Tech startups just got a 'vital' rescue package to help them cope with the coronavirus crisis

A £1.25 billion ($1.56 billion) rescue package aims to help early-stage startups weather the effects of the economic crisis caused by the pandemic.
Written by Daphne Leprince-Ringuet, Contributor

Cash-strapped startups that are struggling to survive the economic upheaval caused by the COVID-19 crisis will now be able to receive a share of government support, thanks to a new £1.25 billion ($1.56 billion) rescue package announced this week by the UK Chancellor Rishi Sunak.

The package consists of grants and loans designed to help UK businesses that are "driving innovation and development" – in other words, early-stage startups that rely on equity investment. Those companies are effectively the most likely to suffer the consequences of shrinking VC capital, with three out of four investors globally anticipating a slowdown in investment for the next one or two years as a result of the pandemic.

The Chancellor put forward a two-fold solution. On the one hand, the government proposed £750 million ($934 million) of grants and loans for the most R&D-intensive small and medium businesses, with cash to be made available through innovation agency Innovate UK. About a quarter of the total budget (£200 million), however, consists of accelerating grant and loan payments already in place as part of the agency's existing programs.

SEE: Launching and building a startup: A founder's guide (free PDF)

On the other hand, the government has designed a £500 million ($622 million) co-investment fund, dubbed the Future Fund, to help high-growth companies across the UK receive the investment they need to keep going during the crisis. Half of the Future Fund will be made of public money, with the private sector expected to make up the remaining half.

Companies can expect to receive convertible loans from the government ranging from £125,000 ($155,000) to £5 million ($6.2 million); the loans, however, are subject to at least equal match funding from private investors. They will convert to shares in the company's next funding round, which means that the government could be taking equity in some of the country's fastest-growing startups.

Russ Shaw, the founder of private sector organization Tech London Advocates, said: "The Future Fund is a vital lifeline that will give UK startups a sense of certainty in a turbulent economic period. The conversion of debt into equity will ensure that early-stage businesses are not too debt-laden." 

UK-based businesses qualify so long as they have raised at least £250,000 ($311,000) in the last five years, and if they manage to attract equivalent funding from private investors to match the amount they receive from the government, as per the terms and conditions of the co-investment fund.

Richard Blakesley, the CEO of Capital Pilot, which uses data to match startup businesses with investors, told ZDNet: "Clearly, what has been announced is for slightly later-stage businesses, which have already been validated by a third-party investor. For companies that don't yet have an established investor in place, things will still be difficult."

"It is hard to decide which companies should and shouldn't be supported right now. In this case, the government can rely on the fact that the companies it will support have already been validated by investment professionals." 

That's an understandable approach, added Blakesley, but it might mean that many startup founders who desperately need cash will miss out on public support. 

Such is the case of Michal Wisniewski, the CEO of Manchester-based company Flock, which provides software that helps teams recruit and develop remote employees. Wisniewski explained to ZDNet that he just missed out on a £250,000 seed round in late March – a direct result of the growing scale of the coronavirus crisis, which caused his investor to delay their decision. 

"The Future Fund is a great initiative," Wisniewski told ZDNet, "however it is not particularly helpful for early-stage startups like mine. Sadly, new startups who did not manage to secure seed funding before the outbreak will not benefit from this initiative."

A recent study among entrepreneurs in London showed that half of startup founders will be prioritizing staying in business over the next three months, with 63% reporting that cash flows would be their toughest challenge for the near future.

While the UK government did launch various schemes designed to help businesses cope with the economic downturn, including an initial £330 million ($410 million) of guarantees, many startups found that they did not qualify for support. Government loans effectively target viable businesses, which means that pre-revenue startups do not have access to public money.

A survey led by the UK's leading lobby group for technology companies techUK showed, in fact, that over half of respondents would be ineligible for support from the government.

Crowdfunding platform Crowdcube launched a "Save Our Startups" petition earlier this month, urging the UK government to provide liquidity packages for startups at risk, as well as stimulate private investment into early-stage companies. The petition was endorsed by high-profile signatories, including the co-founder of Zoopla Alex Chesterman and the co-founder of Lastminute.com Brent Hoberman. 

In a similar effort, the leaders of some of the UK's most successful technology startups wrote an open letter to Chancellor Sunak this month, warning that the existing COVID-19 lending schemes only benefit established firms and fail to help earlier-stage businesses, which tend to focus on growth rather than short-term profitability.

Including Deliveroo's Will Shu, Babylon's Ali Parsa and Benevolent AI's Joanna Shields, the signatories asked the Chancellor "to urgently set up a taskforce (...) to find a way for high-growth tech companies to be able to access the lending schemes you have already established or new schemes if necessary."

Job done, or so it seems – although only to a certain extent. With smaller startups still unable to count on government support for the time being, it is unclear how much of the tech ecosystem has been covered by the Future Fund. 

SEE: Pivot, not panic: How startups are coping with the coronavirus crisis

For Blakesley, however, the initiative remains a sensible place to start. "There was always going to be some degree of selection, because you can't hand out money to everybody," he said. "That selection is very difficult to do at scale."

It is understandable that the government would place its bets on companies that have already some degree of evidence to prove their sustainability. "Hopefully there is more to come for startups, but only time will tell," said Blakesley.

Designed in partnership with the British Business Bank, the Future Fund will launch in May and will initially be open until the end of September 2020. 

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