UK startups applying for government financing under the new £500m support scheme should be “confident” that the money will be there for them starting from next week.
Answering a question from Sifted at the government’s daily press conference, UK Chancellor Rishi Sunak said that the term sheet was already available on the UK government website and startups should begin the process as soon as possible.
“So for those people who think they might need to raise capital, have a look at that term sheet," he said. "If you think it might make sense for you, start putting your round together confident that this will be up and running in May and then we'll be there ready to provide the capital to drive your growth in the future.”
The Chancellor was responding to fears that the funding, which will come in the form of a convertible loan distributed by the British Business Bank (BBB), will be slow to arrive. This could prove fatal for some startups, which may be down to as little as a three-month cash runway.
The BBB has been heavily criticised for being slow to give loans to larger businesses under the Coronavirus Business Interruption Loan Scheme (CBILS), with accusations that applications were “bogged down by form-filling” and there were not enough staff to manage them.
Sunak added that the convertible loan scheme was appropriate for a wide range of high-growth companies, “whether that is you at Sifted or any of the other startups that might be benefiting from the scheme”. Sifted, while backed by the Financial Times, is itself a startup.
The assurance by the Chancellor follows an announcement on Monday morning that the UK government was committing £250m towards a new £500m fund called the Future Fund that would invest in high-growth private companies that needed money to cope with the economic disruption caused by the coronavirus pandemic.
The government said it would invest between £125,000 and £5m in qualifying startups in the form of a convertible loan, meaning that the debt will convert to equity at a discount at the next funding round. It said that the scheme will initially run from May to September, but could be extended.
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Under the terms, the cash will only be invested alongside private money, and only startups that have already raised £250,000 from investors over the past five years will qualify. This is an attempt to ensure that the government is only backing startups with a respectable chance of commercial success.
Monday’s announcement was historic because it means that the UK government may, for the first time, end up owning equity stakes in local startups. The move brings the country closer to the approach taken by France and Germany, which has long taken equity stakes in startups.
Sunak said that this did not reflect a broader policy shift for now, as this package was born out of exceptional circumstance. “It is a very specific response to the unprecedented circumstances that we find ourselves in which is why I think it is the right decision to take a slightly different approach,” he said.
He added, however, that this was now a tool in the government's arsenal and would review how it works: “Of course it is something we will keep in review now that we have it and will be able to see how it performs.”
Meanwhile, the scheme has been met with praise by the vast majority of the UK startup community. Robin Klein, a partner with venture capital firm LocalGlobe and influential figure said that the fund “should really help the best companies cross a bridge over the troubled waters”.
Brent Hoberman, the cofounder of lastminute.com and one of the proponents of the government support package, said: “Entrepreneurs across the country will be delighted with the announcement.”
There was some criticism, however, of the rule that the startups backed by the government needed to have already raised £250,000 in the past.
"My concern with the way the government has structured the Future Fund is that it will not be the lifeline it purports to be to the plethora of truly early-stage startups that have not yet raised £250,000 in private funding to make them eligible,” said Stephen Page, chief executive of UK seed investor Startup Funding Club (SFC).
“It seems quite plausible that government co-investment will instead primarily benefit VCs as they lean on the Future Fund to help tide over their existing portfolio companies.”
Denzel Walters at Community Growth Ventures (CGV) said that it could be bad for diversity: “The Government's "Future Fund" initiative will create a bigger private investment gap between underrepresented founders and their white male counterparts.”
He added: “Requirements like having previously raised 250k in the past five years are barriers to accessibility for underrepresented founders. Private investment has been heavily biased, which means lots of deserving talented UF founders have not been able to raise 250k in the last five years.”
Francesca (Check) Warner, chief executive of Diversity VC, made a similar point in a Medium posts: "We must ensure that the lack of diversity in funded start-ups isn’t simply exacerbated by this new injection of funding — where startups are separated into the ‘haves’ and the ‘have nots’ and the ‘have nots’ are overwhelmingly the ones founded or led by diverse founders."