As the nation-wide lockdown within the United Kingdom is set to continue for the foreseeable future, the market for venture-capitalism and numerous forms of private investment remains uncertain. The EY Item Club, a UK-based economic think-tank, projects the economy will return to its state at the end of 2019 by 2023 (assuming lockdown measures are maintained throughout May and eased in June). This projection is accompanied by an estimated 6.8% drop in GDP in 2020 as consumer spending and production are drastically slowed due to the pandemic. For start-up businesses seeking to innovate in the current economic landscape, uncertainty surrounding the easing of lockdown measures and public spending habits during this period makes investment a challenging prospect.

In order to mitigate the effects of the economic downturn on fledgling businesses, Rishi Sunak, Chancellor of the Exchequer, announced a state-sponsored assistance package worth £1.25 billion to drive innovation on the 20th of April 2020. The package will be split into two types of funds, the Future Fund and the Research and Development Fund. While the former is targeted at enterprises including FinTech start-ups that rely on equity investment are unable to leverage the Coronavirus Business Interruption Loan Scheme, the latter is targeted at established firms in the area of research and development. Sunak stated “this new, world-leading fund will mean they (start-ups) 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 Future Fund is projected to launch in May with availability stretching until the end of September 2020. For UK-based companies to be eligible for the Future Fund, a strict criterion must first be passed to mitigate risk. Firstly, the start-up must demonstrate they are able to attract an equivalent match funding from third-party private investors and institutions. Secondly, the start-up must have previously raised at least £250,000 in equity investment from third-party investors in the last 5 years. This funding is intended to be used strictly for working capital purposes and cannot be used to repay borrowings or to provide bonus payments to associates. Such restrictions on use are intended to ensure the injection of capital is directly impactful on the development of intellectual properties.

The Research and Development fund amounts to £750 million of the assistance package and will be administered through Innovate UK, the UK’s national innovation agency. The fund is expected to be made available in the middle of May 2020. This fund is available to UK-headquartered businesses and research organisations that require capital to develop a process, product, or service.

With funding, such organisations are projected to help raise the UK’s GDP amidst the pandemic. This injection of much needed capital into innovative projects suggests the government is adopting a more interventionalist approach to steering the market amidst unprecedented circumstances.

by Brighton Dube

Start-Ups and Covid-19 – A New Investment Initiative