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Mishcon Academy: Digital Sessions podcast - Support for start-ups during COVID-19

Posted on 22 May 2020

Lydia Kellett:

In this episode, what are we hearing from the Tech Start Up community? What financial support is available to start up and early stage businesses and what can businesses do to maximise their chances of survival?  Hello, and welcome to the Mishcon Academy digital podcasts.  I am Lydia Kellett an associate in the Corporate department at Mishcon de Reya and I am delighted to be joined remotely by Andrew Wolfin, Partner in our Corporate team.  Andrew does a significant amount of work in the young tech start up space and also heads up our M:Tech Programme, our legal advice and mentoring programme for early stage tech businesses.  So Andrew, what are you hearing from the tech start up community?

Andrew Wolfin: 

Lots of things, largely because there is such a wide range of businesses that make up this community.  Inevitably, during an economic crisis, businesses that are primarily focused on funding and scaling are going to be twitchy and nervous about what this means and as soon as Covid became apparent it seemed likely that billions of start up investment was going to go missing and tech start ups that don't have VC funding or people ready to provide the funds they need were likely to struggle.  That said, I think many of the tech unicorns today were founded during the recession of 2008 or shortly thereafter so inevitably there are going to be opportunities here.  Uncertainty brings with it ____ but also opportunity so I think that there will be certainly smaller businesses to the extent they have a low  centre of gravity or slightly more established businesses who have some funds in the bank account already who I suspect will be looking at this strange time and thinking there will be a moment for them at some point in the future. 

Lydia Kellett: 

£663m of new investment was made in the first month of the UK Covid-19 lockdown from 23 March to 27 April but all but £15m of that went to companies which had already secured equity finance at least once before.  I am hearing that a number of funds aren’t doing any new deals at the moment, in part due to lack of bandwidth to take on new projects as that look to shore up their investee company balance sheets.  Is this what you are saying?

Andrew Wolfin: 

I think that the deals we are seeing now were struck some time ago, yes, you're right, so it's really not possible for us to tell yet what the impact will be of the Covid crisis on the investment space.  Inevitably, VC houses and other investors are likely to be triaging their existing portfolio rather than focussing on brand new investment and companies in need of financing who don't already have investors lined up or shareholders that may be prepared to provide the funding required are probably going to struggle - hard to tell at this stage but I think that the pipeline is where the challenges lie and there are still deals being done but they don't necessarily reflect the current market. 

Lydia Kellett:

So what financial support is available to start up and early stage businesses?

Andrew Wolfin: 

The Government have announced a number of schemes that will support start ups although again start ups is a difficult phrase because it can apply to so many different businesses of very different sizes and financial needs.  There is the Coronavirus Business Interruption Loan Scheme, there are grants available from Innovate UK, there are the bounce back loans and in fact I think £2billion was committed within 24 hours of the bounce back loans becoming available for about 69,000 companies or so, so they were very popular and of course there is the Future Fund which was primarily the Government's flagship way of supporting young businesses through investment.  It has received a lot of attention and a fair amount of criticism or rather disappointment I should say simply because of the way it has been structured as a convertible note which means that it won't be eligible for SEIS OR EIS which are the cornerstone tax reliefs for small businesses and because the terms are relatively aggressive or as many people have said VC friendly.  That said, the Government I think is in quite a difficult position, it can't be seen to be speculating with taxpayers money and I guess wants to be seen to be backing the winners although it's hard to know what that means.  The other big issue about the Future Fund is the requirement for matched funding because really it means that only those businesses that have funders lined up will be able to take advantage of it.  The Government may say, I suspect, that the whole purpose of the Future Fund is to provide urgent runway for those businesses that are already on the way rather than to fund start ups from standing start.  Likewise I suspect that some of the justification for the convertible notes will be that the Government simply can't do any meaningful due diligence on these businesses  nor can one really place a value on them in these strange times so the note obviates both of those issues.  I think there has been a fair amount of disappointment amongst the start up community that this isn't going to help a large amount of businesses and perhaps it was never the Government's intention for that to be the case.  Similarly, we are all familiar with the Government's furlough scheme and for those businesses that wish to take advantage of that it can also alleviate some of the financial pressures for them.  Ultimately, each business should be looking at the Government's website which is updated on a daily basis as things change and develop to see whether there are schemes and initiatives that they can take advantage of because this is ultimately what they are there for. 

