One model of support being discussed for startups would see the government probably through the state-backed British Business Bank, offer convertible loans, which could either be repaid by the businesses after the crisis or turned into equity stakes owned by the state, according to the Financial Times.
VC firm Founders Forum was among a number of investors who wrote to UK Prime Minister Boris Johnson at the weekend saying the coronavirus threatened the existence of Britain’s entrepreneurs and the government should provide an “equity-based liquidity package suitable to save startups at risk” by bridging them to the next round.
This is a really irritating request. First, VCs can always bridge to the next round themselves.
Asking governments to do their job and then privatise the profits is the sort of behaviour that helps explain why startups backed by investment funds with deep pockets “have been a lower priority for ministers compared with sectors such as retail and hospitality, where hundreds of thousands of jobs are on the line,” as the FT noted.
It also contrasts with corporate venturing leaders who in working through their portfolio are looking for creative ways to support portfolio companies and find new customers or manage costs.
Second, banks are capable of stepping in and are wanting to do so. As one managing director said on Friday: “In 9.5 years it has never been as good as this.
“We are awash with deposits and have been offering lines of credit that have been undrawn until now and loans are up 10% in a month. OK, so the bar is high for the types we will do this for but we are not jacking up the prices just tranching the loan to reflect the risks. Three-quarters of the venture-backed companies we see will do well out of this crisis and we have been trying to get in with them for years but there has been so much equity we have struggled.”
Bailing out the second class of entrepreneurs that banks and VCs refuse to touch seems useless and governments will wonder why they are laughed at by the wealthy investors.
Officials are also looking at whether additional grant funding to startups could be provided through InnovateUK, a government body providing support to innovative businesses, and whether tax credits could be further extended in areas such as research and development, the FT added. This seems more sensible.
There is a host of schemes from the UK and abroad for entrepreneurs, even loss-making ones, to develop their technology and services.
