Tech investors to pitch for $350 million rescue fund from UK government as recession looms and threatens to sink startups

Boris Johnson

  • The UK’s tech investors are worried that a coronavirus-induced recession could kill off many of the UK’s early-stage startups.
  • A group of investors is working up a pitch for up to £300 million in UK government funding to keep these startups afloat during 2020.
  • The discussions are in the early stages, and may also involve commercial companies fronting cash for the rescue fund.
  • The fund would invest in up to 1,000 startups in 2020, according to draft plans seen by Business Insider.
  • Visit Business Insider’s homepage for more stories.

UK venture capital investors are drafting plans to pitch the government for up to £300 million ($350 million) in funding to keep early-stage startups afloat during any economic slowdown induced by the coronavirus pandemic.

Investors warned this week that a recession is inevitable, and that even healthy startups may collapse.

According to a draft of the plan, seen by Business Insider, investors and angels fear that hundreds of early-stage UK startups will become distressed as they see a sales slowdown and burn through cash reserves.

The draft pitch outlines a potential fund ranging from £100 million to £300 million ($118 million to $350 million) to be provided by the state-backed British Business Bank. The proposed fund would likely require a further cash injection by the UK government into the bank.

This proposed “runway fund” would invest up to £500,000 ($590,000) via convertible notes that would convert into shares on a firm’s later round of funding at a 25% discount on the pre-money valuation.

The goal would be to fund up to 1,000 companies through 2020, the draft plans state.

uk investor rescue fund

Startups would need to prove they’re close to running out of cash; have raised less than £5 million to date from existing early-stage backers; and be able to show they could have raised money if it had not been for the coronavirus pandemic.

The draft plans are at an early stage and being led by a group of investors including Brent Hoberman — cofounder of Lastminute.com, startup builder Founders Factory, and investment fund Lastminute Capital — as well as Capital Enterprise CEO John Spindler. Discussions with the government are being mediated by industry lobby group COADEC.

Brent Hoberman

All three confirmed the discussions.

The plans are at an early stage, Hoberman told Business Insider. He added that one alternative is to have the fund backed by private companies, with matched funding from the government.

“This came from the fact that there are lots of very good startups across the UK, but when the music stops, the music stops,” he told Business Insider. “There are perfectly good companies going to private individuals or early-stage funds that won’t get funded… If you’re a direct-to-consumer business, it’s going to be tough.”

Coadec chair Dom Hallas said in a statement: “Coadec along with a number of early-stage investors are in preliminary discussions with the government about potential additional support for the tech startups impacted by coronavirus. We want to make sure they have access to the capital they need get through this period and thrive after.”

Spindler, Hoberman, and Hallas floated the plans to the UK’s wider venture capital industry on Wednesday morning and said reception had largely been positive.

One venture capitalist who saw the draft document criticized one part of the proposal to Business Insider, pointing out that the fund may be managed by Hoberman’s venture capital outfit Firstminute Capital. The person, preferring to stay anonymous, noted Firstminute would charge fees and take a share of the profit on the fund’s returns, known as “carry” in industry parlance. The draft documents outline a 1.5% management fee for the fund’s first year, down to 1% subsequently, and 10% carried interest. This was perceived by some as an attempt to profit during a crisis.

Hoberman said the goal wasn’t to make money. “I don’t see myself getting economics out of this, that’s not the objective,” he told Business Insider. “Whoever puts money in [to this fund], let them tell us what they think is worth it. I’m only interested in getting something done, not the fee and carry structure.”

Other sources with knowledge the matter added that the proposed management structure would likely change, and said the primary aim was to build a vehicle that would give startups breathing room.

As yet, the plans have not been formally presented to the government or the British Business Bank. It’s possible no funding will materialise, though the investors warned in their draft pitch that the slowdown in business could impact up to 3,000 early-stage UK startups.

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