Russell Lerman is co-founder and head of lending at Fuse Three
Over the past 7 years Fuse Three have completed over 150 deals with a global network of funds. Throughout the Covid-19 crisis we have been in constant contact with our network of lenders and are progressing and closing debt funding deals with high growth tech companies.
On May 20th the government announced the launch of the Future Fund. The Future Fund is intended to match new investments between £125,000 and £5m in high growth British companies with convertible loan notes.
The aim for the Future Fund is to provide support for companies considered high growth, are pre-profit or pre-revenue and typically rely on equity investment to grow and scale up. These companies were previously unable to access government support via CBILS or the Small Business Grants Fund.
Initially £250m has been made available for the scheme.
The aim for the Future Fund is to provide support for companies considered high growth, are pre-profit or pre-revenue and typically rely on equity investment to grow and scale up.
Who is eligible for the Future Fund?
Companies are eligible if they have raised £250,000 in equity in the last 5 years, do not have shares on any publically listed markets and the company is incorporated in the UK.
There is also a requirement for companies applying to the Future Fund to have over half of their staff based in the UK or receive over half their revenues from UK sales.
Who is not eligible?
Companies who have raised money through the Enterprise Investment Scheme and SEIS will not be able to apply to the Future Fund. The British Business Bank estimates 86% of Angel investors use EIS and SEIS to support their investments, meaning the companies they have backed are ineligible.
VCTs will also miss out due to the terms of the convertible loan notes.
The British Business Bank estimates 86% of Angel investors use EIS and SEIS to support their investments, meaning the companies they have backed are ineligible.
A solution not designed for the majority
More than half of UK startups are funded by private individuals and the Future Fund has clearly been designed with VC backed companies in mind. This excludes 56% of UK startups and scaleups funded by Angels, HNW, family offices and founders in favour of just 17% who are backed by venture capital or private equity funds.
Only 17% of UK startups are backed by Venture Capital or Private Equity Funds
Even for those companies that are backed by professional investment the application process is run by the VC, and as a result the funding amount is limited by the firepower of the lead investor and what they are willing to commit.
There are also questions being asked of how far the Future Fund will stretch.
There’s the possibility that the initial £250m committed to the fund will only help 50 companies
Currently the government has only committed to match an initial £250m of funding, which is less than some private debt funds I am working with have committed for funding during this crisis. This could potentially limit the scheme to aiding just 50 companies seeking the maximum £5m. There are reports the scheme was oversubscribed within the first 24 hours.
Future Fund alternatives and other options startups and scaleups can pursue
It has never been more important for companies facing shifting forecasting and growth funding gaps to get as many options on the table as possible to plan their future strategy.
In the current financial environment getting as many varied options on the table as early as possible is vital in ensuring you secure the right funding for your company
I have been in constant contact with a global network of funds throughout this crisis and they have committed capital ready to deploy to scaleup companies in the UK whether they are Future Fund eligible or not.
For companies who successfully apply to the future fund private debt offers an alternative opportunity to increase funding quantum further, extending their cash runway well into the future and taking future funding rounds off the table in the longer term. This will allow them to reduce long term dilution and cost of capital.
For companies who successfully apply to the future fund private debt offers an alternative opportunity to increase funding quantum further
For companies who miss out on the Future Fund due to eligibility issues private debt offers funding options on the merit of the business alone, without investors controlling the process and without limitations based on the investor’s ability to provide further funding.
The Future Fund will only benefit a minority of high growth British companies, but the private debt market is a uniquely positioned alternative to provide much needed cash to companies overlooked by bank finance and government schemes.
- Your borrowing options
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- Your expected cost of capital
- Whether now is the right time for you to pursue private debt finance