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The Future Fund – Who is eligible and what alternatives are there?

Russell Lerman's views on the Future Fund

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.

 

Please get in touch with Fuse Three if you would like an evaluation of your funding options, we have worked with private debt funds throughout this crisis and can tell you:

  • Your borrowing options
  • Typical lending structures
  • Your funding timeframes
  • Your expected cost of capital
  • Whether now is the right time for you to pursue private debt finance

How private debt & equity can support you when your forecast has shifted to the right

If you’re a CFO who is faced with delayed growth plans, making cutbacks and a sales forecast shifting to the right, you may think your choices are limited.

But the reality is, despite the crisis, there are still investors committed to supporting tech companies through the peaks and troughs of scaling a tech business.

For instance, did you know that despite coronavirus uncertainty, technology investors Insight Partners has raised $9.5bn for its newest and largest fund yet?

That’s right!

At this point you realise, now is the time to get options on the table. 

To help you get started, here’s what  you need to know about the private debt market.

 

What is private debt?

Private debt is a term given to debt investments not financed by banks or traded in an open market.

You may also hear private debt described as alternative debt, direct lending or private credit.

Typically, the people who run private debt funds have strong backgrounds in commercial banking.

Better still, many focus on niches and have expert knowledge of the markets in which they work.

 

How did private debt come about?

 

After the 2008 global financial crisis, bank lending to mid-market companies shrank because bankers had to repair their battered balance sheets and contend with stringent new regulations.

So alternative financiers, including private debt funds, stepped in to fill the gap.

And fill the gap they did. In a report titled: The Rise of Private Debt as an Institutional Asset Class ICG tells us: “In the US, “non-bank debt accounts for 75% of total corporate lending, compared to 10% in the Eurozone and 28% in the UK.”

It added: “Private debt is growing in the UK and Europe as investors realise its strong returns.”

Elsewhere, in its <Alternative Lender Deal Tracker Spring 2019 report, Deloitte link to report states: “Surveys show that the private debt asset class as a whole is forecast to hit $1.4 trillion globally by 2023, passing real estate in becoming the third-largest alternative investment asset class after hedge funds and private equity.”

 

What makes private debt attractive to tech companies?

 

Private debt makes it easier for tech company CFOs to raise finance to support a specific need. For example, time sensitive and capital intensive M&A activities.

But that’s not all. Private debt relieves some stress placed on tech company CFOs who need to raise finance during the turbulent global economic and political environment.  During these times, banks have little appetite for risk.

 

What are the advantages of raising private debt over bank debt?

 

First off, private debt funds can provide more flexible loan structures. In direct contrast to bank lending, private debt funds can offer unsecured options. They also consider non-amortisation loans.

Then because many private debt funds focus on sector niches, they can provide less restrictive terms, including less stringent covenant packages.

After that, close access to decision-makers means private debt funds can shorten credit processes and increase the speed of execution.

Unlike bank lending, private debt funds do not restrict your use of funds.

Beyond that, you can use private debt to replace, top-up and complement existing finance facilities.

Most compellingly,  private debt allows companies to access more significant loan amounts without diluting equity.

 

For what purpose do tech companies use private debt?

 

During these unprecedented times, you can use private debt to:

 

  • Manage your cash burn rate
  • Set up working capital buffers
  • Maintain your liquidity
  • Get funding to weather inflection points and make strategic pivots where necessary

 

How can tech companies access the right private debt funds?

 

In its Alternative Lender Deal Tracker Spring 2019 report, Deloitte noted: “The private debt market can be overwhelming, with numerous complex loan options offered to borrowers.”

To find the right private debt fund, and structure the right private debt finance deal consider talking to a specialist private debt brokerage firm.

It is in a specialist private debt broker’s interests to find and close private debt finance deals with minimum strain on your time and resources.

 

So it all adds up to this

If you’re worried about a sales forecast shift to the right, and lack of funding available, then talk to a specialist private debt broker. 

