The government’s £500m Future Fund is open for applications, a month after the scheme to invest in innovative start-ups to help them through the coronavirus outbreak was first outlined in response to claims that such companies are unable to access other government business support programmes because they are either pre-revenue or pre-profit
UK-based companies can apply for a convertible loan of between £125,000 and £5m, to support continued growth and innovation in sectors such as technology, life sciences and the creative industries.
The government has made an initial £250m available for investment through the scheme and says it will consider increasing this if needed.
This funding will be matched by private investors, such as venture capital (VC) funds, angel investors and those backed by regional funds.
To qualify, firms must have previously raised at least £250,000 in equity investment from third parties in the last five years.
They will also need to have investors to provide funding to be matched by the government, and have half or more of their employees based in the UK or generate at least half of their revenue through UK sales.
In addition, companies cannot have any of their shares traded on a regulated market, multilateral trading facility or other listing venue, and must have been incorporated on or before 31 December 2019.
Eligible start-ups will then repay the loans or convert them into equity at the next funding round, or after three years.
The government will also amend the rules of the Enterprise Investment Scheme (EIS), which provides tax relief to investors in high growth firms, to protect Future Fund investors from losing relief on their previous investments made prior to any investment through the Future Fund.
The Fund will be open until September and is delivered in partnership with the British Business Bank.
Michael Moore, director general of the British Private Equity and Venture Capital Association (BVCA) said: ‘The Future Fund is hugely significant and very welcome. For many venture capital-backed businesses it will build the bridge from today’s severe challenges to the period of recovery, enabling them to survive then thrive.
‘We anticipate strong demand for this funding and we will continue to work with the government to ensure that there is enough to achieve the objective of sustaining this strategically-important sector.’
However, RSM said its analysis suggests the fundamentals of the Future Fund in its current form are attractive to VC funds but are unattractive to private investors who typically use the EIS and Seed Enterprise Investment Scheme (SEIS) structures. Since many innovative UK businesses are backed by a combination of both, the Future Fund favours VCs, the firm argued.
Charlie Jolly, partner and head of private equity at RSM, said: ‘Private investors and VC funds provide crucial funding to innovative UK businesses and, to be clear, the Future Fund will support both. ‘However, the matched funding requirements in their current form are less attractive to private investors than they are to VCs so the likely result will be that private investors’ stakes are diluted.
‘No successful economy operates without innovation, so it is crucial that funds such as these are configured in a way that maximises opportunity for all, as opposed to, in this case, being VC-biased in its detail.
‘Angel investment is key to how innovation is funded in the UK and whilst it’s important to the economy today, it is absolutely vital to our economic future.’
RSM also believes the size of the fund will need to grow if it is to provide truly sustainable provision for UK start-ups.
Jolly said: ‘The initial fund size is a good start, but it’s the tip of the iceberg in terms of what UK innovation will require if it is to remain globally competitive. It’s encouraging that the Chancellor has hinted at further funding should the scheme prove successful.’