The government’s Future Fund will open for applications from 20 May, but not all the UK’s tech startups are happy with the terms of the investment.

Announced by the chancellor on 20 April, the fund is aimed at supporting innovative UK companies that fall outside existing Coronavirus financial support schemes.

However, Freetrade founder and chief executive Adam Dodds has argued that the fund will not help most early-stage startups, entrepreneurs or private investors.

“The program seems designed to support venture capitalists and will give them ample opportunity to take advantage of startups in desperate need of funding,” he commented. “Instead of acting in the public interest as it’s supposed to do, the Treasury is taking steps that primarily benefit the industry with the strongest influence and lobbying power.”

The Future Fund has already been criticised for focusing too heavily on venture capital investment, as well as for failing to cater to more diverse and regional founders. Another key problem for many is the lack of compatibility with Enterprise Investment Schemes (EIS).

Luke Lang, co-founder of Crowdcube, commented: "Many entrepreneurs turned their back on the Future Fund weeks ago and got on with existing fundraising plans; the government's new guidance on the Future Fund has proven them right.

"Sacrificing EIS tax relief and having to apply on behalf of a company will be a step too far for most private investors, making the scheme unsuitable for the majority of businesses."

Mike Jackson, entrepreneur success director at Tech Nation, welcomed the fund’s launch, but noted: “Although we understand some terms remain unchanged, in particular around EIS compatibility and the £250,000 investment threshold, there has been a step change with regards to Enterprise Capital Funds, which will now be deemed eligible for Future Fund investment.

“This will benefit many companies across the UK who have been previously supported by national and regional investment funds, and is welcome,” he added.

David Hough, partner at law firm Blick Rothenberg, pointed out that established companies are likely to be able to access the Future Fund more quickly as they will be able to show any historic fundraising that is required as part of the application and will have relationships with third party investors that they can utilise to secure the necessary matched funding.

“Private matched funding will not be eligible for EIS relief and It’s disappointing that the government did not allow this, and it does not seem clear why," he added. "There is a possible issue that the investment via this route will prevent future investments qualifying for EIS - the FAQs say previous investments will not be tainted but it’s silent on future investments - this is another concern for investors.”

Last week, more than 30 startup founders wrote to the Treasury asking them to modify the terms of the loan scheme so that startups without a UK parent company, but whose majority of employees are based here, to be eligible.

Businesses that have taken part in US accelerator programmes are currently not be eligible, as a requirement of the programmes is that the startup creates a US parent company. The Future Fund’s terms state a company must have a UK parent company to be eligible for support.

Many of these startups have returned to the UK from the US, having secured funding and expertise in their fields, but are now excluded from both governments’ support packages.

A statement from the British Business Bank, which has been charged with facilitating the fund, explained that the fund is designed to support companies have been unable to access other government business support programmes because they are either pre-revenue or pre-profit.

Operating on a commercial basis, the Future Fund will deliver an initial commitment of £250 million of new government funding which will be unlocked by additional third-party investment on a match funded basis.

It uses an online platform based on a recognised financial instrument, and a set of standard terms with published criteria, allowing investors to provide rapid support to the companies where they see good potential.

The scheme works by providing £125,000 to £5 million in government support, with third-party investors at least matching that commitment.

It uses convertible loans, so that unlike equity investment, there isn’t a requirement to value the company or the price of its shares, at a time when company valuations have been significantly impacted by COVID-19. There is also no requirement for a company to make regular repayments. Instead, the convertible loans are designed to convert into equity at the next funding round, when an equity value can be negotiated between companies and investors.

Applications on the platform are initiated by a lead investor who will provide information about itself, other investors in the round and the company. If an application is successful, the platform will generate documentation for the company and all investors to sign.

Crucially, the British Business Bank confirmed that companies must be UK-incorporated and if part of a corporate group, only the parent company is eligible.

Companies in receipt of the loans will be required to have previously raised at least £250,000 in equity investment from third party investors in the last five years.

Only eligible companies that can attract at least 50 per cent of third-party investment will receive funding. Companies cannot have any of their shares traded on a regulated market, multilateral trading facility or other listing venue.

The company must have been incorporated on or before 31 December 2019 and at least one of the following must be true for the company: half or more employees are UK based, or half or more revenues are from UK sales.

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