Lydia Kellett: 

Some argue that the Government's co-investment will primarily benefit VC houses as they lean on the future fund to help tide over their existing portfolio companies.  Would you agree and would you agree that the Government is looking to back the winners only?

Andrew Wolfin: 

Well of course the Government is looking to back the winners only and if we all knew who the winners were, I suspect that I would be a lot cleverer and wealthier than I am.  I think the Future Fund was a little disappointing in truth.  It's encouraging that the Government had put in place this initiative and there was some pressures I say for them to support the start up community but when one looks at the criteria realistically it is only businesses that have a meaningful track record of raising at least some capital - £250k is the threshold and have VC's or other investors lined up and we don't know by the way for the matched funding exactly who will qualify as an appropriate or accredited matched funder for the Government but on the other hand, are the Government backing the winners…they are going to have to be seen to be something more than just speculative.  This is not an attempt to bail out the start up eco system as it were but rather to provide runway for companies that desperately need it and have some traction or some track record to maximise the use of this funding.  My own view is that the more established businesses will be able to take advantage of things like the Future Fund and it should tide them over if they are prepared to accept the terms which are certainly a little punchy.  Potentially, the very small businesses who are not yet on the journey won't qualify but may be able to batten down the hatches and just wait until the market peaks a little bit.  I feel like those in the middle may struggle because if you need urgent funding but you don't have VCs lined up or other people willing to co-invest alongside the Government, I'm not sure the Future Fund is going to be of much value or benefit to you. 

Lydia Kellett: 

Some say that the Future Fund specifically is just tiding companies over and actually it is not addressing the real financial difficulties of companies.  What would you say to that?

Andrew Wolfin: 

The mortality rate of start ups is high as we all know and to some extent this is about providing run way for businesses that already have some traction rather than enabling start ups to get off the ground or to invest at the very, very early stages before any content has been proven.  It is nothing more I think than a tide over in the same way that the bounce back loans are loans and they have to be repaid.  The business is going to have to find the money one day that said, the nature of a convertible note is that subject to finalisation of the terms if it is going to be converted into equity at the appropriate time, then they are to some extent backing companies and it's not so much about tiding over as a proper investment.  Yes, they need the VCs or other accredited investors to give them some comfort but they are backing businesses that are legitimate or have some chance of success.

Lydia Kellett: 

And so when thinking about the sort of cash that a business is going to take on, what are the sort of considerations that a company might have in mind when thinking about the identity of the lender or the identity of the investor?

Andrew Wolfin: 

It is difficult to say because in a normal market businesses may take a view as to who exactly they want the money from and in particular I am thinking that so many businesses today are purpose driven or have objectives and goals that are not simply about profitability although inevitably that is a big part of it but in these difficult times, businesses that urgently need money may not be in the luxurious position of picking who it comes from and I am talking here about the businesses that don't have the advantage of simply going to their existing shareholder base or friends and family and asking  them to follow on.  Similarly, when one looks even at the terms of the Future Fund they are relatively aggressive or competitive one might say.  Yes, the Government wants to back the winners so I can understand why but I do know some businesses that have felt that it is just too rich for their blood but then those businesses have to decide, are they going to go down the loan route or are they going to batten down the hatches and wait and I think for an increasing number of businesses it may be that finding ways to cut costs may be a better solution than borrowing or taking on investment and waiting and seeing what the next few months bring.

Lydia Kellett: 

And so speaking about battening down the hatches what can businesses do to maximise their chances of survival in the pandemic if they are not say, for example, taking on third party finance or taking on finance from the Government?

Andrew Wolfin: 

