After weeks of writing about the need for government support to help startups and scaleups through the Covid-19 crisis, I’m pleased to say that we have a deal! This morning the Chancellor announced a billion-pound rescue package, and at first look it is outstanding news for innovative, high-growth businesses across the UK.
In my note this week I will share some details and initial observations about the package. Then as we get more practical information in coming days about how companies can take advantage of it, I will post further updates. I will also be joining Brent Hoberman and others to talk about the package on a digital ThinkIn that Seedrs is co-hosting with Tortoise this Friday, 24 April, at 1 pm London time (more details below, and you can register for free here).
The Treasury Package
The package announced today consists of two pots of funding totalling £1 billion of government money.
The first is a £750 million expansion of Innovate UK’s funding for the most R&D intensive small and medium-sized businesses. This will be made up of grants and loans, and while the bulk of it is reserved for businesses who are already receiving Innovate UK funding, over £200 million will be offered to new firms.
The second pot is a £250 million fund, called the Future Fund, which will be administered by the British Business Bank (BBB) and will invest between £125,000 and £5 million in high-growth UK companies. The investment will take the form of a convertible note, and the main eligibility criteria that have been announced so far are the following:
- The investment will be made on a 50:50 matched basis with private sector investment. So companies will need to raise the private sector money first before they are eligible for the government funding (it is not yet clear whether a binding commitment from private investors will be sufficient or whether cash needs to be in the bank).
- In the past five years, the company must have raised at least £250,000 from third-party investors (excluding any funding that is part of the match).
- The company must be an unlisted UK registered company.
The terms of the note will depend to an extent on what is agreed by the private investors, but Treasury has published a partial term sheet setting out the minimum terms that the government investment will require.
The Future Fund will be available from May, and Treasury says that it will “initially” be open until the end of September. They also say that the £250 million scale of the fund will be kept under review.
Together, the Innovate UK and Future Fund pots represent a major commitment by the Government to support Britain’s most innovative businesses during the Covid-19 crisis. As has been widely discussed (including by me here), the existing relief schemes, especially CBILS, were never going to be sufficient to protect this key part of the future economy. And with France and Germany having already announced packages for their startups and scaleups, there was a real risk that the UK ecosystem was going to emerge from this crisis in much worse shape than its Continental counterparts. So I think everyone who believes—as I so strongly do—in the power of ambitious, entrepreneurial companies to drive innovation, job creation and economic growth should celebrate this announcement. (For an excellent analysis of what all this means for the ecosystem, it is worth reading the piece written by Coadec’s Dom Hallas—who was one of the most important drivers behind making this package a reality—in today’s Telegraph).
There are still a number of details that either have not been disclosed or have not been decided yet:
- One question is where the private sector investment for the Future Fund can come from in order to be eligible for the government match. As might be expected, there are a few of the old guard venture capitalists who have said that it should only come from them. This would be a huge problem for seed and early-stage businesses, many of whom are pre-VC, as well as for many regional (and London, for that matter) companies who have chosen to raise capital from investors other than VCs. Given my belief that high-growth private companies should be an open and transparent asset class, rather than the closed and opaque one it once was, I of course think that investment should be able to come from the widest possible range of investors. Fortunately I am told that senior government officials agree.
- Another is around whether or not the matching private investment needs to be on identical terms. Convertible notes are generally not eligible for SEIS or EIS relief, but with a few reasonably small changes, they can become Advanced Subscription Agreements (ASAs), which are eligible. Whether ASAs will be allowed as matching investment, and what other variances may be allowed to suit the particular needs of the private investors (without disadvantaging the government’s investment), is TBD.
- And then there is the (larger) pool from Innovate UK. Much of this will fall under existing programmes, but all we know about the final £210 million is that it is meant to go in £175,000 chunks to 1,200 companies who do not currently receive Innovate UK funds.
While there may be devil in these and other details, I am optimistic that the open issues will be resolved in a sensible way, and that the final package will prove an effective solution that will help a tremendous number of Britain’s high-potential startups and scaleups make it through this crisis.
Here are a few articles and other resources I thought worth sharing from the past week:
- From Fred Destin, one of the long-time greats of the UK venture capital scene and founder of Stride.VC, comes a hugely informative piece about the potential return of abusive terms in VC rounds. When I co-founded Seedrs in 2009, I heard about these kinds of terms existing in the market, but even then they were on their way out, and they have largely disappeared—or perhaps been in hibernation—for the past decade. Fred gives a clear and concise explanation of what founders (as well as all of the investors in the company) should be looking out for.
- From the FT comes reporting on what may be the crisis’s first impact on merger control. Deliveroo’s strategic investment from Amazon—which the UK Competition and Markets Authority had held up for some time (much to the frustration of Deliveroo’s other investors)—has now been cleared. It appears that Deliveroo successfully invoked the “failing firm” defence, a not-often-successful plea that, but for the transaction’s approval, the company would go bust.
- From analyst-turned-VC Mary Meeker, who is famous for her annual Internet Trends Report, comes a special Coronavirus Trends Report. The report was created for the limited partners of Meeker’s Bond Capital but has been made available publicly via Axios.
- Finally, from VC-turned-analyst Benedict Evans comes a compelling piece that looks at tech evolution/adoption during the crisis through the lens of forced experimentation. I found it a particularly interesting take because it makes little in the way of specific predictions about how we will live and work after the crisis, but it provides a useful framework through which to think about the question.
I’m pleased to announce that Seedrs will be partnering with Tortoise in the coming weeks to co-host a series of digital ThinkIns that dig deeper into how this Covid-19 crisis is affecting startups, and what might happen next.
Many of you will know of Tortoise, the new media organisation “on a mission to slow down and open up journalism.” Founded by James Harding (former Head of BBC News) and Katie Vanneck-Smith (former President of the Wall Street Journal), Tortoise publishes just one story each day. We’re big fans of their work and are thrilled to be collaborating with them on this.
The first ThinkIn will be this Friday, at 1 pm London time, and it is called: Startups in lock-down: should the state step in? It will be a timely discussion given today’s announcement. I will be joined on the panel by Brent Hoberman and a range of other guests, and it is intended to be a participatory discussion. Tortoise has opened their digital newsroom up to everyone in the Seedrs community for this, and their editors are looking for real experiences, new perspectives and story angles from the start-up front line.
So please click here to register, come along and have your say.
That’s it from me for now. As always please do let me know any feedback or contributions, and I hope you all stay well and safe in the week ahead.