May 1, 2020

Convertible Loans: The 'Future Fund' Scheme

Country
Europe
Policy/Program
Description of the core change(s) brought by this policy instrument

The UK government has implemented a £1.25 billion (US$ 1.6 billion) support package to help tech start-ups survive the coronavirus pandemic. A large part of the financing package* consists of a “Future Fund” loan scheme, expected to inject £500 million (US$ 625 million) in convertible loans, for high-growth, early stage start-ups.

The government has committed an initial £250 million, while the private sector is expected to make up the other half on a deal-by-deal basis.

Non-listed U.K. start-ups will be entitled to loans ranging between £125,000 and £5 million, with private investors matching government financing. 

The loans will automatically convert to equity in a start-up’s next funding round, or at the end of the loan if the debt hasn’t been repaid.

The loan shall mature after a maximum of 36 months.

 

*The remaining portion of the rescue package consists of R&D loans and grants worth £750 million instrument is designed small and medium-sized firms focusing on research and development.

Please list the implementing agencies

The Future Fund will be managed in partnership with the British Business Bank.

Please name the policy advisor(s) or leader(s) who have been key in introducing and/or designing this policy instrument

Chancellor of the Exchequer Rishi Sunak. “This new, world-leading fund will mean they can access the capital they need at this difficult time, ensuring dynamic, fast-growing firms across all sectors will be able to continue to create new ideas and spread prosperity,” Mr Sunak said. 

Business Secretary Alok Sharma.

Secretary of State for Digital, Culture, Media and Sport, Oliver Dowden.

Lifecycle of target firms for this policy instrument
Scale-ups
Startup firms
If you marked "start-up" and/or "scale-up" firms, please provide the specific definitions used

To be eligible for a Future Fund loan, applicants must meet the following criteria:.

  • Attract the equivalent match funding from third-party private investors and institutions.
  • Have previously raised at least £250,000 in equity investment from third-party investors in the last 5 years.
  • Be based in the UK (first set of applicants after original announcement). By the end of June 2020, the Treasury announced that this would be extended so as to allow a wider range of startups to join, and include those that had previously been blocked after moving overseas to tap foreign investors.

See full eligibility criteria, here.

Support offered
Direct Financial Support
Indirect Financial Support
Level of intervention
Ecosystem-level
Firm-level
Barrier(s) addressed with this policy tool
Access to Capital
Abstract summary of this Policy resource

The Future Fund supports the UK’s innovative businesses currently affected by Covid-19. These businesses have been unable to access other government business support programmes because they are either pre-revenue or pre-profit and typically rely on equity investment. The scheme will deliver an initial commitment of £250m of new government funding through convertible loan notes which will be unlocked by private investment on a match funded basis. 

Policy timeline

The Future Fund launched for applications in May and will initially be open until the end of September 2020, as follows:

  • The Future Fund opened for applications on 20 May 2020.
  • Provided that applicants provide the information required during the application process in a timely manner, it is expected that the process will take a minimum of 21 days from initial application to funding being made available
  • Convertible loans are reported as approved at the point the Convertible Loan Agreement document is issued by Future Fund for signature
  • The time to which applicants subsequently receive funds will depend on the speed with which they complete the documentation

Figures as of 15 June 2020, here.

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Evidence of results

As of June 28, 2020, the fund has approved over £320.6m of convertible loans to 322 innovative businesses across the UK.

Challenges, criticisms and lessons

Concern 1: Government as a shareholder

Since the loans will automatically convert to equity in a start-up’s next funding round, or at the end of the loan if the debt hasn’t been repaid, this policy instrument could see the UK government taking stakes in some of the country's fast-growing early-stage startups. 

However, experts following the policy design closely explained to the media that the government was unlikely to hold its equity through later funding rounds. Instead, they said, it was probable that late-stage investors would be given the option to buy the government out.

Most, however, clearly see the Future Fund is designed to provide liquidity during the crisis and promote private investment, rather than to end up with the UK government owning equity in UK tech companies.

Concern 2: Tax relief compatibility

Many early-stage firms are heavily reliant on investors using the Enterprise Investment Scheme (EIS),  which offers tax relief to individual investors that buy new equity in startups. Under the EIS, investors can claim up to 30% ­income tax relief on the money they i­nvest in early-stage firms.

As originally announced, but the scheme will not offer investors the tax relief typically available. As of May 10, 2020, the press was speculating that the startups bailout package that enabled the Future Fund could be revamped to offer tax relief to tempt private investors into taking stakes alongside the Government. 

Concern 3:  Overliance on VCs

The Future Fund has been criticized for focusing too heavily on the venture capital (VC) portion of the investment landscape when only 17% of funding of UK startups comes from venture capital and private equity funds, potentially harming the prospects of the pre-VC early-stage startups that are perhaps most vulnerable.

“Unfortunately, the route that was taken has really left out the angel market,” expressed Jenny Tooth, chief executive of the UK Business Angels Association (UKBAA).  

Notes and additional context

This relief package targeted to start-ups emerged after CEOs of some of the country’s top tech companies urged the government to extend its coronavirus relief measures to start-ups. They have pointed out to the financial support tech entrepreneurs received in France and Germany (4 billion euros and 2 billion euros, in relief funds respectively). 

Furthermore, these advocates pointed out that many young tech firms had not been able to access existing emergency funds set aside for small businesses because they were unable to meet the criterion of showing profits have been affected by COVID-19. It is common and acceptable that innovative, growth-oriented companies, such as venture capital-backed tech companies, prioritize growth over profitability in their early stages. As a result, the criteria for applying for the Coronavirus Business Interruption Loan Scheme shut off companies without a history of consistent profits. 

 

Geographic scope
National-level