Venture capitalist Public has called for a £1bn start-up bailout fund for UK companies to help them get through the coronavirus pandemic.
Last week, France announced a €4bn (£3.5bn) start-up bailout fund – called a liquidity plan – to help start-ups stricken by the coronavirus crisis.
The French government start-up bailout fund includes €160m of short-term refinancing, €1.5bn worth of tax credits, €150m of accelerated payment of already-planned investments and €2bn of cash flow guarantees.
However, no such scheme exists so far in Britain, despite the government trumpeting its support for tech-based start-ups. As most start-ups are yet to make a profit, they are unlikely to qualify for the government coronavirus business interruption loan.
Venture capital funding for UK tech firms reached over £10bn in 2019, a 44 per cent increase year on year and an all-time record.
Yet, according to the Sunday Times, venture capital funding for start-ups is already drying up with VCs either pulling out of previously agreed deals or the amount investors are putting into funds plunging.
Writing in City AM, Public co-founder and CEO Daniel Korski has called for the government to make “a sizeable intervention, following the steps taken by the French and Danish governments. This is probably a £1bn action”.
Korski said: “The Covid-19 crisis threatens to underdo 10 years of progress, destroy countless solid companies and burn through VC as an asset class. Start-ups are being hit by a slow-down in orders, closures of offices, problems getting staff. But unlike other businesses they need fresh capital injections frequently because even the best of the bunch are normally loss-making as they grow. They are investing in growth and innovations.
“This crisis threatens to dry up capital. Angel investors will likely conserve cash, not least for their own lives. Many VCs will be under pressure to slow down investing — either because they do not know how long the crisis will last or because their investors, so-called limited partners like pension funds of family offices, have taken a bath in equity markets and so may not honour commitments made or be interested in backing new or follow-up funds.”
Korski warned that because so many of these companies have short-term financing at seed stage, there is a risk of huge number of companies going bust.
Seed funding has declined by 22 per cent globally since January, a report last week by CB Insights said.
Over the past two years, 1,324 UK start-ups have raised sums between £100,000 and £2m each.
EIS investment down 70%
According to the Enterprise Investment Scheme Association, enterprise investment scheme (EIS) funding in the UK has dropped by about 70 per cent over the past fortnight, as the lockdown takes hold.
Four of the biggest funds investing through the tax-efficient enterprise investment scheme (EIS), which is worth £2bn a year, have seen investments plunge by more than half since the start of the year.
Startup advisory business Vala Capital told the Sunday Times that funding in the most recent quarter has fallen 70 per cent on last year; EIS fund Wealth Club said investment had dropped 62 per cent in the past two weeks; and two more funds, Kuber and Sapphire Capital, are understood to be down more than 50 per cent.
Jasper Smith, founder at Vala Capital, said: “Running any a business is a challenge, running a start-up is like climbing a cliff without a rope. Startups are now in free fall and we must ensure that private investors are motivated to support them. Government should increase tax relief for small company investors, to unleash public support for our most innovative companies. We need action now. The future success of early-stage businesses is crucial for the UK economy and private investor support is the lifeline for many.”
According to Korski, British start-ups now face a “triple tumble”: a slowdown in new companies as people favour secure jobs rather than entrepreneurial risk; a collapse of many companies that have just gotten going; and a stalling of companies which had real traction but who cannot now develop.
Korski said that after the dotcom crisis of the early 2000s, it took nearly two years before funding taps were opened again.
And things may be about to get worse.
About 80 per cent of EIS funding takes place in the final quarter of the tax year, with cash released to the companies after April 6. Many start-ups expecting a cash injection early next month are unlikely to survive without it.
VCs pulling out of deals
Meanwhile, the Sunday Times also reports that venture capitalists are pulling out of deals which have already been agreed in principle before the coronavirus pandemic erupted.
SeedLegals, a law service for start-ups, estimates that 30 per cent of term sheets for deals have been revoked in the past two weeks. In normal times, once documents are issued, a deal is a formality unless dramatic new information comes to light.
Some smaller London-based VC funds have halted fundraising efforts, reported the Sunday Times, while many of those with cash to spend have stopped all new investments to focus on the survival of their existing portfolio.