With their help you can ready your war chest to help you to deal with the unprecedented changes in the business environment.

In particular, a private debt broker can get you options on the table to help you to maintain your cash runway, liquidity and make strategic pivots where necessary.

Trust me; you’ll be glad you did.

Covid-19 response, help and guidance

Are you an owner, CEO or CFO of a tech company and worried about how Covid-19 affects your ability to raise capital?

In this post, I want to arm you as a business leader, with information to help you to make the right decisions about how you can use private debt to keep your company liquid and to maintain cash flow during the crisis.

I’ll cover the five common questions you ask and give you my answers to those questions. 

If you have additional questions about your ability to raise private debt during the Covid-19 crisis, contact us online or call us today on +44 2071 181 108 to speak to a specialist private debt advisor about the current lending market and how you can get options on the table.

 

1. How is the private debt fund market affected by the Covid-19 crisis? Can I still access funding?

Here’s some good news. Yes –  while private debt funds are focusing more on managing their portfolio companies, they are still open for business. 

If you have a robust business model and operate in a market with plenty of room to grow, then you have the opportunity to close a transaction.

However, given the increased credit risk associated with these uncertain times, private debt funds want to avoid overleveraged transactions.

 

2. What about the cost of capital? Is it increasing?

At the moment, we haven’t seen the cost of capital being unduly affected by the Covid-19 crisis.

But it might mean some businesses that would have qualified for certain funds yesterday might have to consider slightly more expensive options today. But we are talking about one or two % points here.

 

3. How has Covid-19 affected the process of raising private debt?

First off, you can expect timelines to increase. Therefore, we recommend you start conversations earlier. 

In particular, you should factor in an increase in the lead time from signing a term sheet to completing the process. In other words, we expect the process, including due diligence to take between 12 and 16 weeks to complete the process, and drawdown funds.

 

4. What should I do now to maintain the financial strength and stability of my company?

We recommend you get options on the table now so that you can make an educated decision about how to:

  • Manage your cash burn rate
  • Set up working capital buffers
  • Maintain your liquidity
  • Get funding to weather inflection points and make strategic pivots where necessary

 

5. Do I need to postpone my mergers and acquisitions plans?

M&A activity is always a tough subject during troubled times. 

So once again, we recommend getting options on the table so that you can ready your war chest to help you to deal with the unprecedented changes in the business environment.

The bottom line is this. During the Covid-19 crisis, private debt funds will focus more on managing their portfolio companies. But at the same time, they will consider taking on new deals from companies that:

  • Can demonstrate a robust business plan
  • Operate in a market with plenty of room to grow

If this sounds like your tech company, then now more than ever we recommend you look at funding options before you need them.

 

How we’re continuing to support you and your business

Know that Fuse Three has one goal. To help fast-moving, disruptive and agile tech companies around the world to keep going through this unprecedented crisis by brokering specialist flexible private debt finance with minimum dilution. 

So please be assured that we’ll do our best to support you and your business during this crisis.

 

Some additional resources 

And finally, you may find these additional resources useful:

 

Practical tips tech companies can take to maintain financial strength and stability

How tech companies can use private debt to navigate inflection points

Here’s a method to help you to extend your cash runway

Why raise debt capital when you don’t need it

Fuse Three assists MarTech company to extend its cash runway with private debt capital

A UK MarTech company engaged specialist private debt broker Fuse Three to raise £1,500,000 in private debt capital to extend its cash runway.

The MarTech Company improves the way B2B sellers and customer facing teams communicate with their customers. 

 

Situation

Fuse Three’s client, a UK based MarTech company is achieving moderate growth, but is concerned about client concentration.

To solve the problem, the directors want to reduce the company’s monthly payments to extend its cash runway.

The company chose to work with Fuse Three because of its experience in raising private debt for B2B SaaS companies.

