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Government Announces £1.25bn Package to Support Start-Ups

Posted 4 years ago

Government Announces £1.25bn Package to Support Start-Ups
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Author: Sacha Bright & Oliver Murphy

The government has announced £1.25bn worth of funds to help support start-ups that are not eligible for the current coronavirus economic relief schemes.

The UK has followed similar moves by France and Germany to prop up their start-ups. The French government unveiled a €4bn package to support its local start-ups in March, and earlier this month Germany pledged €2bn to help its start-ups weather the crisis.

According to the Treasury, funding includes a £500 million investment fund for “high-growth” companies impacted by the crisis. SMEs whose primary focus is on research and development will also benefit from £750m of grants and loans.

The package would ensure firms - ranging from tech to life sciences - are protected through the crisis so they can continue to develop products and help power UK growth.

The news comes after a Corporate Finance Network Report estimated between 800,000 to 1 million small UK businesses cannot access CBILS.

In a statement, Chancellor Rishi Sunak said: “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 £500m Future Fund has been designed to ensure high-growth companies across the UK receive investment to continue during the crisis.

Delivered in partnership with the British Business Bank and launching in May, the fund will provide UK-based companies with between £125,000 and £5 million from the government, but only if they can find matching private investment.

To be eligible, a business must be an unlisted UK registered company that has previously raised at least £250,000 in equity investment from third-party investors in the last five years.

Key takeaways

Full details are yet to be released, but here is what we have managed to extract from the government’s briefing:

  • £750m made available for grants and loans overseen by Innovate UK.
  • Any money that is put into a business by the government must be matched by private investors. If the money is not repaid, the government will take an ownership stake in the company.
  • The bridge funding shall automatically convert into equity on the company’s next funding round at a minimum conversion discount of 20% to the price set by that funding round with a company repayment right in respect of accrued interest.
  • Start-ups that accept the funding will also have to pay a minimum of 8% interest, which shall be higher if a higher rate is agreed between the company and the matched investors.

Potential issues and fixes

The program is undoubtedly a positive step in the direction of protecting essential start-ups. With Britain being the start-up capital of Europe, this new government program recognises the importance of protecting this key part of the economy.

However, there are some key issues. CEO of NextFin, Sacha Bright said: “Right now there is no incentive for private investors to invest in a start-up affected by Covid-19. As the Enterprise Investment Scheme Association has reported, an estimated £9bn has been removed from funds that invest in early-stage businesses. Although government funding goes some way to incentivise private investment, it has not fully recognised this, and match funding is not available.”

“As we have seen with the fiasco surrounding the Coronavirus Business Interruption Loan Scheme (CBILS), running these investments via overly-bureaucratic government institutions means that this funding does not get to businesses fast enough. Having applied myself for government funding on several occasions, it could take up to six months to receive the capital.”

“As we have reported before, the government needs to take advantage of fintech companies when taking into account CBILS. The same needs to apply to equity investment.

“We would like to see the government use private fund managers such as M&G who can deploy capital much faster. We would also like to see them use high tech funding methods such as equity crowdfunding to mobilise private investor’s assets.”

“With equity crowdfunding, the public would invest alongside the government to save our start-ups, much in the same way as the public did when donating via donation-based crowdfunding for Captain Tom’s 100 laps for the NHS on Just Giving."

NextFin believes that the government could more readily encourage investors to match funds at 50% by expanding the threshold and rate of tax relief of the Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS).

As NextFin has shown, doing so would also encourage greater levels of private investment and thus more follow on investment post-Coronavirus by mitigating a larger proportion of risk for investors.

Already, the SEIS and EIS have been responsible for almost £20 billion of private investors’ capital to create and drive the growth of over 27,000 businesses. But in these challenging times, the schemes must go much further to attract even more private investors to help keep businesses liquid.

If the government complemented this new program with an increase of the income tax relief credit to 50% for EIS and 70% for SEIS, we would see millions freed up for matched funding.

He added: “Look at it like this: if you give a man a fish, you feed him for a day, if you give him a fishing rod you feed him for a lifetime. So, by increasing EIS and SEIS allowances, you give entrepreneurs the tools to attract their own investment, without any government intervention.”

Disclaimer

To the best of our knowledge, the information we have provided is correct at the time of publishing. SEIS and EIS tax benefits are dependent on your financial circumstances. Sacha Bright is not a solicitor or accountant and we recommend that you seek professional advice on any topic discussed.

Tagged: News EIS SEIS CBILS



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