The Government has committed extraordinary amounts of capital to a number of rescue initiatives. Unfortunately, none of them are of much use to early stage businesses reliant on equity funding.
The Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) (as well as Venture Capital Trusts) have been instrumental in driving capital into early stage equity investments. Many of the companies that have benefitted from these schemes are too young for debt funding. Often they are pre-profit; sometimes they are pre-revenue.
In the light of the Coronacrisis, and the deep economic uncertainty it has caused, there is a great reluctance amongst angel investors and crowd investors to make high-risk investments (for that is what they are). The prospect of high returns, which can be many multiples of the sums invested, is now outweighed by fear. Asset prices have plummeted across the board and the proportion of an angel investors net wealth which is held in early stage investment will be higher. Investors are sheltering from the storm and need a significant incentive to venture out.
They may decide to support good companies that they have already invested in – good companies that, were it not for Covid-19, would be showing signs of positive growth – but there will simply not be enough capital invested in the growth sector to counter the effects of Coronavirus. Government support is needed here in the same way that it is for more established companies.
The EIS Association have been active in promoting ways for the government to help with early stage funding. We have been monitoring the discussions but in spite of strong arguments put forward, the Chancellor seems not to be listening. The focus has been elsewhere.
The Coronavirus Business Interruption Loan Scheme (CBILS) has failed to deploy capital quickly enough. This scheme relies on banks to provide the lending with the benefit of a government guarantee. The problem has been the time taken for companies to pass through the application and due diligence process. Any successful scheme will need to crack that nut if it is to deploy capital quickly. Aside from that, CBILS is not available to early stage businesses; applicants must be making money and of a size larger than most start-ups.
Attempts to support start-ups have been made. On 20 April the Chancellor announced the Future Fund. This could have been the lifeline needed. We were asked for our views on what that fund should look like and, along with those from other sector specialists, they were fed back to Government. What we did not suggest was a convertible loan note (CLN), nor a 100% redemption premium.
It is clear that the Future Fund (like CBILS) is not fit for application to early stage businesses. The Future Fund is a co-investment model: The government will match money put in by other investors. Those likely to invest in early stage businesses have historically done so with the incentive of EIS or SEIS, but these tax reliefs are not applicable to CLNs. This makes the Future Fund unfit for use with early stage businesses. We need a scheme that recognises that companies at this stage in the cycle rely on equity funding and tax reliefs, not debt.
This morning (25 April) the Chancellor has announced his plan to provide a Big Bazooka for small businesses, but this again seems to focus on debt not equity.
We are working on a proposal to be put to government that will provide a solution for early stage businesses, focussed on equity. We hope that they will listen and that the support will come before it is too late for the majority of early stage businesses. It is too late for some already.
There is no such thing as a blunt instrument in a crisis. The Chancellor needs to do something.