FinTechs and Start Ups – UK Government Announces £1.25 Billion Support Package
By Arun Srivastava, Sarah Pearce & Nina Moffatt
On Monday 20 April 2020, the Chancellor of the Exchequer, Rishi Sunak, announced a Government support package of £1.25 billion aimed at driving innovation and development during the COVID‑19 outbreak.
Mr. Sunak recognised the United Kingdom as a global leader in innovation saying, “Our start-ups and businesses driving research and development are one of our great economic strengths, and will help power our growth out of the coronavirus crisis. 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.”
The support package announced by the Government includes:
A Future Fund which will provide government loans to U.K.-based companies ranging from £125,000 to £5 million, subject to at least equal match funding from private investors. The scheme will be delivered in partnership with the British Business Bank; and
A Research and Development Fund of £750 million to support small- and medium-sized businesses.
The Future Fund
This Fund will be an option for businesses such as FinTech start-ups that rely on equity investment and are unable to access the Coronavirus Business Interruption Loan Scheme.
The Future Fund will launch in May and will run through the end of September 2020.
The Fund will be available to innovative companies and start-ups. While full eligibility criteria is yet to be published, a company will, prima facie, be eligible if it is:
Based in the U.K.;
Can attract the equivalent match funding from third-party private investors and institutions; and
Has previously raised at least £250,000 in equity investment from third-party investors in the last five years.
If the company is a member of a corporate group, only the ultimate parent company, if a U.K. registered company, is eligible to receive the loan.
The funding will operate by the Government providing unsecured bridge funding available alongside other private third-party matched investor(s). The Government loan will constitute no more than 50% of the bridge funding being provided to the company, with the remaining amount provided by matched investor(s).
There are limitations on the use of such funding as it can only be used for working capital purposes. As such, it cannot be used by the company to repay any borrowings, make any dividends or bonus payments to staff, management, shareholders, or consultants or, in respect of the Government loan, pay any advisory or placement fees or bonuses to external advisers.
The Government will receive a minimum of 8% per annum (non-compounding) interest to be paid on maturity of the loan. The interest rate shall be higher if a higher rate is agreed between the company and the matched investor.
The starting position is that the bridge funding will automatically convert into equity on the company’s next successful funding round at a minimum conversion discount of 20% (the “Discount Rate”) to the price set by that funding round with a company repayment right in respect of the accrued interest.
For these purposes, a successful funding round is deemed to be where the company raises an amount in equity capital (excluding any shares issued on conversion of the bridge funding or to employees/consultants on exercise of options) equal to at least the aggregate amount of the bridge funding.
The Government will have limited corporate governance rights during the term of the loan and as a shareholder following conversion of the loan.
Since the announcement, the Future Fund has been well received by the market. Undoubtedly, it responds to many issues raised by tech companies and founders who found themselves struggling in light of the pandemic. Erin Platts, Silicon Valley Bank, Head of EMEA and President of the U.K. Branch said: “We welcome today’s announcement from the Chancellor as a very positive step in supporting the U.K.’s Innovation Economy. Getting funds into the hands of entrepreneurs to protect the U.K.’s technology and healthcare industry is critical to maintaining our place as one of the most attractive and successful tech hubs globally...”
This latest package from the U.K. government signals the immense importance of innovative technology and the role it plays in the economy. Key to its success will be meeting the deadlines for the schemes going live, ensuring they are accessible to all those who need them and that a broad range of investors can take part in the co-investment fund.
Research and Development fund of £750 million
The £750 million fund is designed to support small and medium size firms involved in research and development. It will be made available through Innovate U.K.’s grants and loan scheme. Innovate U.K. is the U.K.’s national innovation agency.
It is expected that Innovate U.K. will accelerate up to £200 million of grant and loan payments for its 2,500 existing Innovate U.K. customers on an opt-in basis.
An extra £550 million will also be made available to increase support for existing customers and £175,000 of support will be offered to around 1,200 firms not currently in receipt of Innovate U.K. funding. The first payments will be made by mid-May.
This package builds on the Government’s existing support for innovative, high-growth firms including the £2.5 billion British Patient Capital fund, the upcoming £200 million Life Sciences Investment Programme, research and development tax reliefs and commitments to increase public research and development spending to £22 billion by 2024-25.
To be able to apply for this funding, a firm needs to be a U.K.-based business or research organization that requires the funding to: (i) research and develop a process, product or service; or (ii) test its innovation ideas; or (iii) collaborate with other organizations for research and development purposes.
Further details to the Innovation Funding Service are available on their website under the various projects run by Innovate U.K.