LONDON – The U.K. treasury announced a £500 million (US$622.5 million) COVID-19 bailout plan for research-based startups, which could see the government holding equity stakes in venture capital-backed firms.
The aid will come in the form of a government loan of between £125,000 and £5 million, which must be matched by an equivalent private investment. These loans will automatically convert into equity on a company’s next qualifying funding round, at a 20% discount to the valuation, or at the end of the loan if they are not repaid.
To be eligible, a business must be an unlisted U.K. registered company that has previously raised at least £250,000 in equity investment from third-party investors in the last five years.
The move follows complaints from life science and tech startups, with the Bioindustry Association (BIA) joining forces with counterparts in the tech sector, to protest that they fell through the gaps of existing emergency COVID-19 support schemes.
U.K. chancellor, Rishi Sunak, a former hedge fund manager, said the targeted and tailored scheme would protect pre-revenue companies. The new fund “will mean they can access all the capital they need at this difficult time,” he said.
The government is committing an initial £250 million to the scheme, which will be open until the end of September, with the scale of the fund kept under review.
After an intense few weeks of lobbying, during which he said he was in contact with the treasury and ministers every day – without seeing any action – Steve Bates, chief executive of the BIA, welcomed the initiative, saying it would enable biotechs, “to weather the COVID-19 storm.”
Many BIA members are facing significant delays to R&D projects and funding rounds, and COVID-19 is hitting workforces, supply chains, clinical trials and investor confidence.
“BIA, along with representative bodies across the science and tech community, have been calling for this, after it became clear that existing government support measures would not be accessible to our sector,” Bates said. “The chancellor’s statement will enable U.K. biotech companies to emerge from the COVID-19 disruption in a strong position to continue their growth.”
While welcoming the announcement, Bates said the details and the delivery are critical. There have been delays in high street banks granting loans under other schemes set up help companies to stay afloat. “We now need [the government] to get this money out of the door as quickly as possible and ensure it reaches the companies that need it,” said Bates.
Providing support through the convertible loan scheme, to be administered by the British Business Bank, provides a “technically simple structure,” that will enable the bank and existing investors to make decisions at speed, Bates said. However, there are questions to be asked about the details of the scheme.
In addition to the £500 million co-investment and loan scheme, there will be a further £750 million in loans and grants for science and technology startups, to be channelled through the government innovation agency, Innovate UK.
Innovate UK will accelerate the payment of up to £200 million of grant and loan payments to existing recipients of its support and also provide grants of up to £175,000 to around 1,200 companies not currently in receipt of Innovate UK funding. The first payments are promised by mid-May.
Bates said grants are an efficient way for the government to support research and development in startups. “In this crisis, they could not only be a lifeline for those facing an uncertain financial situation but will also ensure U.K. research and innovation bounce back quickly once the disruption has passed,” he said.
Both the French and German governments have announced schemes specifically designed to bring venture-backed science and technology startups through the crisis intact.
While waiting to see the fine print of the bailout scheme, BIA will continue to lobby for R&D tax credit payments to be brought forward by a year, to provide additional liquidity. Bates said all companies in the sector would benefit. “This would be money that companies would be getting anyway,” he said, “so [it] would not be an additional cost to the tax payer.”
But for COVID-19, U.K. biotech would be in good health, with companies having raised £309 million between December 2019 and the end of February, before global markets crashed in response to the pandemic.
A total of £186 million was raised in public follow on financings, up from £95 million in the same period of 2019. However, the £123 million raised in private venture capital was down from £182 million in the same period last year.