Despite a rapid influx of applications, claims have emerged that the UK’s Future Fund will exclude the majority of startups and favour venture capital-backed companies.
According to Anthony Rose, founder of SeedLegals, 80 percent of early stage investment in UK companies is carried out through the Seed Enterprise Investment Scheme (SEIS) and Enterprise Investment Scheme (EIS), neither of which are supported by the Future Fund.
“[The Future Fund] substantially takes [angel investment] out of that pool. There’s nothing in a sense wrong with it, it’s just that it’s a fund designed really for scaleups rather than startups. And if it had been positioned as a fund for scaleups, great. But the messaging – not necessarily from the government but from many others – was that it was there for startups, but actually it’s suitable we think for maybe 25 percent of startups,” he says.
Announced on April 20, the Future Fund launched on May 20 with over £500m of funding applied for on day one, surpassing the initial £250m limit. Firms can receive a convertible loan of between £125,000 and £5m, granted they match the funding from investors and have raised at least £250,00 in private investment in the past five years.
Rose believes companies will have rushed to apply given the £250m fund size, though he suspects the limit will be changed so that no company will lose out.
The application process is “a bit backwards” as investors complete the paperwork rather than the companies themselves, which could potentially add confusion as most companies have multiple investors.
“I think the key challenge is that by not supporting SEIS and EIS, most angel investors wouldn’t be interested in investing. They’d be better off to not invest and just invest regularly in the company and get their SEIS rather than go this route and not get it,” says Rose. Other options would be to seek foreign investment or corporate investors.
“But corporates are often not doing that much investing; they’ve got their own problems these days. And that then leaves you with VCs which then takes you back to being VC favoured in a sense. I think the fact it doesn’t support SEIS and EIS means that realistically most of the investors will be funds.”
Michael Buckworth, managing director of UK startup law firm Buckworths, predicts a long term impact on startups.
"The government risks losing a generation of innovative startups if they do not introduce a temporary tax relief scheme for angel investors. Our view is that this should be similar to EIS but with a higher upfront rate of income tax relief, and lighter restrictions on repayment of debts incurred in the ordinary course of business,” he said in an email.
Despite calls for changes to the scheme or more tenable alternatives, Rose believe it is unlikely that the government will announce any further assistance outside of the Future Fund, Coronavirus Business Interruption Scheme (CBILS), Bounce Back Loans (BBL) and Coronavirus Job Retention Scheme.
“People are now planning for the end of lockdown, so I think you would be either naïve or unduly optimistic to be holding out for anything else. The question is what percent of founders do? I think there are some that live in hope and I suspect that the vast majority have either moved on to figure out an alternative plan or see if they can use the Future Fund,” says Rose.