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Will The Future Fund Really Help UK Start-ups?

Posted 6 months ago

Will The Future Fund Really Help UK Start-ups?
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Much excitement has been generated around the Future Fund, with many in the startup community praising its current performance. But to what extent will this new scheme help startups? 

Providing government loans ranging from £125,000 to £5 million, the Future Fund (which also provides a facility for loans to be converted into equity at the next funding round) was launched off the back of an open letter signed by British startups demanding support during the lockdown. 

On the surface, the scheme seems like the answer to many startup’s prayers. With the government providing matched funding, it seems like a great solution to the current shortage of cash for businesses. However, taking a closer look, the Fund may not be as suitable start-ups as its proponents may think. 

The Future Fund in incompatible with S/EIS

The fact that the Future Fund is not compatible with the Seed and Enterprise Investment Scheme is a significant setback for early-stage businesses, many of whom rely on private funding. 

The schemes use tax reliefs as a means to incentivise private investors who are willing to recognise that significant returns could be achievable if they are willing to risk their funds by investing in early-stage businesses. 

SEIS allows for a maximum investment of £150,000 targeted at helping start-up businesses to attract seed-funding, whereas EIS allows for follow-on, allowing a company to take up to £5 million in investment per year. Both of these schemes are capital equity investments in return for shares in a company.  

The schemes play an important role in securing a smooth flow of risk equity capital from private individuals to early-stage businesses. Just over £1.92 Billion was raised under EIS for 3,920 companies in 2017-18. 

However, as a result of the incompatibility of the two schemes with the Future Fund, a large proportion of startups will be unsuccessful in securing matched funding from private investors. 

Most funding for startups comes from business angels and private investors. But the incongruence of the scheme and EIS means that Venture Capitalists are overly-compensated for co-investing compared to early-stage investors. 

In an interview with City AM, Glafkos Tombolis, partner at tech law firm Kemp Little, said: “EIS relief is critical for angel investors. Angel investors take a measured approach in that they know a large proportion of investments will fail, and they’re banking on 10 per cent becoming successful.

Without the tax relief, investors will be unlikely to put money in alongside the government, risking the future of British startups particularly badly hit by the coronavirus crisis.

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.

The Future Fund is more suited to non-EIS who usually invest in larger startups. EIS is aimed at early-stage businesses; the businesses that will eventually form part of the effort to pull out of recession. 

The fact that excellent growth businesses will now not receive additional funding that VC backed companies will receive will diminish the efforts of other government initiatives including the work by BEIS, Downing St, and the Rose Review

So what now?

With all this in mind, the question is: what next for British startups who are now unable to access CBILS, the Bounce Back Loan Scheme and the Future Fund

At NextFin, we believe the government should introduce a temporary increase in the tax relief available through EIS. This should resemble an increase from 30 to 50 percent to help overcome investor caution and restore capital flows

Rather than relying on debt, startups would be gaining equity investment. Afterall, if we want to ensure the innovative UK technology sector continues to thrive after the crisis, it is more equity-based solutions that we need.

Authors: Oliver Murphy & Sacha Bright

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: Coronavirus SME Future Fund EIS SEIS Startups Business Entrepreneur



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