Designed to support tech startups through the coronavirus crisis, the UK government’s convertible loan scheme leaves many small companies without financial support.
“The biggest risk right now is that there will be a whole cohort of startups that started between 2017 and 2019, that may have been bootstrapping for a year or two or were developing a product and are only just now bringing it to market,” says Lindsay Fisher, co-founder of Sparkbox, a retail optimisation platform.
“I think we’re risking losing the early staged companies that have made the most traction privately, and I think there’s big danger there. There’s a lot to be said for a company that can bootstrap its way to venture viability and I’m worried that now the venture money will go to people that can get matched funds rather than people that are raising for the first time.”
On April 20, UK Chancellor Rishi Sunak announced a £1.25bn coronavirus package to protect innovative firms. The funding will be divided between a £500m loan scheme for “high-growth” firms called the Future Fund, and a £750m scheme for small and medium seized businesses focusing on research and development.
In order to qualify for the Future Fund scheme – which is slated to start in May – a company must be UK registered, match the funding they receive from private investors and already have raised at least £250,000 in private investment in the last five years.
Fisher says the Future Fund portion is “a step in the right direction” and is positive for the larger startup community, but leaves the companies who haven’t raised £250,000 without support.
“We don’t qualify for [Coronavirus Business Interruption Loan Scheme] (CBILS) because we’ve reinvested our profits in the company, I won’t furlough employees because that would halt product development and unfortunately we won’t qualify for the Future Fund despite having raised VC investment in March,” says Fisher.
“How do you differentiate between a company that hasn’t raised venture finance yet because they can’t and a company that hasn’t because they’ve chosen not to?”
Miquel Herrera, co-founder of software company EileanTech, also questions the £250,000 investment prerequisite. “I think there will be a lot of potentially viable businesses that will not fit into the selection criteria and will go bust and disappear,” he says.
Market participants are also seeking clarification over how the convertible loans will be delivered.
“I think this aspect needs to be clarified. As it stands it seems that if companies go bust then the money is lost. This means that the taxpayer would be exposed to all of the downside and none of the upside. In the end it looks like it will be another case of privatising profits while socialising losses,” says Herrera.
“It’s difficult to understand how they’re going to be issued and who will get priority with those applications because I think there will be more demand for them than actually exists,” she says.
Some market participants are calling for further measures to be taken. Russ Shaw, founder of Tech London Advocates and Global Tech Advocates, thinks existing schemes should complement the Future Fund.
“More can be done, such as expediting R&D tax credits or modifying [Enterprise Investment Scheme] (EIS) and [Venture Capital Trusts] (VCT) rules to enable investors to inject cash into startups now. This combination will go further to address the immediacy of the issue,” said Shaw in an email.
Yet some startup founders remain hopeful: Fisher is waiting for Innovate UK to announce its assistance package, which she hopes will help bootstrapped companies. According to an Innovate UK spokesperson, the organisation will assess applications for additional finances to address shortfalls in general business funding, to fill the emerging gaps in funding strategies. Fisher hopes Innovate UK grants could help bridge the gap, or else many UK startups will remain at risk.
“The longer-term implication for startups is will [venture capital] be favouring the convertible loan program? If we don’t qualify for that, is there going to be a barrier to entry into the funding market because of that?”