Government launches £500m fund to help struggling startups

Government will sink £250m into the fund and expects remaining half to be matched by private investors

Chancellor of the Exchequer Rishi Sunak has launched a £500m ‘Future Fund' to assist UK-based start-ups struggling as a result of the ongoing pandemic.

The money is part of a £1.25bn package designed to buoy struggling young companies; with the £500m assisting venture-backed startups and the remaining £750m supporting SMBs involved in research and development.

The scheme - run in partnership with the British Business Bank - is designed to help those companies that are not eligible for the government's Coronavirus Business Interruption Scheme (CBILS) and will run from May to September.

The government has already agreed an initial £250m for the fund, with private investors expected to make up the remaining half.

Loans will range from £125,000 to £5m, providing a company can find private investment to match, and will carry an eight per cent interest rate, payable after a three-year period.

"Our start-ups and businesses driving research and development are one of our great economic strengths, and will help power our growth out of the coronavirus crisis," Sunak said in a press statement.

"This new, world-leading fund will mean they can access the capital they need at this difficult time, ensuring dynamic, fast-growing firms across all sectors will be able to continue to create new ideas and spread prosperity."

To be eligible to apply to the fund, a firm must be UK-based, has previously raised at least £250,000 in equity from third-party investors in the last five years and can attract match funding from private investors and institutions. Full eligibility criteria are pending.

James Tucker, CEO of mortgage technology provider Twenty7Tec, welcomed the news: "This has to be a welcome move for both tech and research-led businesses. Many of them are loss-making in their first years and so need firm backing from business angels, early investors and venture capitalists.

"The challenge for tech businesses is that there has been less appetite for risk over recent weeks, for obvious reasons. But this move by the chancellor using convertible loans looks set to plug a gap in the market and give a real boost to the companies that will emerge as the tech stars of the future.

"If you've got a track record of raising capital and want to shore up confidence in the business, the Future Fund looks like a good way of doing so. For many start-ups, this will be a massive lifeline. We're waiting to see the full details on how the fund will work, but at first blush, the terms seem reasonable - 36-month maximum term, convertible loan that must be equally or better matched by private funding."

However, some greeted the news with some scepticism. Mark Brownridge, director-general of the Enterprise Investment Scheme Association (EISA), said that private investors are hesitant to invest in anything at the moment and need "advantageous tax treatment" than matched funding.

"Positioning the additional support as a convertible loan, carrying an eight per cent interest rate and a 20 per cent discount on conversion, all in favour of the government, will be of very little encouragement for private investors to invest alongside," he stated.

"We need to be focusing on encouraging new investors, and the only way to do that is through more advantageous tax treatment for them, which is what the EISA, along with other investment funds, has been lobbying for.

"Over the coming weeks, we need to be working with the government in finalising the terms of the new Future Fund, to ensure both that the terms are as good as the CBILS scheme, and that we do all we can to encourage the additional investment appetite from private investors, which must include more favourable tax treatment for an interim period whilst the uncertainties caused by the crisis continue."