The Future Fund is Here —Thoughts from the Chairman #7

The Future Fund is Here —Thoughts from the Chairman #7

18th May 2020 by Jeff Lynn

This afternoon the government published the long-awaited details of the Future Fund, and the application portal for match funding applications will open on Wednesday. You can see an overview here, investor-specific information and FAQs here and company-specific information and FAQs here.

If you are interested in raising your private match funding for the Future Fund through Seedrs, please get in touch. If you already have a contact at Seedrs, you can email them directly, or else please get in touch here.

Today’s announcement comes after nearly a month of intense work to flesh out and operationalise this initiative, which the Chancellor first announced on 20 April. Some of the outcomes are positive, some less so, and I am conscious that since the initial announcement, many people have expressed valid concerns about the eligibility criteria, terms and much else. But while this is not perfect, I continue to take the view that, on balance, it is a fantastic and much-needed contribution to the startup and scaleup ecosystem during this time of crisis.

I’ve written previously about the need for this sort of package and reactions to the initial announcement. I won’t repeat those here, nor will I go into all of the details released today as they are available on the Future Fund section of the British Business Bank website. Instead, I want to use this opportunity share thoughts on a few of the key features of the Future Fund and what I think they will mean for businesses and investors. 

First-Come, First-Served

The Future Fund will be distributed on a purely first-come, first-served basis. As companies raise the required match funding, they (or, specifically, their lead investors) will be able to apply to the Future Fund through the online portal. Assuming all eligibility criteria are met, the Future Fund will then allocate funding based on the order in which the application was received or processed (it is not yet clear which).

There had been some speculation that the distribution process might be more nuanced, with specific pools set aside for smaller or regional companies. The decision not to do so was presumably taken in the interest of simplicity and efficiency, but it does create a few risks. One is that the £250 million pot allocated to the Future Fund gets deployed very quickly: given that the fund will match up to £5 million per company, it won’t take a whole lot of applications from businesses that have raised substantial matching capital before all the government’s money is spent. As a corollary to this, and perhaps more worryingly, larger companies with established investor bases are likely to be able to move faster than smaller ones, meaning that we may see the bulk of the Future Fund allocated to VC-backed, London-based firms rather than spread across sector, stage and location.

How this plays out will all depend on whether more money is made available to the Future Fund once the initial £250 million has been spent. Government clearly wants to avoid another situation like CBILS, where a huge amount of money was nominally made available, but then the process of getting it out the door was slow and restrictive. So they have set up a system here that will maximise the speed with which funds are deployed, and in doing so they have made noises to the effect (and the Chancellor confirmed in the Commons today) that if demand is sufficient, more money will be released.

As long as that actually happens, then the first-come, first-served approach should work fine. The more sophisticated businesses will still probably be the first to access the money, but if there is then enough in the (expanded) pot to meet the needs of companies who take a bit longer to raise their private funding and submit their application, then I think the substantive concerns are largely addressed.

Broad Investor Eligibility

I wrote in my piece on “Leaving the Tower” a few weeks ago about how there were some voices arguing for tight restrictions on who could provide the private match funding. The specious, and I think self-interested, arguments effectively said that only established VCs should be able to provide the match, because otherwise the Future Fund would risk following “dumb” money.

Fortunately Treasury paid these arguments no more heed than they were due and instead opted for a very broad definition of who can be an eligible investor. Essentially any self-certified high-net-worth or sophisticated investor will be eligible, as will investment professionals (which includes essentially all FCA-authorised firms, among others) and similar categories. And this applies not just to investors who meet the UK definitions of these terms but also those international investors who satisfy the equivalent home country standards.

This is a very good outcome, and the inclusion in particular of high-net-worth and sophisticated investors is going to be important for a range of companies that rely on individual investors, especially those that are too early for VC funding and those from outside London. And note that if you raise capital through an investment firm, such as Seedrs, that makes the investments on the investors’ behalf, investors do not even need to meet the high-net-worth or sophisticated tests so long as they satisfy the firm’s client onboarding requirements.

No EIS

A less encouraging development was the final determination that the private match funding will not be eligible for EIS relief. It was known that this was a likely outcome at the time of the initial announcement last month: the Future Fund’s investments will be by way of convertible loan note (CLN), and CLNs are not EIS-eligible; so if the government was going to require the private match funding to be on the exact same terms as the Future Fund’s investment, the private funding would not be eligible either.