 

Objectives

  • To release capital to extend the company’s cash runway by refinancing existing debt

Outcome

  • Got term sheets on the table quickly and within the company’s timescales
  • Kept the management team’s workload as light as possible during the debt raising process
  • Helped the company to avoid being heavily diluted by the new capital it needed to keep it on its growth trajectory

 

About Fuse Three

Fuse Three helps fast-moving, disruptive and agile tech companies around the world to scale and grow by brokering specialist flexible private debt finance with minimum dilution.

Fuse Three arranges acquisition funding for RegTech SaaS company VoxSmart

B2B RegTech SaaS company VoxSmart engaged specialist private debt broker Fuse Three to raise £5,000,000 in private debt to enable the company to carry out an acquisition and to enhance the company’s working capital.

VoxSmart develops and distributes a multi-award-winning cloud-based communications surveillance platform to heavily regulated enterprises within the financial services sector.

The company is headquartered in London and has offices in Singapore, Madrid and New York.

 

Situation

VoxSmart’s directors identified an acquisition target, which has the potential of exploiting the substantial commercial and technological synergies between the two companies.

If successful, the acquisition will bolster the company’s product development capacity, revenue and customer base.

The company chose to work with Fuse Three to arrange acquisition funding because of its track record of sourcing lenders, structuring and closing such time sensitive transactions.

 

Objectives

  • Raise funds to meet acquisition costs
  • Raise funds to meet ongoing growth capital needs of the company

 

Results

Fuse Three successfully arranged a complex cross border transaction with many moving parts.

 

About Fuse Three

Fuse Three helps fast-moving, disruptive and agile tech companies around the world to scale and grow by brokering specialist flexible private debt finance with minimum dilution.

Here’s what you can do now to improve cash flow and liquidity

What should I do now?

You’re not alone.

CEOs and CFOs are all asking the same question.

Covid-19 is challenging every business to operate in a tremendous time of uncertainty.

  • How long will it last? 
  • What will it mean for our working capital and liquidity?
  • Will credit markets seize up?

These are questions no one can answer.

But having said that, there are things you can do to prepare. 

Here are some questions we can answer. Also, here’s how we can help support you with getting funding options on the table during the Covid-19 outbreak.

Rest assured, we will update you as and when we get more information.

 

1. Can I still access funding? Are private debt funds even lending?

 

The good news is the answer is yes. But obviously, it might take a little more time than usual to get answers and secure funding. 

 

2. Should I wait to borrow, or take action now?

 

Given the extra time it will take to secure funding, now more than ever before, we recommend planning ahead and to not leave it to the last minute to seek funding.

 

3. What options do I have available?

 

Private debt funds and in particular venture debt specifically caters to the needs and perceived risks associated with tech companies.

You can use private debt facilities to top-up replace and complement existing finance facilities.

In times of uncertainty, you can use private debt to:

  • Extend your cash runway
  • Enhance liquidity and improve working capital
  • As a cushion to protect your company against potential delays, a strategic pivot, or if you need more cash than initially planned.

 

Elsewhere you can strengthen your business financially by refinancing your existing debt. Because when you refinance your debt you can:

  • Secure more favourable terms
  • Free up cash flow to generate more working capital
  • Free up capital to reinvest into your business
  • Have greater operating flexibility
  • Reduce your cost of capital
  • Get fast access to cash

 

4. What about the cost of capital?

 

The paramount concern of any lender is risk. 

So if you have a solid business plan, and up and until now operate in a market with plenty of room to grow, then you have a good chance of raising the funds you need at a reasonable price.

 

6. Should I even be considering taking on debt during a crisis?

 

The answer to this question depends on an individual business.

If your business model is robust and you operate in a market with plenty of room to grow, then it’s worth getting options on the table.

You could consider taking advantage of low-interest rates and getting capital in place for when the economy and the market recovers.

During this crisis, banks may lose their appetite for risk. Therefore it may take months to secure the money you need.