Well I think I said earlier, it's an ill wind that blows no one any good and as a result I think this crisis is going to produce opportunities for businesses that can re-engineer or re-pitch themselves to be relevant in a crisis.  We are already seeing a huge amount of businesses in the online education space, remote work solutions, Med Tech and they are all such very basic measures that businesses can do it sounds self-evident but aside from obvious things like cutting any unnecessary expenditure, one should also be looking at contracts and seeing whether Force Majeure or there are other provisions that enable businesses to at least have a discussion with the counterparties to their contracts.  One can negotiate rent holidays, mortgage holidays if not already done.  I know of a number of businesses that are working in co-working spaces who have sought to renegotiate.  We are in strange times now and there is a certain congeniality, I think that each business wants to support other businesses while recognising that they themselves are having to deal with this crisis as well but I do think that smaller start ups and early stage businesses may be well placed simply because they don't have huge numbers of staff where they have to deal with redundancies or furlough, they don't have huge large real estate so they aren't dealing with difficult conversations with landlords so likewise they may not be reliant on supply chains or distribution arrangements.  This is the time to focus on internal work so if there is or can indeed be done from a desktop if there are strategic objectives that can be worked on, all of the things that I think in the busy times are very hard for businesses to focus on, this is the time to focus on them.  As you say, whether it is battening down the hatches or keeping costs to an absolute minimum the other thing I think the businesses could do is look to incentivise talent through equity rather than salary or other remuneration there has probably never been a better labour market for getting people to work for sweat right now and if you can do that and keep your existing relationships happy so speak to your customers, speak to your suppliers, make sure that they understand that you are still there and that you are doing everything you can and I think for those businesses there will be better times ahead.

Lydia Kellett: 

So Andrew, what now for the start up and early stage tech community?

Andrew Wolfin: 

Right now, I think this is the time for business to try and sit tight and I know that is a very difficult thing to say if you are in need of urgent funding but, to some extent, where businesses are able to cut costs rather than look at doing anything with new money that's probably the right move at least in the short term.  I appreciate for a lot of businesses if that's not possible there are Government initiatives as we have mentioned that will enable them to get funding but it is as I think you say to some extent tiding them over.  As I mentioned, the mortality rate of start ups is high so anything one can do to maximise chances of survival should be done.  A lot of it is going to be focusing on the internal workings of the business rather than anything external but as I said, maintaining relationships is so important and focussing on what the business is seeking to achieve anything that can be done from a desktop or working collaboratively internally rather than looking at the businesses external focus is likely to be more sensible at least in the short term.  The Government funding, whether it's loans or the Future Fund is not a disaster it is that it's only going to be applicable for certain businesses but absolutely businesses should be checking the Government's website not least because the terms and details of these schemes keeps changing to see whether or not they are schemes that they can take advantage of.  I do think this is a good time psychologically too for purpose driven businesses and there will be on the other side of this crisis whenever that is I think a big upturn in investment inevitably people will be coming out ready to play again and those businesses that can simply keep their head above water and wait for the tide to turn I think will do very well particularly in the early stage tech space.

Lydia Kellett: 

Well for now let's wrap up there.  I would like to say thanks so much Andrew Wolfin for joining me for this Mishcon Academy Digital Sessions podcast.  I am Lydia Kellett and in the next episode my colleagues Victoria Piggott and Katy Colton  will be talking about how businesses are adapting their usual practices to contribute to the Covid-19 effort and what the result in long term benefit of putting purpose before profit is.

The digital sessions are a new series of online events, videos and podcasts all available at mishcon.com and, if you have any questions you would like to be answered or suggestions of what you would like us to cover please do let us know at coronavirus@mishcon.com.  Until next time, take care.

Mishcon Academy: Digital Sessions are a series of online events, videos and podcasts looking at the biggest issues faced by businesses and individuals today.

Join Partner Andrew Wolfin and Associate Lydia Kellett as they discuss the support available for start-ups during COVID-19.

This Mishcon Academy: Digital Session covers what we're hearing from the tech start-up community, what support is available to these early stage businesses, and what they can be doing to maximise their chances of survival.

Editor’s note: This podcast was recorded on 14 May. Since then, the Government has announced further details on the Future Fund and applications opened on 20 May.

Partner Andrew Wolfin commented:

At the time of recording we were a little sceptical about the number of businesses who would be able to take advantage of the Future Fund and in particular there were concerns around SEIS and EIS eligibility. The Government has since clarified that Future Fund investors will not lose their relief on previous investments made prior to any investment through the Future Fund. However, it remains to be seen whether any further revisions will enable the investments themselves to qualify for those reliefs.

Since applications opened on 20 May, the Fund has been massively oversubscribed, which has come as something of a surprise to many within the start-up community. Given the extraordinary take-up already, it seems likely that the size of the fund will be increased. Even so, it may go to support only a small proportion of the UK start-up community: I suspect primarily those with VCs already behind them who are looking to follow on their existing portfolio investments.  The level of demand from growth companies in technology and life sciences in particular is encouraging and suggests that the Fund will in fact dwarf original expectations."

For our briefing note on the Future Fund click here.

For our note on funding options for businesses click here.

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