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The Coronavirus Future Fund

What is the Coronavirus Future Fund?

The UK Government this week announced its plan to help high-growth companies navigate COVID-19 in the form of the Future Fund, albeit more details will need to be forthcoming in due course. In partnership with the British Business Bank, the Government has committed a pot of £250 million to be invested in innovative companies who are facing financing difficulties due to the pandemic. The minimum investment amount per business will be £125,000, with a maximum of £5 million and will be by way of convertible loan notes (CLNs). Any investment from the Fund will need to be matched by the same amount from accredited private investors.

In order to qualify for funding, businesses must (i) be an unlisted UK registered company, (ii) have raised £250,000 in aggregate from private third party investors in a previous funding round in the last five years and (iii) have a substantive economic presence in the UK.

Given the challenge of trying to value a young business in a pandemic and the time it would take to undertake a full due diligence exercise, the Government will have opted for a CLN so as to obviate these hurdles. But the requirement for match funding will make it much harder for businesses who do not have private investors lined up or already on board. Given the high mortality rate of start-ups, the Government presumably requires the match funding as a signal of quality of standard for these investments. However, if the match funding must be made via the same CLN (which we understand the Treasury is currently insisting is the case), it cannot qualify for SEIS/EIS reliefs, which will only serve to reduce the number of private investors willing to provide it.

It is encouraging that the Government has responded to significant lobbying to provide financial support to boost the start-up ecosystem. But there has been some disappointment from the community that many dynamic, fast-growth businesses won’t be in a position to take advantage of this initiative, either because they won't qualify or because they won't be able to secure the private match funding required.

Fundamentally the primary purpose of the Fund is to extend the runway for existing businesses, not to fund new start-ups, so this is really for those businesses with a relatively robust track record and not the vast majority of start-ups. At £250 million, the Future Fund is also a relatively modest pot (although it may be increased over time), so even when fully deployed it will only go to support a very small proportion of the UK start-up community. The Government will need to tread a fine line between supporting early-stage businesses in difficult times and speculating with tax payers' money in high-risk investments. That said, the Government is expending far greater sums to businesses under the furlough scheme, many of whom unfortunately may not survive this crisis.

Given the stated intention to support high-growth young businesses, it leads to question whether this was a missed opportunity for the Government to focus on purpose-driven/ESG businesses for example, given reports from investment markets which indicate greater resilience in this crisis by companies run along sustainable lines. A much larger pot could have been committed, perhaps with fewer strings attached, as a way of kick-starting this exciting and rapidly growing sector of the start-up ecosystem.