However, as I’ve mentioned before, many private debt funds take a specific interest in the tech sector and structure loans accordingly.

To get their attention, talk to a specialist private debt fund broker. Due to the amount of transactions sourced, structured and closed, a broker will have good relationships with funds with capital to deploy. 

 

How is Fuse Three operating during the lockdown?

 

Thanks to the tech sector, in particular, SaaS businesses, it’s business as usual for Fuse Three, albeit from a different location.

Of course, we’ve asked all our staff to work from home. Fortunately, we already employ remote workers, so they’re used to it.

Finally, we expect more change over the coming days and months. But like you, we’re an agile company and as such, we’re equipped to carry on supporting you.

We’re in this together.

Practical tips tech companies can take to maintain financial strength and stability

These are unprecedented times. What do you do when faced with the world grinding to a halt?

While CEOs and CFOs scramble to assess risks and take action to mitigate against short term scenarios, it is worth pointing out that planning for the long term will help keep you strong and stable.

You see when you plan for the long term; you keep your options open. Building a war chest helps you to deal with changes in the business environment.

Here are some practical steps you can take:

 

1. Be proactive in speaking to advisors about your options 

 

A specialist debt advisor knows which funds to approach to support your transactions. Better still can get options on the table to you fast.

 

2. Review your cash runway

 

Make sure your company doesn’t outrun its source of cash. Investigate options for temporary finance. Know that debt finance buys you time and gives you a protective ‘financial’ cushion so that you can get back on track.

 

3. Review your working capital requirements

 

Cash is king. Strong working capital helps you to stay resilient when faced with unforeseen circumstances such as a sudden decrease in sales revenues.

 

4. Review your business and resources 

 

Determine what cash you need to operate in a complex environment. Also, make sure you have the funding you need to hit the ground running when the world returns to normality. 

 

5. Look for opportunities to maintain and control your business

 

There’s no time like the present to remind yourself that business growth isn’t always linear. Make sure you have the funding you need to weather inflection points and make strategic pivots where necessary.

 

To sum up

 

The best advice we can give CEOs and CFOs of tech companies is to ready a war chest to help you through these uncertain times.

 

A specialist debt advisor can run through your options. Also, source the most appropriate lending partners and structure transactions so that you can confidently take steps to keep your company financially strong and stable.

 

As a result of your planning, you’ll give yourself options for:

  • Extending your cash runway
  • Keeping working capital flowing
  • Investing in business and resources so that you can hit the ground running when the market returns to normal
  • Having the financial strength to weather inflection points

 

I’m ready. Are you?

A simple strategy you’re not using to create liquidity without giving up control

Do you want to extract value from your business to reward yourself for the hard work you’ve put into building it?

Picture this, you’re the founder of an owner-managed or VC backed tech company, and you’ve worked hard to move it into profitability. What’s more, you have a healthy cash flow.

You’d like to unlock part of the capital tied up in your business so that it can be reallocated to other projects, or for retirement planning.

But at the same time, you do not want to relinquish your controlling interest.

The good news is you can raise non-dilutive debt to recapitalise your business so that you can fund a partial equity release. 

In other words, you can raise debt to support a partial cash-out of your business.

Download our eBook Your blueprint for cashing out of your tech business to find out how.

Cashing out of your tech business

So what makes raising debt to cash-out of a tech business so special?

 

If you think about what is important to you when raising any form of capital:

  • Time to set up a transaction and to access funds
  • Equity dilution
  • The cost of capital

 

Then raising debt provides the answer.

Recapitalising your business with debt so that you can fund a partial cash-out is a transaction that is relatively quick to set up.

When you raise debt, you retain a controlling interest in your business, because when you raise debt, you do not dilute equity.

And given the current economic climate, when you raise debt, you can take advantage of low-interest rates to get a low cost of capital.

 

That’s all very well, but I can’t imagine banks supporting cash-out transactions

 

And you’d be right.

