Relatively, COVID 19 has put pressure on everyone. Right from the general-public to startups, corporate companies, state governments and central governments across the world witnessing the ruthless claws in the form of a financial crisis.
Companies lost profits, yet they have to pay salaries to their employees. Moreover, maintaining the business setup without income may pile up liabilities quickly.
To revive, and in a step to prevent the businesses from going bankrupt, the UK government announced a few lending schemes. These lending schemes look promising, and it might help large players to some extent.
But startups and venture-backed companies may not be able to avail these loans due to the eligibility criteria that these schemes carry.
Honestly, many startups and venture-backed companies have tremendous growth opportunities, and they equally contribute to the liquidity in the system as well.
The startup ecosystem pressurized the government to initiate schemes that are helpful for startups as they are barely able to manage the COVID 19 crisis.
What is The Future Fund?
UK government plans to launch the Future Fund aiming to channelize the fund inflow to the startups and high-growth companies that lack adequate liquidity to remain operational.
However, as per the eligibility criteria, companies looking to avail the funding must be a private company registered in the UK. Not only that, but they also must have raised £250,000 in the last five years in the form of private investment. The funding will be in the form of convertible loan notes.
The scheme seems to go live in May 2020. It seems the UK government is planning to invest in select startups in the range of £125,000 to £5 Million. And, the scheme will have the scale of fund status as “under review”.
That means that further inflow into the future fund could be diverted to the qualifying startups.
How Does The Future Fund Work?
The options for repayment are not completely clear at the time of writing this article. However, some debates discuss one of the two notable options could be set as a repayment option.
- Option 1: The companies receive the funding will have to repay with certain % of interest on the total amount. Repayment means, 100% redemption value + interests accrued. Investors will make 2x money in case a company makes a repayment.
- Option 2: If the companies don’t repay, then the loan notes will be converted into equity. Given the current scenario and the government’s need for securing shares of the stable startups suggest that the conversion of loan notes to equity could be mandatory.
Which option could be better?
Experts and critics suggest that a mandatory equity conversion could be the best choice given the current scenario.
Practically, the companies that make better profits are the ones that deserve investment. Contrarily, they will choose to pay back the funds rather than automatic conversion. Besides, companies that fail to make profits would decide to convert the loan notes into equity.
Both these things could expose taxpayers to a considerable downside with little or no upside.
However, if the repayment option says that the redemption of 100% value plus interest, then the investors would get 2x returns, which is a safe and sound proposition.
Precisely, the automatic conversion system could prove to be favourable for the UK government, as they will get to hold discounted equities of the best-performing companies to offset against the worst ones.
But, we have to wait to get clear communication from the authorities regarding the features of the Future fund.
As per some reliable resources, the conversion will be mandatory except for some specific scenarios where companies will be paying 100% redemption value plus interest amount.
Focus and support for R&D businesses – £750 million
Precisely, growth stimulus for R&D is the need of the hour. The future fund is a great initiative, so is the £750 million funding for R&D businesses. Research and development have always been one of the United Kingdom’s greatest strengths.
Some portion of the said fund is from previously committed money, yet it makes a big difference at present to create an exit strategy out of COVID 19 crisis.
As per the UK treasury, UK’s innovation agency (Innovate UK) will push £200 million for the existing customers via an opt-in basis. There are around 2500 current customers who will benefit from this step.
Besides, an additional £550 million will be pumped-in for the benefit of the existing participants of Innovate UK funding. £1,75,000 of funds will be allocated to 1200firms, which are currently not part of Innovate UK’s funding program.
The first tranche of this funding will be available for the recipients by the second or third week of May 2020.