Future Fund Goes Live

The UK Government’s Future Fund, a co-investment initiative to help UK start-ups, is now live and accepting applications.

Under the scheme, which was announced on April 20, the government will provide convertible loans ranging from £125,000 to £5 million to certain UK-based high-growth innovative companies, subject to at least equal match funding from private investors, and will be managed by the British Business Bank (BBB). This means that the minimum loan to a company is £250k with no maximum, since there is no upper limit on the amount that additional investors may co-invest.

There is no requirement for a company to make regular repayments, and the intention is that the loans will be converted into equity at a discount at the next funding round or after three years.

BBB states on its website that “the Future Fund uses an online platform based on a recognized financial instrument, and a set of standard terms with published criteria. This allows investors to provide rapid support to the companies where they see good potential. Importantly, it provides a clear, efficient way to make funding available as widely and as swiftly as possible without the need for lengthy negotiations.”

Although the Future Fund is capped at £250m of state money, Rishi Sunak, the chancellor, indicated this week that he would be “more than happy” to extend the scheme should demand outstrip the initial funds allocated.

The government’s Future Fund page includes the template convertible loan agreement for applicants. Applications for the scheme can be made on the British Business Bank’s Future Fund webpage, which also has detailed information about the scheme.

The Future Fund program is investor-led. An application on the platform is initiated by a lead investor who will provide information about itself, other investors in the round and the company. If an application is successful, the platform will generate documentation for the company and all investors to sign.

Unlike equity investment, there is no requirement under these convertible loans to value the company, which helps speed the process at a time when company valuations have been significantly hit by COVID-19. Applications are submitted through the BBB portal, the process for which takes approximately 21 days.

These convertible loans may be a suitable option for businesses that typically rely on equity investment and are unable to access other government business support programmes because they are either pre-revenue or pre-profit. The financing supports companies are facing a significantly extended length of time between funding rounds, due to the impact of the current economic situation.

Start-ups are eligible for the Future Fund if:

• it is UK-incorporated. If the business is part of a corporate group, only the parent company is eligible[1];
• it has raised at least £250,000 in equity investment from third-party investors in the last five years;
• none of its shares are traded on a regulated market, multilateral trading facility or other listing venue;
• it was incorporated on or before December 31, 2019; and
• (i) half or more employees are UK-based or (ii) half or more revenues are from UK sales.

Participation in the Future Fund scheme will not negatively impact enterprise investment scheme (EIS) investments in a company. Whilst EIS investors are not precluded from participating in the Future Fund scheme and triggering matched investment from the Future Fund, they will not be able to obtain EIS relief on such investment through the Future Fund scheme and may lose their entitlement to make future EIS investments in that company going forward.

Further information concerning eligibility, matched funding requirements, headline economic terms, governance terms and the application process is available here.

The Future Fund is part of a wider package of support for UK businesses suffering liquidity or other financial problems caused by the COVID-19 pandemic. Other measures include:

• £750 million of targeted support for SMEs will be available through the national innovation agency, Innovate UK’s grants and loan scheme. The first payments will be made by mid-May.
• The HM Treasury and Bank of England COVID Corporate Financing Facility (CCFF), which will provide funding to sound businesses by purchasing commercial paper of up to one-year maturity, issued by firms making a material contribution to the UK economy.
• The Coronavirus Business Interruption Loan Scheme (CBILS). This a temporary scheme, which is being delivered by the British Business Bank via its accredited lenders (including high-street banks, challenger banks, asset-based lenders and smaller specialist local lenders). It aims to support businesses with an annual turnover of no more than £45 million access bank lending and overdrafts. A lender can provide up to £5 million in the form of term loans, overdrafts, invoice finance and asset finance.
• The Coronavirus Bounce Bank Loans (BBL) for small businesses launched on May 4. Under this scheme, businesses will be able to borrow between £2,000 and £50,000 from accredited lenders. The government will provide lenders with a 100% guarantee for approved BBLs and pay any fees and interest for the first 12 months. No repayments will be due from the borrowers during that period. After the initial 12-month interest-free period, a flat rate of 2.5% interest will be charged. A business that has already taken out a loan under the CBILS of £50,000 or less can switch that loan to the BBLS until November 4.
• The Coronavirus Large Business Interruption Loan Scheme (CLBILS). Under this scheme, the government will guarantee 80% of loans of up to: (i) £25 million to firms with an annual turnover of more than £45 million; and (ii) £50 million for firms with an annual turnover of more than £250 million. From May 26, the maximum loan will be increased to £200 million. Those borrowing more than £50 million will be subject to certain restrictions on dividend payments, share buybacks and executive pay for the duration of the loan.

[1] There have been indications that an exemption will be applied to the criterion that the applicant must be UK incorporated for companies that have ‘flipped’ to another jurisdiction (possibly U.S. or EU only) in order to be able to participate in an accelerator program, such as Y-Combinator. Confirmation of this and details are awaited.