After much backlash from the start-up community, we were initially delighted with the news the Treasury had announced a rescue package totalling £1 billion for 'innovative new companies' that are struggling to survive the COVID-19 lockdown. The funding has been labelled "bridge funding" to help start-ups through this challenging time, but is it all that it seems?
Here we take a look at some of the information we know so far.
The plan comprises of two pots. The first pot of £750 million is an expansion of Innovate UK's funding, the majority of which will go to existing Innovate UK businesses. However, £200m is dedicated to new smaller businesses focused on research and development.
The Future Fund
The second pot is called the Future Fund and as is so often the case, the devil is in the detail with the Fund perhaps not as accessible as it seems, particularly for Scottish start- ups.
It is aimed at businesses that rely on equity investment and are unable to access the Coronavirus Business Interruption Loan Scheme (CBILS). The Future Fund, to be launched in May 2020, is a £250m fund in partnership with the British Business Bank whereby companies will be eligible to receive between £125,000 to £5m by way of a convertible loan note carrying an interest rate of at least 8% - in other words, a loan with an annual interest rate of 8% that can convert into equity at some point in the future with a 20% discount.
This is not an uncommon form of funding for start-ups and we see VCs use this form of funding regularly. The interest rate of 8% is also relatively sensible in the market as we typically see VCs using a 10% interest rate for these types of deals, so it's not necessarily with regards to the financial terms of the support where we identify an issue. It is in the criteria that businesses need to meet to allow them to access this support that we see difficulties and feel that Scottish start-ups may be disproportionately adversely affected.
Businesses must have raised at least £250,000 in equity investment in the last five years to be eligible for the support. This is where we may see geographical differences, with it being more suitable for London based starts-ups, for example, where there is a much larger average deal size. Having looked at the Harper Macleod deal figures for start-us over the last five years, over 50% of our clients would not be eligible for this funding, so where do they go for support?
Partial Term Sheet
Further, the funding is a match funding source so there is a requirement on the business to find 50% from private investors, which may be a struggle given the current climate. The terms will therefore be heavily dictated by the private investor, but the government has published a partial term sheet setting out the minimum terms they are agreeable to. This is thought to be a way of ensuring that "zombie" start-ups do not receive large sums of cash, and that the cash is only accessible if the private sector also has some skin in the game. This does seem reasonable from an economic point of view but it is another challenging hurdle for businesses to overcome in the current economic climate.
The UK appears to be following recent moves by France and Germany who over the last few months have pledged €4bn and €2bn respectively to help their start-ups through this pandemic. The UK move aims to ensure that we are not left behind in comparison to our European counterparts.
We still do not know the full detail of how this is going to be implemented, but we will keep you updated with more information as and when it is announced.