The British Business Bank’s Future Fund
On 20 May, the British Business Bank launched its Future Fund. This is the latest in a series of initiatives announced by the Chancellor in recent weeks to support businesses through the ongoing pandemic. Unlike previous measures, the Future Fund has been designed specifically with young, innovative companies in mind.
Both the Coronavirus Business Interruption Loan Scheme (CBILS) and the Bounce Back Loan scheme are subject to eligibility requirements that limit their availability to certain business. In the case of CBILS, for example, the applicant must demonstrate an annual turnover of at least £45 million, which rules out many small and/or young companies in their early stages. Bounce Back Loans, on the other hand, are subject to a cap of £50,000 (or, if lower, 25% of turnover), which may limit their attractiveness. Importantly, both types of loan also require the applicant to demonstrate that it has been adversely affected by the coronavirus outbreak. None of these criteria apply to loans made under the Future Fund.
The key features of the scheme are as follows:
- Loan amounts will range from £125,000 to £5,000,000. The Government has initially made £250,000,000 available for such loans, but has indicated that this may be increased depending on the popularity of the scheme.
- The support takes the form of convertible loans, with a maturity period of 36 months. The loans will convert into equity in certain circumstances, including a subsequent investment round or an exit during that period.
- The loan amount must be matched by co-investment from third party investors, who will invest on the same terms as the Future Fund. These terms are set out in a standardised agreement that has been issued by the British Business Bank, which is not subject to negotiation.
To be eligible for a Future Fund loan, a company must:
- Have raised at least £250,000 in equity from third-party investors prior to 19 April 2020
- Be the ultimate parent company of its group (if applicable)
- Not have its shares listed on any regulated market
- Be incorporated in the UK
- Have at least half of its employees based in the UK or generate at least half of its revenues in the UK.
As mentioned above, these criteria – in particular the absence of any requirement to evidence historical turnover or demonstrate that coronavirus has had a significant impact on the business – seem to make the scheme more suitable for early stage companies than CBILS or Bounce Back Loans.
There are, however, a number of issues with the way the scheme has been formulated that may limit its appeal.
First, the Future Fund is not compatible with the Enterprise Investment Scheme (EIS) or the Seed Enterprise Investment Scheme (SEIS), meaning the large number of start-ups that have those arrangements in place will not be able to benefit.
Second, the requirement that the company must be the ultimate parent in its group also disqualifies tech or other companies that have US-based parent companies as a result of having previously participated in a US accelerator programme.
Third, the scheme is described by the British Business Bank as “investor led” and any application must be initiated by an investor, rather than the company itself. This and certain other features of the scheme have been criticised for favouring the interests of venture capital over those of start-ups seeking additional funds. For example, the scheme will match new external investment, but not additional founder investment. In addition, the commercial terms of the standardised Convertible Loan Agreement – including a minimum 20% conversion discount rate – might be perceived to be unreasonably aggressive and pro-investor from the company’s perspective.
The features of the Future Fund as summarised above will mean it is not a good fit for all start-ups in tech and other sectors, but time will tell how popular it proves to be.