine as far as it goes, but matching by definition requires investors to be putting up money, and at the very early stage this has dramatically dried up in the current climate — both for individual companies and for the smaller funds that rely on risk-based investment from angels and high-net-worth individuals.”
Can I raise my share of investment through EIS or SEIS?
According to SeedLegals, no you cannot. Future Fund is not currently SEIS/EIS compatible, so you’ll need to find VC investors (they mostly don’t get SEIS/EIS) or persuade angel investors to forego SEIS/EIS for this round and (because of the way SEIS/EIS works) for all future investment that they make in your company.
Who can apply for the Future Fund?
A start-up is eligible for the Future Fund providing:
- Half or more of your employees are based in the UK or generate at least half of your revenue through UK sales
- Your business can attract the equivalent match funding from third party private investors and institutions
- Your business has previously raised at least £250,000 in equity investment from third party investors in the last five years
- Any private investor, UK or non-UK based can be eligible – they can be an individual, venture capitalist or a corporate investor
What if I’ve taken part in a US accelerator programme?
A non-UK ultimate parent company of a corporate group which participated in an accelerator programme on or before April 19 2020 may be eligible for the Future Fund, provided that the company has satisfied the following:
- The company must have raised at least £250,000 in equity from third-party investors in previous funding rounds in the last five years (from 1 April 2015 to 19 April 2020, inclusive)
- If the company is a member of a corporate group, it must be the ultimate parent company
- The company is the equivalent of a UK limited company in the relevant non-UK jurisdiction
- The company does not have any of its shares or other securities listed on a regulated market, a multilateral trading facility, a recognised investment exchange and/or any other similar market, stock exchange or listing venue
- it participated in an accelerator programme, on or before April 19 2020, and participation in the accelerator mandated incorporation of the ultimate parent company in a non-UK jurisdiction
- iI the group (or any entity within the group) was in existence before the company was incorporated, the ultimate parent company of the group (or the sole entity, if applicable) must have been incorporated in the UK
- The company is the ultimate parent company of a group which has:
– half or more of its employees based in the UK, -or
– half or more of its revenues from UK sales
- It is the ultimate parent company of a group which contains at least one subsidiary operating company incorporated in the UK on or before 31 December 2019; and
- The company received investment from the accelerator programme on or before April 19 2020
What is the application process?
Investors have to initiate the application process for start-ups via an online portal. Start-ups cannot apply directly.
If you have multiple investors, you will need to appoint a lead investor to submit the application for them. Your lead investor will also need to have details of any other investors and on the company itself.
The lead investor must be investing at least £12,500. However, they do not necessarily have to be investing the largest amount.
According to the British Business Bank, once applications are submitted, they are assessed and funding is allocated on a first-come-first served basis.
What conversations should you be having with your investors?
You should look at whether you meet the criteria in the first instance (see above). If you do, you should inform your pool of investors that they are eligible and highlight the scheme as a way for them to invest in the business in the current climate, says Victoria Price, UK&I private client services leader at EY.
“Entrepreneurs should be clear that this is not equity and that the convertible loan is not compatible with EIS,” says Price. “Participating in the Future Fund may result in an investor losing EIS on future equity investments.”
For businesses who haven’t taken a convertible loan before, what should they be aware of?
Convertible loans are short-term loans that convert to equity, usually at a discounted rate. The loans from this scheme in particular have an interest rate of a minimum 8 per cent per annum and will mature after a maximum of three years, says EY.
The conversion process, which occurs when the loan matures, is one of the key differences between a convertible loan and other sources of finance such as, for example, a bank loan, says Price; a bank loan remains debt unless you do something about it.
According to Price, convertible loans can be an attractive option as there is no erosion of equity. The disadvantage is that they can be complex compared to other financing options and there are legal and accounting fees as part of the process, she says. Cash from the Future Fund scheme cannot be used to pay these fees so other sources of funding may need to be considered.
Businesses also need to ensure they understand the terms of valuation for when the loans converts into equity, and what will trigger this. For the Future Fund, the loan will automatically convert into equity in the company’s next fundraising round where the amount raised is at least equal to the aggregate bridge funding.
How quickly can businesses expect to receive capital?
This can depend on how long the process takes to complete and how quickly investors and start-ups get the application completed.
The expectation is that that funding should be awarded a minimum of 21 days from the initial application.
Can a business apply to the Future Fund if they have already received other types of Government aid related to COVID-19?
The government have introduced a range of broad measures including the Coronavirus Job Retention Scheme and business rate relief. Applying to the Future Fund won’t impact their ability to tap into these pockets of support.
£750m for research and development
Small businesses focusing on research and development will also benefit from £750m of grants and loans.
The £750m of targeted support for the most R&D intensive small and medium-size businesses will be available through Innovate UK’s grants and loan scheme.
Innovate UK, the national innovation agency, will accelerate up to £200m of grant and loan payments for its 2,500 existing Innovate UK customers on an opt-in basis. An extra £550m will also be made available to increase support for existing customers and £175,000 of support will be offered to around 1,200 firms not currently in receipt of Innovate UK funding. The first payments will be made by mid-May.
Victoria Price, EY Entrepreneur of the Year Leader in the North and UK&I Private Client Services Leader contributed to this article