Since the coronavirus lockdown in the UK the tech start-up industry has been under a lot of pressure. The British Government has already implemented three main initiatives, but they all have basic requirements that effectively rule out scaled-up and smaller start-ups from applying. Start-ups have been increasingly worried that they were being left behind.
After much debate, plans for a new 'Future Fund' designed to support high-growth companies - namely start-ups - has been announced.
Future Fund - key highlights of the scheme
- £500 million Future Fund is unsecured bridge funding, comprising of £250 million from the Government, combined with equal match funding from private investors, delivered in partnership with British Business Bank.
- Expected to be launched in May and open until end of September 2020.
- Loans will automatically convert into equity on the company’s next qualifying funding round, or at the end of the loan if they are not repaid.
For a tech firm to be eligible, the business must meet the below criteria.
- Be unlisted and UK registered.
- Be able to attract equivalent match funding from third party private investors and institutions.
- Previously have raised at least £250,000 in equity investment from third party investors in the last five years.
- If the company is a member of a corporate group, only the ultimate parent company, if a UK registered company, is eligible.
- No criteria on trade or activity has yet been announced.
Organisations must note that the minimum amount provided by Government to the company is expected to be £125k, the maximum will be £5 million. The government will not commit more than 50 per cent of the total funding and there will also be no cap on the amount that the matched investors may loan to the company.
Clearly many of the viability tests and criteria set for the CBIL scheme are not applicable for this funding, making it potentially attractive and available to younger and more innovative tech businesses. However, companies are still going to have to satisfy investors that the business has a viable plan to weather the coronavirus crisis and that further investment is warranted, before applying for assistance under the scheme.
The government is initially making £250m available of loans between £125,000 and £5m solely for working capital purposes.
The terms of the convertible loans, whilst still to be fully announced, are expected to be along the following lines.
- Should be an unlisted UK registered business that has raised at least £250,000 from private third-party investors in the last 5 years with a substantive economic presence in the UK. (Only the ultimate partner of a group will be eligible and must be UK registered)
- Loans of between £125,000 – £5m will be available as unsecured bridge funding alongside other third-party matched funding. The loan can be no more than 50 per cent of the total bridge funding being provided.
- The bridge funding should be used for working capital purposes only and may not be used to repay other borrowing, pay dividends, staff, management, shareholders or advisory costs.
- Loans will mature at 36 months and carry an interest rate of 8 per cent unless a higher rate is agreed with matching investors. Interest will be non-compound and paid on maturity of the loan. On maturity the loan can (1) be repaid (2) convert to equity at the discount rate of the most recent funding round.
- The bridge fund will automatically convert to equity on:
- The next qualifying funding round. (Raising additional equity of the same or greater than the bridging fund)
- A non-qualifying funding round at the election of most of the matching investors.
- On sale or IPO (The loan can also be repaid in these events)
- The company will not be permitted to create indebtedness that is senior to the loan (some exceptions). Should any further convertible loan instruments be issues with more favourable terms, those terms should also apply to the bridge funding.
Innovate UK will accelerate up to £200 million of grant and loan payments for its 2,500 existing Innovate UK customers on an opt-in basis.
An extra £550 million 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.
The Tech sector has been and will continue to be crucial to helping the UK economy bounce back quickly after the pandemic.
UK health tech start-up Medshr recently launched LetsBeatCOVID.net, a platform that helps healthcare officials in the UK and US track the spread of the outbreak by inviting people to take quick symptom surveys. It also provides personalized advice for those who upload their information.
In addition, we are seeing companies on the Tech Nation cohort at the heart of the task force. BenevolentAI, who recently joined Future Fifty 8.0 have already identified a potential coronavirus treatment that has moved forward to clinical testing.
According to research carried out by Tech Nation, 'The UK healthtech sector has been able to step up because it is one of the strongest in the world, having attracted $7.7bn (£6.2bn) from global venture capital investors over the last five years, according to data from Tech Nation’s Data Commons, provided by Dealroom.co. Healthtech is now the second biggest sub-set of the UK tech sector after fintech and there are more than 100 healthtech companies that are on track to become $1bn businesses.'
For more information, please contact David Blacher.