A substantial amount of work went on behind the scenes in order to try to fix this issue. There was talk of allowing private investors to invest via an Advanced Subscription Agreement (ASA), which is like a CLN but lacks the debt-like features that make CLNs ineligible. This was rejected on the basis that the government wanted the terms to match exactly between the Future Fund and private investors. My own view is that this could have worked just fine—not least because the ASA would have been slightly less advantageous to investors than the CLN, so the Future Fund would have gotten the better end of the deal—but I think a combination of ensuring efficiency and a lack of familiarity with ASAs prevented this idea from going forward (Seedrs does ASAs quite frequently, but there are some who view them as still a primarily American instrument). There was also discussion of a rule change to allow CLNs—or at least those used specifically for this match funding process—to attract EIS relief, but the lawyers concluded that such a change would violate EU state aid rules.

So investors will not get EIS relief, and this will no doubt put off some of the individual investors, as well as VCTs and EIS funds, who might otherwise have wanted to put up the match funding (VCs and many other funds are not eligible for EIS, so it will not affect them). I am slightly less bothered by this than many people are, as I think that while EIS is a fantastic scheme that benefits UK startups and scaleups hugely, investing in a portfolio of early-stage businesses should be a high-returning endeavour even without tax relief. Clever investors will hopefully feel that the opportunity to invest in good businesses on what are relatively investor-friendly terms—and in doing so take advantage of government leverage in the form of match funding—offsets the lack of EIS. But I am conscious that some investors will feel differently, and again this is mostly likely to be to the detriment of smaller and regional businesses.

There is a separate, complicated point around whether investing in a CLN could result in investors losing EIS on previous or future investments they have made or will make in the company. This was a significant concern, but it has been partially resolved in the FAQs which make it clear that there will be no impact on relief in respect of previous investments. The FAQs are, however, silent on future investments, saying simply this is a matter for HMRC. Hopefully HMRC will clarify that soon, but at least the issue for previous investments has been taken off the table.

Investor-Led Process

Finally, I thought it noteworthy that the application for Future Fund investment will need to come from the lead investor of the private match funding, rather than from the company. There may not be a whole lot in this, but at first glance it seems a bit odd: generally it is the company that has most of the necessary information to process investment-related documentation, and while an institutional lead investor will likely have systems in place that make this process easy, it may prove cumbersome—and even error-prone—for investors who are not as focused on the technical details of execution. In practice I would expect any sensible company to work together with their lead investor to ensure that the process goes smoothly, but this approach does seem like a hurdle that doesn’t add much real value.

One benefit that indirectly relates to this process (but could have happened even if applications were company-led) is that investors are being asked to sign the Investing in Women Code. I think this is a very good initiative: the challenges that women founders face in raising capital are well-publicised, and this Code will help provide transparency and corrective action to help ensure that the highest-potential entrepreneurs succeed in raising capital regardless of gender. Check Warner of Ada Ventures has written an excellent piece about how this Code and other measures can help ensure that the Future Fund is allocated across diverse businesses and teams. (I will confess that I was not aware of the Code until learning about it in the context of the Future Fund, but after discussing with and receiving unanimous support from our Executive Team, I have now signed it on behalf of Seedrs).

Final Thoughts

The Covid-19 crisis is an unusual one: unlike the dot-com bust or even, to an extent, the 2007-2009 financial crisis, this is not a period where dried-up funding streams and massively reduced valuations represent a normal and necessary market correction following a period of overexuberance. Here we have a startup and scaleup ecosystem that was thriving but not (with the exception of a handful of companies) a bubble, and most of these businesses are well poised to continue their growth once the economy re-opens.

But in the short-term, many businesses whose strategy is to invest in growth rather than reap early profits, and who run lean on cash in the process, are going to face significant challenges. Meanwhile, private sector investment is inherently going to decline as investors—both institutional and individual—look to sit on cash while uncertainty prevails. The Future Fund provides a critical solution to help bring capital into the market and ensure that all the work we have done over the past decade to build this ecosystem is not lost during this period.

No structure or approach to providing this capital was ever going to be perfect, but as we now see more of the details on how the Future Fund will work, I am increasingly confident that it will be a success. As I discuss above, a few things need to be true: there certainly needs to be more funding if (and when) the £250 million is quickly deployed; and even if EIS isn’t available on this investment, it needs to be clarified that investing in a CLN will not prejudice future EIS relief. But so long as those two things happen, I think that given the broad investor eligibility, the streamlined (if slightly peculiar) application process, and a distribution system that prioritises speed and efficiency, this initiative is going to be a win for the government and, more importantly, a win for many startups and scaleups across the country.

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That’s all from me this week. Once again, please get in touch if you would like to discuss raising a CLN via Seedrs – you get in touch here, or email your Seedrs contact or me at anytime. As always please let me know if you have feedback or contributions, and I hope you all stay well and safe in the week ahead.

Jeff Lynn

Jeff Lynn

I'm Executive Chairman and Co-Founder of Seedrs.

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