The government funding scheme will be delivered by its business-focused subsidiaries, and will collaborate with the private sector to aid tech startups and SMEs in tech and other sectors through the crisis and beyond.
It has been predicted that many tech startups and SMEs could be severely impacted financially by the crisis.
Aaron Archer, a partner at Cooley LLP, one of the law firms that advised the government, said: “This package will be a lifeline for many UK startups. The scheme will go a long way to ensure the UK remains the preeminent European location for emerging companies and venture capital, and one of the most attractive places in the world for the very best talent in technology and life sciences. Whatever we can do to ensure that remains the case, we will.”
The widely anticipated Future Fund will issue convertible loans between £125,000 to £5m to startups that are facing financial difficulties due to the pandemic.
The government has pledged £250 million towards the scheme, which is set to launch in May, and funding must be matched by private investors.
These loans, which will be delivered by the British Business Bank, will be in place for three years at an interest rate of 8%.
Going forward, the government may end up owning half of some of Britain’s fastest-growing tech businesses, with loans possibly converting to equity at a discount of at least 20% when companies undergo their next funding round.
How does the government fund and support UK tech startups?
Research and development funding
Additionally, the second part of the new government package will go towards funding research and development carried out by SMEs.
With R&D expected to cause an accelerated strain on company finances due to the pandemic, the government has pledged £750 million towards this department.
Payments, which will be made via the government’s innovation agency Innovate UK, are set to begin in mid-may, with the agency in place to accelerate up to £200 million of grant and loan payments.
Also £550 million has been pledged towards support for existing customers, and an extra £175,000 will go towards around 1,200 firms not receiving funding from Innovate UK.
This package from the government for startups and SMEs could success in helping struggling companies stay afloat, according to some experts.
Gerard Grech, chief executive of Tech Nation, said: “Tech startups and scaleups are crucial to the UK’s future growth, jobs and innovation. The £500m Future Fund and £750m for loans and grants for R&D for startups is a bold intervention, and although the full implementation details are to still be released, it is likely to give the sector a welcome boost in these unprecedented times.
“How to target the money effectively should be the next priority.”
James Tucker, CEO of Twenty7Tec, commented: “This has to be a welcome move for both tech and research-led businesses. Many of them are loss-making in their first years and so need firm backing from business angels, early investors and venture capitalists.
“The challenge for tech businesses is that there has been less appetite for risk over recent weeks, for obvious reasons, but this move by the Chancellor using convertible loans looks set to plug a gap in the market and give a real boost to the companies that will emerge as the tech stars of the future.
“If you’ve got a track record of raising capital and want to shore up confidence in the business, the Future Fund looks like a good way of doing so. For many start-ups, this will be a massive lifeline.
“We’re waiting to see the full details on how the fund will work, but at first blush, the terms seem reasonable – 36 month maximum term, convertible loan that must be equally or better matched by private funding.”
Ritam Gandhi, founder and director of Studio Graphene, said: “The nation’s early stage businesses have been in limbo for too long, with many deliberately loss-making startups falling between the cracks of state-backed loan schemes.
“I welcome the new relief proposals, which aim to give fledgling UK companies some financial breathing room while they ride out the storm. Government support is needed now more than ever before; indeed, a recent poll conducted by Studio Graphene found that 69% of UK tech startups do not have faith in the Government’s ability to support the private sector through the pandemic. This is a startling statistic and one that reflects the lack of cohesive advice given to date.
“New measures like the Future Fund unveiled today could reverse this sentiment and settle some nerves. However, I would urge the Government to do more still.
“It must demonstrate that it is willing to do whatever it takes to protect innovative UK businesses and sustain them through what is probably the biggest challenge they have ever faced.”