The Future Fund explained
NOTE: new guidance now available! Since this article was published, the British Business Bank has launched a dedicated Future Fund page on their website. Click here to view the page in addition to the summary, eligibility criteria and criticisms of the Future Fund detailed below. Watch this space for our in-depth and updated guide to the Future Fund coming next week.
Almost a month ago on 20 April 2020, the UK Government announced their latest financial support scheme amidst the coronavirus pandemic: the Future Fund. Though not yet live, or fully fleshed out, the Treasury is set to provide further details about the fund this week.
In this article, we’ll take a look at what the Future Fund is, how it works and who can apply. We’ll also explore some of the main criticisms of the fund which have been causing a stir in the UK startup community.
Though the finer details have yet to be released, early information pegs the Future Fund as a scheme designed to provide financial support to “innovative companies which are facing financing difficulties due to the coronavirus outbreak”. In other words, startups who have seen the interest of VCs and other potential investors dry up as the world waits in limbo for the crisis to subside.
Unlike the Coronavirus Business Interruption Scheme (CBILS) and the Bounce Back Loan Scheme (BBLS) which deal exclusively with debt funding, the Future Fund will issue convertible loans between £125,000 and £5 million. This bridge funding will then automatically convert to equity at the company’s next eligible funding round.
The catch is that businesses hoping to get their hands on one of these convertible loans must also secure match funding of equal or greater value from a third party investor. So, just as the CBILS and BBLS were set up to encourage lenders to lend, the Future Fund will (hopefully) encourage investors to invest.
The Future Fund is of course more complicated than a few simple paragraphs here but, in the absence of neatly penned guidelines and FAQs, businesses must for now wade through the government’s headline terms for further detail. In addition to this wonderfully dry document, the government’s website promises to publish further details shortly.
With a May launch date planned but not yet public, the British Business Bank doesn’t yet have a dedicated Future Fund page on their website in keeping with those created for the CBILS and BBLS. If these schemes are anything to go by, the dedicated BBB page that one can assume is in the works will likely be the best source of up-to-date and reliable information about eligibility and how to apply.
The government’s website remains painfully vague despite four weeks having passed since the Future Fund was announced. For now, the available eligibility requirements state that you can apply for the Future Fund if…
- Your business is based in the UK
- You can attract the equivalent match funding from third party private investors and institutions
- You have previously raised at least £250,000 in equity investment from third party investors in the last 5 years
That last point may sound logical at first but innovative businesses have questioned whether it’s really fair. Let’s take a look at this, and some of the other criticisms, that have been raised since the Future Fund was announced.
It excludes bootstrapping businesses
Not every startup dreams of raising equity investment from third party investors. In fact, plenty of startups pride themselves on making it on their own, growing a business from the ground up without anyone’s help. The startup community has therefore questioned whether it’s fair of the Treasury to exclude these businesses from the Future Fund just because they didn’t need, or want, to raise £250,000 or more in enquiry investment over the last 5 years.
It excludes US accelerator programme graduates
Putting the bullet points displayed on the government’s Future Fund page to one side, it’s an additional criterion hiding in the headline terms that’s got tongues wagging (and fingers typing) in the startup world:
“If the company is a member of a corporate group, only the ultimate parent company, if a UK registered company, is eligible to receive the loan.”
A group of 32 CEOs including Thread’s Kieran O’Neill and Hiroki Takeuchi of GoCardless wrote an open letter last week to commend the Treasury on their “speed and thoughtfulness”, calling the Future Fund “just what the startup ecosystem needs”. But they also called on Sunak to remove the requirement that the startup’s parent company be based in the UK, providing the majority of their employees are UK-based.
US accelerator programmes such as Y Combinator and TechStars for example have provided an invaluable leg up to hundreds of successful startups that call the UK home. However, accelerator programmes like these require startups to register a parent company in the US, which means they’re not eligible for the Future Fund.
The letter warns that failure to remove this requirement could lead to redundancies, declining growth rates and a situation in which some startups simply don’t survive. Others may be forced to cede market leadership and first-mover advantage or to sell prematurely to competitors overseas.
Early reports suggest that the letter hasn’t fallen on deaf ears. Speaking to City AM, O’Neill said that the Treasury were “surprised and concerned by the issue” having been genuinely unaware of the potential repercussions of what the letter refers to as a technicality.
It puts too much focus on VC investment
On the other side of the coin, some have questioned whether the Future Fund is not only excluding certain businesses, but also certain types of investors. With exact details still pending, the information currently available suggests that the fund won’t be compatible with the Enterprise Investment Scheme (EIS) or SEIS (Seed Enterprise Investment Scheme). Both of these schemes provide tax relief to private investors.
Jenny Tooth, CEO of the UK Business Angels Association (UKBAA), told Sifted last week that the Future Fund has left out the angel market. Angel investors are generally high net worth individuals who use their own money to invest in startups in exchange for equity. The article points to British Business Bank and UKBAA research which found that 86% of angel investors rely on EIS or SEIS tax relief to support their investments. With both these schemes incompatible with the Future Fund, Tooth argues that “few angels will have the appetite to co-invest alongside the government.”
This is not the first government scheme to be criticised but, as with the CBILS, business leaders who have raised their concerns have been rewarded with understanding and eventual action.
Though slow to start, the government acted quickly to put measures in place to speed up the delivery of funds through the Coronavirus Business Interruption Loan Scheme. As the weeks have gone by, more and more fintech business lenders and other alternative providers have been accredited under the scheme bringing agile thinking and fast-paced processes with them. Clunky eligibility criteria and security requirements have been streamlined to support more businesses through the CBILS and Bounce Back Loans were introduced this month to widen that net even further.
And while the future (pun intended) of the fund remains uncertain, we can draw on the government’s reaction to these past criticisms as a source of hope that the Treasury will do the right thing and give the UK’s most innovative startups an equal opportunity to participate in the Future Fund. Without it, they may not survive and their potential to shape industries, markets and the world as we know it will be lost forever.
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