The Future Fund

April 20, 2020

This week, the UK government finally announced its relief package for UK startups in the face of the Covid-19 crisis, so we've prepared this primer on how companies can use the programme to support themselves.

So first up, the package is split into two parts:

  • The Future Fund
  • Innovate UK loans and grants 

The Future Fund

Back to the Future™ Trilogy — Back to the Future (1985)

Probably the more eye-catching of the two, the Future Fund could see the government taking stakes in a wide pool of startups. However, this help isn't a direct equity investment. Instead the government is issuing what are called convertible loan notes - a loan to a company secured by the option to convert the value into company stock.

Here's how it works:

The conditions of the programme are pretty complex, partly to ensure the government is as covered as possible, but here's as simple as we can make it.

The government will partner with private investors to give startups a direct cash infusion via one of these convertible notes. Although the total fund is touted as £500m, only half of it will come from the government with the rest supposed to come from private investors. Then a few different scenarios can play out.

Scenario 1

The company performs well and reaches another funding round equal to or more than the loan amount. Here the loan auto-converts into equity at a 20% discount to the valuation in that round. That means if the government loaned £1m and in the next round new investors put in £1m for 1m shares (paying £1/share), the government loan would convert into 1.25m shares (paying 80p/share). Then the government can either keep rolling the investment, or seek to sell it on.

Scenario 2

The round is smaller than the loan. The government has the option to either convert into equity on the same terms as above OR take a repayment of the loan with a 100% premium, plus the interest (that's basically double the loan plus interest). The repayment option is on fairly harsh terms, so we'd have to hope the government would still opt for equity if viable.

Scenario 3

If the company doesn't have a funding round at all in the next 36 months, the options are pretty much the same as in scenario 2: the government can either take equity at 20% discount to the most recent round or opt for a redemption.

After some confusion, the government have clarified that the investors (i.e. the government and their partners) will have the sole decision on whether to convert the loan into equity or seek a repayment AKA a redemption. The companies can't opt to repay if they want to - and given the high price to redeem the loan in cash, it's unlikely they'd want to.

The facts:

  • Launches in May 2020
  • Government loan contribution per loan ranges from £125,000 to £5,000,000
  • Private investors must at least match, but can add more if they want
  • Interest minimum 8%
  • Loan term maximum 36 months
  • Funds can only be used on working capital

How to qualify:

  • Your business is based in the UK
  • Your business can raise matching funds from private investors
  • Your business has previously raised at least £250,000 in equity investment from private investors in the last 5 years

Although the package is generous, there are a fair number of protections and restrictions on the government side. Check out the full guidelines here.

Innovate UK funding

The larger part of the package is less interesting, but it is, well, larger. It's an expansion of the pre-existing Innovate UK research and development programme.

This government-backed body exists to fund businesses pursuing technical development as part of their operations. The criteria are fairly broad - you certainly don't need to be a cutting edge firm to get funding. You just need to demonstrate you're doing something novel in your business.

There's a bit of spin here: £200m of this funding is just accelerating cash that was already pledged. However, the government is adding an extra £550m of available funds.

How it works

You'll see these Innovate UK funds referred to as loans AND grants. That's because there's no big single pot of money.

Instead, Innovate UK holds 'competitions', in which businesses submit projects to compete for funding. Each competition has slightly different criteria, different amounts of money and that money can vary between a direct grant and a loan. The criteria are usually fairly broad though: things like 'any project to develop a game-changing product or service with clear commercial potential'.

To apply for an innovation loan or grant, you can head here.

How to qualify:

  • Your business is based in the UK
  • Your business has an innovative ongoing project that matches a current competition

To wrap up

The government have certainly put together a decent package, but it's not necessarily the kind of swift, responsive solution that many startups need right now.

The Future Fund is apparently more radical, but it's also considerably more hedged and conditional. The government need to balance effective support for startups with public opinion and the optics of throwing cash into risky companies without safeguards. It's also still unclear what will happen if startups can't find private investors to match funds and how the government will convince a wary venture market to stump up right now.

If you qualify and get through a fairly easy application process, the Innovate UK funding could be a good option. Of course, you'll have to achieve some actual research & development in your business and not just keep the lights on.

Remember, if you want funding faster, simpler and with no complicated strings attached, you can fund with us with no equity, no personal guarantee and no interest.