The Government’s “Future Fund” initiative (a summary of which can be found here) has been cautiously welcomed by UK SMEs dealing with the impact of coronavirus. Whilst clearly a positive step in terms of protecting innovative and fast-growth companies, the scheme has not been met with universal acclaim.
In this post, we look at the main criticisms and assess whether or not they are justified.
Is the pot big enough?
The criticism - Given that the minimum and maximum cheque sizes are set at £125k and £5m respectively, it is easy to understand why the British Venture Capital Association has lobbied to increase the size of the initial pot of £250m to £500m.
The response - The Government has stated that the size of the Future Fund will be kept under review, suggesting that the amount available under the scheme may well be increased. Francis Evans of BEIS backed this up at the Tech Nation event, encouraging companies and investors not to “look at it as if once it’s gone it’s gone.”
EIS and SEIS compatibility
The criticism – The concern is that if matched funding under the scheme is to be made in the form of a convertible note, such investments will not qualify for EIS or SEIS relief or VCT treatment as the government investment will constitute state aid for those purposes. This incompatibility will prevent companies’ from accessing matched funding from business angels and VCTs. Given that UK Business Angels Association research suggests that 86% of angels use EIS / SEIS to support their investments, the impact of this incompatibility is marked.
The response – During a panel discussion hosted by Tech Nation, Francis Evans of BEIS said “don’t expect the headline terms of the Future Fund to change” suggesting that investee companies should not pin their hopes on the terms being amended to ensure compatibility. In defence of the proposal, it might be argued that those making use of EIS and SEIS relief are already benefitting from a significant tax break and by focusing on co-investment from VCs (other than VCTs) rather than friends and family and/or angels, the government is able to rely on the assessment criteria and due diligence carried out by professional investors.
Are the terms attractive enough?
The criticism – The proposed terms reflect a venture capital style approach to investment and may not be attractive for investee companies. We will look at the terms in more detail in a subsequent post, but suffice to say that references to a 100% redemption premium, a most favoured nations clause and an automatic conversion into the most senior class of equity at a 20% discount suggest that the terms are commercial rather than benign, leading some to suggest that the terms of the deal on offer could dampen appetite among investee companies.
The response – As with any early stage investment, capital deployed will be at significant risk. It is incumbent on the government to protect taxpayers’ interests and prudent to ensure that successes result in a return on taxpayers’ investment.
In balancing the interests of fast-growth (but often cash-strapped) companies with the need to ensure that investments are made on commercial terms attractive to taxpayers, the Government has had to tread a delicate line. While undoubtedly welcome. with many of the key details of the Future Fund yet to be announced (for example the full eligibility criteria), it remains to be seem how successful the package will ultimately prove to be.
Written by Alex Lloyd and Mark Devlin.