Future Fund Provides Life-Line for High Tech Companies but some Innovative Businesses could Struggle to Survive

The government’s £500 million Future Fund which opened on 20 May, will enable many innovative and high-growth British businesses to secure investment to help them through the Coronavirus outbreak. Launched initially with £250 million, UK-based companies can now apply for a convertible loan of between £125,000 and £5 million, to support continued growth and innovation in sectors as diverse as technology, life sciences and the creative industries.

The Fund will be open until September and is delivered in partnership with the British Business Bank. Private investors – potentially including venture capital funds, angel investors and those backed by regional funds - will at least match the government investment in these companies.

The Chancellor of the Exchequer, Rishi Sunak, said: “Our start-ups and innovative firms are one of our great economic strengths, and they will help spur our recovery from the pandemic. The Future Fund will support firms across the UK to get through the pandemic by stimulating investment, so that they can continue to break new ground in technology and innovation.

“Match fund investors will be encouraged to sign the Treasury’s Investing in Women Code, which commits firms to improving female entrepreneurs’ access to tools, resources and finance. The Future Fund is a signatory of this.”

The government would also amend the rules of the Enterprise Investment Scheme, which provides tax relief to investors in high growth firms, to protect Future Fund investors from losing relief on their previous investments made prior to any investment through the Future Fund, the Chancellor stated.

Built with a layer of protection for the tax-payer and investors, the scheme does offer a promising way forward for many established high tech companies and has received positive response.

Michael Moore, Director General of the British Private Equity and Venture Capital Association (BVCA) said: “The Future Fund is hugely significant and very welcome. For many venture capital-backed businesses it will build the bridge from today’s severe challenges to the period of recovery, enabling them to survive then thrive.

“The post-COVID economy is likely to look very different to today’s. The global leadership of venture capital-backed companies in the digital, high technology and life science parts of the UK economy will be critical to the UK’s success and this government support will help them to do that. We anticipate strong demand for this funding and we will continue to work with the government to ensure that there is enough to achieve the objective of sustaining this strategically-important sector.”

Jenny Tooth OBE, CEO of UK Business Angels Association (UKBAA) commented: UK Business Angels Association congratulates the Government for bringing this important initiative so rapidly into the market. The Future Fund responds to the needs of innovating growth focused businesses that may have had investment from angel investors in their early growth stages and now have the capability to benefit from the support of a Convertible Loan alongside VC investment. This will bring vital further finance to enable them to address the impact of the Covid 19 crisis and ensure their continuing ability to build and scale their business.”

However for some innovative, emerging high tech companies such as new start-ups, the lack of investment history effectively creates an insurmountable stumbling block for applicants. Qualifying criteria requires at least £250,000 in equity investment from third parties in the last 5 years, along with investors willing to provide funding to be matched by the government.

David Hough, a partner at London-based tax and advisory firm Blick Rothenberg said: “Convertible loans partially protect the taxpayer as the Government retains an equity interest in start-up businesses that cannot repay the loans within the 36-month term. However, eligibility rules for the Future Fund scheme mean that accessing funding will be difficult for many technology businesses.”

He added that many private investors, who could be feeling the impact of economic uncertainty, may decide that now is not necessarily the right time to take on additional risk and suggested that the Government could encourage more individual investors to back hard-hit early stage companies through tax restructuring:  “In order to incentivise investment from private individuals, the Government should look to expand existing tax reliefs, such as the Seed Enterprise Investment Scheme (SEIS).”

“We are aware of many businesses that will be delighted at the announcement of the Future Fund, but also aware of many businesses that will not qualify for a variety of reasons and still face uncertainty about the long-term future of their businesses. Extending the SEIS relief for a short period of time would seem a simple and effective solution to bridge the funding gaps for these businesses.”

Genevieve Morris head of Corporate Tax for the firm explained: “SEIS provides Income Tax relief to investors at the point that they invest, and then additional tax relief in the event that the business fails, and the investment made is lost. This limits the downside risk to investors, whilst encouraging those who can to support entrepreneurial start-up businesses.

“However, the rules to qualify for SEIS are strict and limited to small businesses that have been operating for less than two years. The big brother of SEIS, the Enterprise Investment Scheme (EIS), is available to some larger (and older) businesses and also provides relief to investors, but the relief is less generous and therefore less attractive, particularly in the current climate,” she added.

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