VC-backed companies are an increasingly important aspect of the UK business landscape. There are approximately 30,000 start-ups and high-growth businesses in the UK which employ some 3.3 million people. But even for well financed and well capitalised VC-backed companies, maintaining liquidity during an economic crisis caused by the COVID-19 pandemic is likely to be a struggle. The British Private Equity & Venture Capital Association (BVCA) has recognised that the private sector on its own cannot save cash-strapped loss-making VC-backed companies and more needs to be done from a Government level to support these businesses during this challenging period.
The BVCA has written to the Government recommending the introduction of a £500 million funding package for VC-backed, early stage companies operating in the digital, biotech and life sciences sector. The BVCA was prompted to act to plug a coverage gap it sees in the Government’s current package of coronavirus liquidity schemes, such as the Coronavirus Business Interruption Loan Scheme (CBILS), which are intended to support businesses through this period of disruption. Most early stage start-ups and scaled-up portfolio companies are unlikely to satisfy the eligibility criteria set out in these schemes or are being denied funding from banks delivering CBILS on the basis of elements of the EU state aid framework.
The start-up funding package proposed by the BVCA would be in the form of bridge financing injected by the British Business Bank by way of a convertible loan of up to £5 million per company (The British Business Bank is a Government owned business development bank dedicated to making finance markets work better for smaller businesses). Convertible loans – which could either be repaid by the borrower company on the maturity date or converted into shares in the borrower company at a pre-agreed valuation or at a discount on the occurrence of a conversion event – are a common method of VC financing and will be familiar to VC-backed companies looking to raise emergency funds prior to a conventional round of VC fund raising. The speed at which any funding package for the UK start-up ecosystem is rolled out and implemented is an important factor in deciding the best financing mechanism to introduce. The nature of convertible loan instruments makes them relatively quick to implement, which will be a crucial factor during this fast-moving liquidity crisis.
For support on equity investments / fundraisings or for further information on convertible loans, please contact Nick Atkins or Nassar Nassar.
Nick Atkins