Britain's start-up rescue fund, which has been extended to include UK startups that have moved the headquarters overseas, still “fails to hit the mark” for many early-stage companies, business leaders have warned.
The Future Fund, launched in May, provides Government funding of between £125,000 and £5m for start-ups, which is matched by external private investors. The investment comes in the form of a convertible loan, that ultimately turns into equity. An initial £250m was available, which was to be topped up by investors to £500m.
It has seen a booming demand. It has had more than 600 applications. So far, £320m of taxpayer funding has been allocated to 322 start-ups, extending the fund beyond its original £250m limit by £70m. The Treasury said it will keep the size of the fund under review.
But some entrepreneurs remain concerned about constraints on the fund. “I still believe the Future Fund fails to hit the mark,” said Ritam Gandhi, founder of Studio Graphene.
Founders and investors are concerned the fund does not comply with rules around the Enterprise Investment Scheme (EIS), a form of tax relief for start-up funding. This means some early stage investors miss out on a tax break they would normally be eligible for.
Other investors are concerned that they have been unable to provide backing to start-ups due to state aid rules. Venture Capital Trusts (VCT), which operate as publicly traded investment funds, cannot participate due to current barriers. Its industry body has called for the Government to ease restrictions on how and when these funds can invest, which it says would unlock up to £500m more in funding without costing the taxpayer.
Stuart Veale, managing partner of investor Beringea and chair of the Venture Capital Trust Association, said: “Swathes of small and medium sized businesses throughout the UK are unable to access vital investment, particularly while EIS and VCT funds remain unable to invest alongside the Future Fund.”
A British Business Bank spokesperson said any tax decisions related to the fund would be up to the Treasury.
There are also worries over the transparency of the fund. Henry Whorwood, head of research at start-up data provider Beauhurst, said the British Business Bank, which manages the fund should make details which start-ups are getting backing public. He said: “The taxpayer has a right to know where their money is going.”
However, despite the limits, hundreds of firms have received funding, while the Treasury has removed the £250m cap from the fund. It has also offered funding to start-ups that may have their legal base overseas, but still maintain the bulk of their business in the UK.
Catherine Lewis La Torre, interim chief executive of the British Business Bank: “Companies are getting more funding than they would have without the Future Funding. Broadly it’s been very well received.”
Dom Hallas, chief executive of Coadec, an industry body that advised on the fund, said: “We would have been supportive of EIS. But at the end of the day, we have seen £320m go into start-ups in the middle of a pandemic.”
The Future Fund also offers funding purely without “picking favourites”, aside from a due diligence process. Start-ups that meet certain criteria are eligible, regardless of sector. This has meant around 45pc of funding has gone outside the capital.
Tim Levene, chief executive of listed investment company Augmentum, said: “It is targeting a lot of the right businesses, but over time it will be really interesting to see how those cohorts perform.”
While the British Business Bank has received some criticism over transparency, with founders understood to be signing NDAs to not disclose how much funding they receive, some start-ups have revealed they have taken part.
Richard Ahlfeld, of automotive engineering AI start-up Monolith AI, said: “We, of course, tried to raise funding from the private sector. But most VCs were focused on just getting their existing portfolio to survive.”
Melvin Jay, founder of craft soft drink brand Gunna Drinks, said: “It has been a godsend. It is a recognition of how important start-ups are.”