Announcement of the Future Fund
We have reviewed the details of the Future Fund, a co-investment programme announced by the Chancellor on Monday 20th April 2020. This is our headline analysis:
As currently framed, the Fund appears to exclude matching investment made by private investors wishing to obtain EIS relief. It therefore seems to skew in favour of VC-led (rather than angel-led) businesses.
Existing EIS investors in companies who do provide matching investment under this scheme will not be able to maintain their EIS eligibility for any future round of investment.
Because of the relatively strict eligibility criteria for the Fund (which looks at previous investment track record, and sets a minimum raise value), the Fund will exclude many smaller companies (including all bootstrapped companies) looking to raise smaller amounts to survive the crisis.
More details as follows:
The Chancellor on Monday announced a new funding package aimed at SMEs suffering from the economic effects of COVID-19. The package comprises:
£250 million in convertible loans (to match an equivalent contribution from private investors) called the Future Fund; and
£750 million in grants and loans to businesses focussing on research and development, made available through a scheme run by Innovate UK.
Future Fund
The fund is being delivered in partnership with the British Business Bank and will be launched in May. The scheme will be open until the end of September.
It will provide companies with between £125,000 and £5,000,000 in convertible loans, which must be matched by private investors.
The government loans, if not repaid, will automatically convert into equity on the company’s next funding round or at the end of the term of the loan.
The loans will:
be unsecured;
mature after 3 years; and
convert into shares at a 20% discount on the price set at the next funding round.
To be eligible for the loans, a business must:
be an unlisted UK-registered company;
have previously raised at least £250,000 in equity investment in the last 5 years; and
procure matching investment from private investors.
Further details will be published in due course.
This announcement has been welcomed by various CEOs and business leaders, and we encourage any effort to help SMEs through this crisis. However, the proposed structure of the scheme raises a few concerns, and means that a significant number of UK businesses will miss out.
Many start-ups and SMEs are funded primarily by individual angel investors who are incentivised to invest by the tax benefits offered under SEIS and EIS. The Future Fund appears to be structured on the assumption that any matching private contribution will – like the government’s funds – be made available by way of convertible loans, a form of investment which invalidates EIS eligibility. We will look with interest for further clarification on this point (e.g. whether private investors will be permitted to take a more EIS-friendly approach, e.g. under an advanced subscription agreement), but in its current form the fund appears to be structured to the advantage of VCs and other institutional investors, and to the detriment of angel investor-led companies.
The eligibility criteria for the fund skews in favour of more established SMEs. The government has likely set this criteria so as to avoid putting money into unproven businesses with no track record of investment. While understandable, this will exclude a number of promising, well-run companies (and all bootstrapped companies) from benefitting from the fund. Also, some of the smaller, most at-risk businesses do not need a £250,000 cash injection (the minimum amount under the scheme) – they may only need a fraction of that to give them sufficient runway to survive the crisis.
If the fund, as suspected (whether by design or not), helps more established businesses already known to VC networks, there is a risk that businesses and founders outside those networks will lose out. Those companies would be better helped by measures designed to unlock funds held by private individuals (rather than institutional investors), for example a short-term increase in EIS relief for investments made during the crisis.
Dragon Argent are ready to help with any questions you may have, and to provide advice on how this affects your business.