The Future of the Future Fund: Concerns raised over equity purchases to be made by the UK Government

August 18, 2020

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What's going on here?

HM Treasury’s refusal to publish a full list of recipients and the prospect of the UK government owning a portion of a “sextech” company has caused the government’s startup-supporting Future Funds scheme to be placed under further scrutiny.

What does this mean?

Unveiled in April 2020, the Future Fund scheme was designed to support UK startups excluded from other coronavirus rescue schemes. So far, over 450 companies have been approved for the convertible loan of up to £5m. This means that if the initial amount of money borrowed from the government is not paid off, it will transform automatically into equity (shares). 

With the potential for the Government to become a shareholder in lots of startups, UK taxpayers are naturally interested in the nature of companies supported. Funding websites, such as Seedrs, have given the public an insight into the unlikely partnerships which may emerge. 

Killing Kittens, an organiser of adult parties, is named among the firms required to raise the same amount of third party cash (i.e. from investors) to be eligible for the scheme. However, you could say other recipients are characterised by more conservative forms of business, including Cracker Drinks, a vegan restaurant and a Manchester-based car start-up.

What's the big picture effect?

In a free-market economy, state involvement in business affairs is always going to be a sticking point, even amid a global pandemic. The initiative is reminiscent of state-backed investment strategies pursued internationally, most notably in China, and runs the risk of future conflicting management interests. Therefore, whilst there are obvious benefits for early-stage companies in the short-term, artificially replicating pre-COVID levels of liquidity, the long-term impact is not so clear. 

For instance, the very nature of startups is that very few survive in their early stages even in a healthy economic climate. It is a major player in driving forward innovation, which allows entrepreneurs to assess and formulate exciting new business models. Three-quarters of startups that raise a seed round never reach a Series A (the first significant round of venture capital financing) and investors only expect that 20-30% of start-up investments in a portfolio to be successful. Can this intervention then be said to be interfering with natural economic cycles or even misuse of taxpayers money? 

The simple answer is, yes and no. As is evident from the current development of the global economy, tech startups and unicorns (private companies valued at $1 billion or more) are becoming increasingly important, with the UK’s future growth and jobs at stake. For instance, in 2019 a third of all European tech investment was in the UK – the third highest in the world. Whilst the Future Funds initiative is not solely directed at businesses in the technology sphere, there is reason to believe that startups may be the future powerhouses of the UK economy. Yet, there continues to be the risk that the benefits of the scheme may not be felt for years to come, or even ever.

Report written by Katrina Hughes

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