The UK government’s £1.14bn Future Fund was a lifeline created for British startups during the coronavirus pandemic. But what was supposed to help these fledgling businesses might now spell the demise of some.
The programme was a flagship policy of now prime minister Rishi Sunak, then the country’s finance chief, and offered over a thousand startups cash through convertible loans. This kind of financing usually converts to equity at the next funding round — in the case of the Future Fund it should happen within three years.
As private funding has become scarcer for startups, the three-year conversion deadline is now looming for hundreds of Future Fund-backed businesses. The terms of the Future Fund agreement say that if a startup fails to raise a priced round before that date, it must repay the full amount, plus a 100% “redemption premium”. Struggling companies either pay a bill double that which they borrowed — or face bankruptcy.
The state-owned British Business Bank (BBB), which has been running the scheme, says it’s willing to extend the deadline for well-functioning businesses, but startups say the conditions of the extension have been unclear.
“If it wasn’t for the Future Fund loan, we’d never be insolvent,” one founder, who is dissolving their business after not being able to meet a £1.5m repayment to the Future Fund, tells Sifted. The founder asked to remain anonymous.
“The experience has been absolutely horrible. We were told that the government was here to support the startup community, but now it’s all turning out kind of predatory,” another founder, who fought to extend their seven-digit loan, tells Sifted. This founder also prefers to remain anonymous.
“The Bank will always aim to secure value for money and protect the taxpayers’ interests but has introduced the possibility of extending the convertible loan term for solvent companies that might need additional time to complete a fresh fundraising,” a BBB spokesperson tells Sifted.
Help for startups
The Future Fund was rolled out in April 2020 and pledged to match investments from private investors from £125k to £5m. The terms of the deal allowed the BBB to purchase equity at a 20% discount when the note converted.
Some critics allege that the Future Fund often didn’t do enough due diligence on the companies it supported (due diligence was done by the private investors). Some recipients weren’t fast-growing; some went bust — including infamous events startup Pollen.
However, it was the only government financial support scheme available to UK startups during the pandemic. Many founders say it was fast — decisions were taken in roughly 21 days — efficient and sorely needed.
“The fact that it was there — it was evidently helpful,” says Tom Davenport, a founder of Alvius, a staffing technology startup, who took out the loan, which he later converted. He stresses the Future Fund was “relatively sensible and flexible” and that the closing process was “a little bit painful, but not remotely terrible, considering it's a government thing”.
The Fund closed for applications in 2021 after providing financing to 1,191 companies. As of June 30 this year, 591 companies had fundraised and converted the loan, including Dice, Hackajob and Zeelo; 51 exited and 129 went bust.
The other 420 startups, whose names the Future Fund isn’t disclosing, still have loans that have already reached maturity, or soon will.
The BBB sends emails to the founders whose deadline for converting is approaching. The note, seen by Sifted, says that if a startup can’t convert the loan before the deadline, the Future Fund “will be electing for a repayment of the loan”.
It also suggests founders should seek “appropriate financial and legal advice” if they are or expect to be unable to pay back.
Startups’ problem, not ours
Those founders who managed to fundraise and convert their loans on time are usually satisfied with the Future Fund. But those struggling to fundraise describe a different experience.
The founder facing the £1.5m bill took a six-figure loan in 2021, and two years later, received an email that the fund wanted repayments.
As a deeptech startup with high upfront costs in a tough fundraising environment, the founder and the company’s investors were left with very few options for keeping the business alive. They wanted to find “a middle way” between raising and insolvency, such as selling the business or spinning out into a consultancy. But the loan meant it was no longer an option.
“It becomes a poison pill whereby any potentially positive outcome is poisoned by a really ugly balance sheet,” the founder says.
If a fundraise takes longer than expected, investors often extend the note’s conversion date “because they don’t want to put the company into administration”, says Charles Waddell, a partner at Pinsent Masons law firm, who has dealt with Future Fund conversions. Moreover, private investors usually don’t expect convertible loans to be paid back because the aim is to keep a stake in the company, he says.
That was the position of the other investors in this deeptech company, who were happy to extend the loan’s term, says the founder. However, he says that the BBB was unwilling to engage in any other scenario planning except repayment. It resulted in him having to liquidate the business he had been working on for six years.
“As someone who hopes to be a serial founder, having an insolvent liquidation on your name is not helpful, and it can have repercussions for future business,” he says. Insolvent liquidation refers to a situation where a business closes because it cannot pay its debts.
The second founder that Sifted spoke to took a seven-digit Future Fund loan in 2020. A year later, an investor wanted to buy out the Fund’s position — offering to pay back the loan and the premium. The BBB refused, stating it preferred to convert the loan into an equity stake.
As a result, the investor dropped out and two years later the founder was faced with the repayment deadline — and had not managed to fundraise further. The founder had a call with the BBB and insisted that the terms of the repayment were harsh, especially amid “the worst fundraising environment in recent memory for startups”.
“The response we got — and I'm not exaggerating — was literally ‘Well, that's your problem, not our problem’.”
The founder adds that even though the startup’s business is performing fine, they “don’t have that much spare cash lying around. They were willing to put us into bankruptcy”.
After multiple calls with the Future Fund, the founder secured an 18-month extension of the loan. But given the fundraising environment and the Future Fund complications, the entrepreneur is not very optimistic about the future.
“It was a mistake for us to take the Future Fund,” the founder says.
The BBB’s spokesperson said they would not comment on individual cases.
The BBB’s spokesperson says that the Future Fund loans “are market standard instruments, and the commercial terms were benchmarked against industry norms before launch” — and that the eligible borrowers can apply for a loan extension of up to two years.
“Where the extension application is from a company that has the support of other CLA [convertible loan agreement] lenders, is not in default of its obligations under the CLA agreement, passes our customer due diligence checks and is solvent, then the Future Fund will agree to an extension. This is true for almost all applications,” the spokesperson adds. The BBB spelled out the exact criteria in its guidelines.
In practice, the founders and lawyers say the criteria are unclear.
Pinsent Masons’s Waddell says companies that have been backed by reputable VCs might have more chances with it. “But for companies who have raised money from angel investors or family offices, they're not getting that sort of extension,” he says.
The extension is “very much at the discretion of the Future Fund and is subject to a number of conditions and requires you to act fast in applying for such extension,” says a guidance note from another law firm, Fox Williams.
The BBB doesn’t disclose how many companies have applied for an extension and how many of them have been granted.
“What is ironic… is the Future Fund’s stated purpose at that time was to save British technology companies,” says Waddell. “They didn't want people to go to the wall. And then, here they are.”