The UK government has promised £1bn worth of support for startups struggling to cope amid the coronavirus pandemic, bowing to the pressure of the local tech community.

On Monday, the government said that it was committing £250m towards a new £500m fund that would invest in high-growth private companies that needed money. The government also promised £750m worth of grants and loans to small and medium-sized businesses focusing on research and development.

It comes in the wake of similar packages by the French and German governments earlier this month and follows a sustained campaign by influential figures in the UK tech community, with the Save our Startups lobby group calling for exactly these kinds of measures announced today.

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But the pledge from the UK government will likely prove controversial, with fears that the money will help to prop up zombie startups and that taxpayers money could be better spent elsewhere.

Robin Klein, a partner at London-based VC firm LocalGlobe and influential tech figure, summed up those fears writing in a piece for Sifted: “Please use scarce taxpayers money in the sectors that really need it — hospitality, transport, recreation, arts and charities. Offering startups debt packages or handouts is not the way to go.”

The UK government was conscious of the debate and has attempted to structure the funds to limit the risk of the government spending taxpayer’s money on poor businesses.

The private sector will be supplying the other half of the £500m fund, named the Future Fund, according to the government. The investment into startups, which will be between £125,000 and £5m, will therefore only come alongside private sector investment to ensure that they have “skin in the game” as well.

The government-backed investment in startups will come in the form of convertible loans, which means that if the loans are not repaid they will convert into equity in the company. It is designed to provide liquidity in difficult times and promote private investment, rather than to end up with the UK government owning equity in a large number of UK tech companies.

Brent Hoberman, the cofounder of lastminute.com and one of the proponents of the government support package, said: “Entrepreneurs across the country will be delighted with the announcement that the Chancellor has launched this important source of support at this critical time.

“The capital being made available under the Chancellor’s programme should also serve as a powerful catalyst to the unlocking of private support, which together will provide essential funding to worthy early stage companies to help them get through the current crisis.”

Gerard Grech, chief executive of Tech Nation, said: “This is a bold and welcome intervention for the tech sector. Tech startups and scaleups are crucial to the UK’s future growth, jobs and innovation.”

Matt Clifford, the cofounder of company builder Entrepreneur First, who had been sceptical of the idea of a bailout fund for startups, said that the current package looks sensibly structured. “Very encouraging: great package of support for startups, structured to give taxpayers upside and require skin in the game from VCs.”

Rishi Sunak, the UK Chancellor, said: “Britain is a global leader when it comes to innovation. Our startups and businesses driving research and development are one of our great economic strengths, and will help power our growth out of the coronavirus crisis.

“This new, world-leading fund will mean they can access the capital they need at this difficult time, ensuring dynamic, fast-growing firms across all sectors will be able to continue to create new ideas and spread prosperity.”

The UK government said that the £750m of support for R&D intensive small and medium size companies will be available through Innovate UK’s grants and loan scheme.

As part of the deal, Innovate UK will accelerate up to £200m of grant and loan payments for its 2,500 existing Innovate UK customers on an opt-in basis. An extra £550m will also be made available to increase support for existing customers and £175,000 of support will be offered to around 1,200 firms not currently in receipt of Innovate UK funding.

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Gary Smith
Gary Smith

Whilst I applaud the objective of supporting the tech start-up scene, I’m not sure that a centralised system of handouts is the optimal approach for early stage start-ups. Who will coordinate the thousands of applications for the new funding and make the decisions about who to invest in? Surely a simpler, and more importantly, scalable approach would be to boost the existing seis tax scheme by increasing the total amount that can be raised from £150k to £500k.

Robert Spencer
Robert Spencer

There are existing delivery mechanisms in the form of specialist SME funders like the FSE Group with 5 regional offices, almost 20 years experience and more than 30 skilled fund managers whose sole remit is to support growth orientated SME’s with potential

Peter Cooper
Peter Cooper

Only startups that can’t seem to manage a business plan without having to sell equity, naturally.. Those of us bootstrapping a profit will soldier on paying our corporation tax without any handouts 😏

Jonathan Scott
Jonathan Scott

oooh, how true… if you bootstrap, did it on your own and profitable, you not allowed help….. If you built something with other people money in a bubble, that does not work, we will help you.

Great message by the govt….

Ed Moris
Ed Moris

just quickly sifting through the Innovate UK site the majority of competitions seem to be focussed on automotive and transport. Er what about Entertainment, arts and like, everything else…? How can the government seek innovation when it is dictating the (arguably failing) sectors it is willing to support. Surely the best innovations are as yet unknown!