A controversial UK government Covid support scheme, which lent tens of millions to failed startups, was “imperfect” but represented a “critical form of support” to pandemic-scarred startups, say the scheme’s participating crowdfunders.
The UK government’s Future Fund was launched in April 2020 and aimed at helping UK startups facing difficulties due to Covid.
Championed by the then chancellor Rishi Sunak, it offered loans between £125,000 to £5 million, which had to be match-funded by the private sector. The debt converted into equity at the startup’s next round of financing.
It was overseen by the state-owned British Business Bank (BBB), which was set up in 2014 to lend money to and buy stakes in startups and growing companies.
Figures released by the BBB reveal that of June 30 this year, 129 firms that lent money through the scheme had become insolvent, out of a total of 1,191 that participated. The startups have raised £1.14 billion in loans.
The figures also show the government now has an equity stake in 591 UK startups, after the startups took an additional funding round.
Over 400 startups have yet to undertake new financing or repay the loan, which has a three-year term and has to be repaid with a 100 percent redemption premium.
The scheme was beset by challenges from the get-go. A month after it launched, BBB then CEO Keith Morgan warned ministers it would only attract “second tier” firms that couldn't attract funds from elsewhere.
Meanwhile, according to BBB audit meeting minutes seen by the Financial Times, it's then non-executive director Dharmash Mistry warned in June 2021 that Future Fund startups had a “limited chance of growth to a sufficient scale for success”, resulting in “zombie businesses”.
PM’s wife's connection
The Times and the Guardian have both reported on the failures of startups, funded through the Future Fund, which counted Akshata Murthy (the wife of then chancellor, now prime minister Sunak) as an investor.
Murthy-backed furniture business The New Craftsmen collapsed in November 2022; children’s education business Mrs Wordsmith, which Murthy also backed, collapsed in March 2021; while Digme Fitness, a gym chain also backed by Murthy, went into administration in 2021.
According to a recent Guardian report, the Future Fund invested nearly £2 million in firms linked to Murthy.
Crowdfunders Seedrs and Crowdcube lead co-investment
Co-investors in the scheme spanned a broad range of fund types, including private equity, VC firms, angel networks, and corporate venture arms.
Also highly active were crowdfunding platforms Seedrs and Crowdcube, whose platforms were used for scores of co-investments.
It is understood that none of the startups that co-invested through Crowdcube and Seedrs have collapsed. The government now owns a stake in Pockit and Snoop.
What Seedrs say
Kirsty Grant, managing director, Seedrs, said the Future Fund was a “critical form of support” for the UK’s startup ecosystem but admitted it had “shortcomings”.
“The Future Fund scheme was a critical form of support for the UK’s startup ecosystem during the difficult years of the pandemic.
“As the UK economy was severely affected by lockdown and the unprecedented disruption to regular consumer behaviour, many investors chose to hold back capital until there was less market uncertainty.
“As a result, in the face of the monumental challenge for early stage British businesses, the Future Fund provided many ventures that did not qualify for loan-based Covid-19 support programmes with the short-term capital required to fuel their growth.
"As the scheme was designed to match funds from private investors, it also encouraged and incentivised private investors to continue to deploy capital into high-growth UK companies during a crucial and uncertain period.
"At the time, Seedrs acknowledged some shortcomings with the Future Fund - such as its lack of compatibility with EIS investment incentives — but ultimately recognised its value and co-invested in several businesses with the scheme.
“While we appreciate that in subsequent years further issues, such as the terms of convertible loan note, have become more acute, we still feel that the scheme was a useful tool in encouraging continued investment and an important source of funding for many businesses who would have otherwise likely failed.”
What Crowdcube say
Matt Cooper, co-CEO, Crowdcube, admitted the Future Fund was “imperfect”.
“The problem was unprecedented in size and scale, and while the government’s solution was imperfect, inaction was not an option.
“The government needed to act swiftly to safeguard Britain's startup and early-stage business ecosystem.”
Like others, he said one of its key benefits was its “matched funding structure.
“One of the key benefits of the Future Fund was its matched funding structure through the British Business Bank. This meant that the risk was shared between investors and the bank.
“The loan's duration of 36 months was designed with the anticipation that it would convert at a time when the economy was likely stabilising.
“Startups play a pivotal role in building a thriving economy. They inject energy, drive innovation, and act as catalysts for change and disruption. Beyond that, they employ hundreds of thousands and contribute significantly to the economy.”
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