The U.K. financial technology community has welcomed the government's announcement of a £1.25 billion scheme to support startups through the coronavirus crisis. But the support package is not a silver bullet, and the government could run into problems getting the money out of the door in the same way it has with the Coronavirus Business Loan Interruption Scheme, or CBILS, industry observers say.
U.K. Chancellor Rishi Sunak announced £500 million investment fund for high-growth companies hit by the crisis, made up from a mix of government and private sector financing. Startups will need to demonstrate that they can raise money from the private sector, which will then be matched by the government via the so-called Future Fund. The startup must already have raised £250,000 before applying for the scheme.
The loans will convert into equity at the startup's next funding round, or at the end of the loan if it is not paid off. But the repayment option comes with strings attached. The majority of creditors will have to agree to the repayment, and the startup will have to pay a repayment premium equal to 100% of the principal on the bridge funding.
Industry experts say this is an unusual clause in the startup world, but that it is designed to protect the interests of the taxpayer — to avoid a situation where they are exposed to all of the downside but none of the upside of the scheme, which could be the case if the best-performing startups all repay.
The scheme be delivered in partnership with the British Business Bank plc, which is also administering CBILS, and launches in May.
Preserving the fintech ecosystem
Fintech industry insiders say the Future Fund will play an important role in preserving the U.K.'s fintech ecosystem.
British fintechs attracted a record-breaking $48.5 billion of investment in 2019, up from $25.4 billion the year before, according to figures from consultancy KPMG. Fintechs are also highly important to the country's incumbent banks, with some 82% of lenders saying that they expect to increase fintech partnerships in the next three to five years, according to government figures.
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Sunak's announcement follows on a campaign, "Save our Startups," mounted by heads of industry in the tech and startup world, which garnered support from senior fintech executives from the likes of Seedrs Ltd., Crowdcube Ltd, Zopa Ltd. and Assetvault Ltd.
"It took more than five years for the U.K. government and the private sector to build up London and the U.K. as global fintech hub," said Susanne Chishti, CEO of Fintech Circle, a network for fintech angel investors. "It would be a shame to lose this strategic advantage due to Coronavirus in less than five months. So it's absolutely the right decision for the UK government to support our tech startups and our valuable ecosystem."
Franz Doerr, CEO of Flatfair Ltd., a fintech that enables deposit-free home renting, said in an interview that he welcomes the scheme, adding that had government not acted, it would "risk erasing years of growth" in the tech sector.
Putting the policy into action
Farid Haque, co-founder of digital legal and financial products provider AssetVault, said the exclusion of the smallest, newest startups is a "monster snag" and risks "cutting the legs off" early-stage businesses.
Small companies with a bright idea won't be able to get funding, and while that won't hit the fintech ecosystem now, the lag in innovation will be felt a couple of years from now, he said in an interview.
Simon Taylor, head of ventures at digital consulting and research firm 11:FS, says that the package is welcome but warns that it won't necessarily unlock a flood of new private sector investment into fintech.
"The package of support is a mix of private and state capital, so it's more likely to thaw existing investments that had been paused than it is to create a new wave of investment activity," he said in an email.
"We know deals fell through as we entered the pandemic and this move by the U.K. government may re-introduce some confidence," he said, adding that it remained to be seen whether it would have the intended effect.
There could also be delays in getting the money out to startups that need it, as has been the case with the CBILS scheme, Taylor said.
The CBILS scheme has come under fire for being slow to get money out to small businesses facing a cash crunch.
The package will be a welcome boost for many startups, Sam Louis, head of consultancy at the Angel Investment Network. But it won't work for everyone.
"There are a lot of companies that won't qualify, with the government's terms hedging their risk away from the earliest stage companies [i.e. those that have raised less than £250,000]," he said in an email.
The government is having to walk a fine line between protecting the interests of startups and the interests of the taxpayer, Louis said. For this reason the scheme includes some unusual components, such as 100% redemption and unrestricted freedom to transfer ownership, which would raise eyebrows under normal circumstances but which "understandably" play into protecting taxpayer interests.
But the government has made a clear indication of its commitment to supporting the sector, Louis said, adding that it is something he "sincerely hopes" it will follow through on.