But in direct contrast to conventional bank lending, private debt funds can provide more flexible loan structures, as well as unsecured options. 

What’s more, because many private debt funds focus on sector niches, they can provide less restrictive terms, including less stringent covenant packages.

 

How much equity can I release from my business?

 

The amount of equity you can release from your business depends on your:

  • Turnover (must be over £5m)
  • Profitability
  • Continued opportunities for growth
  • Strength of cash flow
  • How leveraged your business is

 

OK, I’m convinced… What do I do next?’

 

Download our Blueprint for cashing out of your tech business eBook’.

Not only does it describe in detail how you can raise debt to extract value from your tech business, but it also sets out how you can use a partial cash-out to:

  • Buy out a departing shareholder
  • Reduce time-consuming admin by buying out small investors and tidying up your cap table
  • Take charge of your company’s financial destiny, by raising funds to buy out your VC
  • Get employee commitment to help your business to grow/handle succession changes, by raising funds to set up an Employee Ownership Trust
  • Raise money to fund an MBO

 

To sum up

 

If you want to unlock part of the value tied up in your business so that you can enjoy the perks of being a successful owner, without disrupting your business, then download our Blueprint to cashing out of your tech business.

And if you need more guidance about your options for cashing out of your tech business, get in touch.

How to take the pain out of buying out a departing shareholder

[Free chapter from my eBook]

 

Do you have a shareholder departing due to retirement, or moving on to another venture? Or indeed as a result of a company acquisition?

Recapitalising your tech business with private debt to fund a partial cash-out is a little known way for companies that do not have cash in the bank to buy back shares from a departing shareholder.

You may think share buybacks are not for your company, because you typically associate them with listed companies, including tech giants such as Apple, Google and Microsoft.

But here’s the thing, companies of all sizes may at some point find themselves in a position where they’ll need to repurchase shares. 

 

What is a share buyback?

According to Investopedia, “Share buybacks refer to the repurchasing of shares of stock by the company that issued them. A buyback occurs when the issuing company pays shareholders the market value per share and re-absorbs that portion of its ownership that was previously distributed among public and private investors.”

 

What do I need to think about when planning a share buyback?

First off, assess the value of the departing shareholder’s equity. To do this value your business and apply a value to the equity stake associated with the person leaving. 

Then, when you’ve decided upon a value to which everyone agrees, choose the most appropriate funding for the buyback.

 

What type of finance is available to fund a share buyback?

 

Private debt bridging loan

Similar to a traditional bridge loan, a private debt bridge loan is a short-term loan that provides companies with immediate cash flow/capital.

 

A partial cash-out

If you’re not overleveraged and cash positive, you can recapitalise your business with private debt to fund a partial cash-out. You can then use the proceeds of the partial cash-out to buy out your departing shareholders.

 

When should you think about raising finance to execute a share buyback?

Early exit planning gives you the time you need to explore options for raising funds.

Of course, the need to buy out a departing shareholder is just one of the reasons why tech CEOs find themselves in a position where they need to take money out of their businesses.

That’s why I’ve written a handy eBook that outlines six different scenarios in which tech CEOs should consider recapitalising their businesses with private debt to enable them to execute partial cash-outs.

 

Download “Your blueprint to cashing out of your tech business”

Blueprint for cashing out of your tech business

 

Not only does Your blueprint to cashing out of your tech business provide you with a strategy for recapitalising your business with private debt so that you can arrange a partial cash-out to fund a share buyback, but it also sets out:

  • Key features of private debt transactions
  • How to get advice about cashing out of your business
  • What to consider in regards to funding
  • The role a broker has in structuring private debt finance deals on your behalf

As well as an abundance of useful resources.

You can download Your blueprint for cashing out of your tech business here.

And if you’d like additional guidance about your options for recapitalising your business with private debt to fund a partial cash-out of your tech business, do get in touch.