Jeff Lynn, Executive Chairman and Co-founder of Seedrs.
I’m going to focus this week’s post on Save Our Startups, a critically important new campaign to persuade the Government to help protect our amazing startup and scaleup ecosystem during the Covid-19 crisis. Seedrs is proud to be a Founding Partner of the campaign together with a number of other industry leaders.
Why Save Our Startups
The growth of the startup (and, more recently, scaleup) ecosystem has been one of the great successes of the UK economy over the past decade.
When Carlos and I founded Seedrs, one of the criticisms levied at us was that there just weren’t enough good entrepreneurs or would-be entrepreneurs in the UK to make the business worthwhile. And while we knew that wasn’t true, it was difficult to produce evidence to the contrary. Back then, when asked what tech startups the UK had produced that had grown to billion-dollar valuations, the answer was usually “Well, there’s Skype, and then there’s…uh…Skype…and…”
As we entered 2020, the landscape had changed dramatically. There were 62 unicorns in the UK last year according to Dealroom, and there are countless more successful, fast-growing businesses below that level. As these companies have emerged and grown, they have created a wave of jobs across the country, put the UK at the forefront of innovation in a number of industries, and introduced a generation of investors to the returns potential of this asset class.
That great work is now under threat. As in many sectors, Covid-19—and the economic shutdown that accompanies it—is going to impose substantial harm on many startups. Some, of course, will thrive in this environment, but many others will see their revenues decline sharply or evaporate completely. And as all small businesses tend run on fairly limited cash balances, these declines could be the difference between collapse and survival.
But even if the problem is common across sectors, the right solutions are different. As I wrote last week, the Coronavirus Job Retention Scheme (CJRS) will be helpful in allowing some startups and scaleups to reduce costs by putting employees on furlough. However, the Government’s main source of emergency funding for small businesses is the Coronavirus Business Interruption Loan Scheme (CBILS), which is designed solely for traditional/profitable small businesses. Very few startups and scaleups are going to be eligible for CBILS, meaning that as of now there is no effective government scheme to provide these businesses with much-needed funding.
Meanwhile, investments from the private sector will inevitably slow down. We have been fortunate at Seedrs that, thanks to the size and diversity of our investor base, we are experiencing near-normal levels of investment activity, but it is too early to tell whether that will last. And across the investment landscape, we are seeing many investors look to shore up their own portfolios instead of making new investments, while others are withdrawing from the market entirely.
The combination of reduced private investment and an effectively-inapplicable lending scheme (CBILS) means there is going a dearth of cash available to startups and scaleups just at the time they need it the most.
Enter Save Our Startups, which is putting forward three straightforward asks to help startups and scaleups solve their cash problem during this challenging period.
First, we are asking that the Government provide an equity-based liquidity package suitable to save startups and scaleups at risk. This may be something similar to the Runway Fund, which I mentioned in my note last week and has gotten significant coverage; and similar examples are available in the French and German initiatives. Or it may take a different form. There will undoubtedly be different views on the best structure, but the principle of providing an appropriate funding structure for these kinds of businesses is a clear one.
Second, we want to see a fast track for existing payments to startups and scaleups from public funding schemes. Payments like R&D tax credits and Innovate UK grants are already an important part of many businesses’ cash flow, and as other cash inflows decline in coming months, many startups and scaleups will rely on these payments even more. In normal times these payments are often slowed by bureaucratic processes, but now more than ever it is critical to clear the red tape and get these payments moving.
Finally, we are seeking an expansion of the existing tax reliefs—EIS, SEIS and VCT—that incentivise investing in startups and scaleups. The better the incentives available to private investors during this period, the more they will be willing to accept the inherent risks of the current market and keep on investing. Without expanded schemes, we are likely to see continued contraction of investment levels until the crisis is over—which will be too late for many businesses.
None of these three asks, or indeed the three put together, will have a material impact on the Exchequer’s takings. In the context of the overall business relief packages being put together, the quantum of these proposed initiatives is tiny. And only the changes to the tax reliefs would result in a net outflow from the Government: any equity-based liquidity package is likely to be accretive to the government in the long-term, and expedited processing of existing payments loses the Government nothing other than the time value of money (which is limited in the current interest rate environment). So for a relatively small cost, the Government has the potential to preserve the country’s startup and scaleup ecosystem and ensure that it remains vibrant and globally competitive in the decade to come.
What You Can Do
A lot of great folks are working on Save Our Startups. Seedrs is joined as a Founding Partner by a range of great organisations whose missions are focused on the continued growth and health of the startup and scaleup ecosystem:
- Capital Enterprise
- Draper Esprit
- The EIS Association
- The Entrepreneurs Network
- Founders Forum
- Tech London Advocates
- The UK Business Angels Association
But organisational support is not enough: the Government needs to hear from the entrepreneurs who are affected by the Covid-19 crisis and the investors who have backed them. Over 2,000 people have already signed the open letter, and the more who can do so, the more effective the campaign will be.
So I would ask everyone to please visit the Save Our Startups site and consider adding your name to the open letter. It will only take a moment, and doing so will help demonstrate the depth and breadth of community support for these initiatives to the policymakers who will decide whether they become reality. And for those keen to keep an eye on the campaign going forward, you can follow it on Twitter at @saveourstartups.