Remember when the Covid pandemic began? It was both a mere 4 years as well as a lifetime ago.
I also remember thinking about how many businesses, mainly young startups, were going to be forced into closure as the confluence of events meant that investors were sitting on their hands, not willing to put more capital at risk whilst, at the very same time, supply lines were closed off and revenue streams had halted as customers retrenched. Spending stopped as the world entered uncertainty.
It was an impossible time. And then after a lot of government lobbying, a lifeline appeared - almost overnight: The Future Fund.
The Future Fund allowed for public funds of between £125,000 and £5 million to be deployed into startups via convertible loans at an 8% interest rate as long as those companies were able to match the funds with private investment. This allowed founders to keep their businesses alive, staff employed and, with luck, make it out the other side of the pandemic scarred, but not beaten.
Fast forward a few years and the UK has settled into its favourite pastime of finding fault in even the most ambitious of endeavours. Articles have been written talking of the scale of the write offs or how founders are now faced with the choice of paying back the loan (because they have not been able to raise a fresh round of equity investment), or facing insolvency.
The hand wringing is almost euphoric. Even as it utterly misses the point.
According to figures from the British Business Bank at the end of last year there were 1,190 companies funded via the scheme (plus one additional company via a demerger) for a total of £1.137 billion. Of these:
- 260 companies continued to hold loans of £242 million
- 696 companies’ loans totalling £691 million had converted to equity either after a fresh fundraise or an exit event where part or all of the consideration was shareholding in the acquiring company or listed business.
- 62 companies have repaid their loans as a result of acquisition such that the British Business Bank no longer has an outstanding loan nor equity interest in the business - this comes to £53m.
- 173 companies have gone insolvent and, assuming no value can be realised by administrators, these loans totalling £151 million will be or have already been written off.
To the casual observer, these figures could spark anger - founders being pushed into insolvency, taxpayer money to the tune of millions lost.
But startups go bust all the time. The fact that during a period of massive stress they chose to take on debt funding but have since been unable to raise fresh equity from private investors or repay their loans is just the reality of trying to build startups.
Arguing that the government has somehow imposed this outcome on them is self serving and unreasonable. Yes, their balance sheets don’t look great, but they chose to roll the dice and as outcomes go, they almost certainly got to survive a few years longer than they may have done otherwise.
Let’s also not forget that the two years post the pandemic were some of the most exuberant periods in the venture capital markets. In the UK $41 billion was invested in 2021 and $31 billion in 2022 versus between $13 billion and $18 billion from 2013 to 2020. Which really means that pretty much anything was getting funded during these periods.
Secondly - and importantly - the business of venture capital is one of power laws.
In essence this means that a very small number of companies return the majority of the value back to investors. According to data compiled by VenCap International, across11,350 companies only 121 generated sufficient exits to return all the committed capital of the funds that had invested in them - that’s each individually, not in aggregate. That’s 1.1%.
So to put the Future Fund in context, from the power law of returns seen in the venture capital asset class, it would follow that 12 of the 1,191 businesses currently invested in could return all the capital originally loaned or converted.
And that’s not to mention that thus far, only 14.5% of the companies backed have been complete write offs versus 22.6% per VenCap data.
It is also true that private startups take time to get to an exit where they return liquidity back to investors - ranging from sector to sector - but typically in the region of 10 years.
What this means is we are incredibly early in judging the success or failure of the Future Fund. So I choose to be optimistic. With close to 700 companies in which the fund now holds equity positions, it only takes one to have made the whole thing a success.
A success born out of quick decisions made at a time when the only thing anyone could be certain of was that the future was impossibly uncertain. That’s not a bad outcome at all.
Aarish Shah is the founder of EmergeOne, a consultancy providing fractional CFO support to venture capital backed startups from seed to Series B, and the host of Nothing Ventured, a podcast exploring the venture ecosystem.
