Last month The Future Shapers investigated the UK Government’s Future Fund. The Investigation called out one of the strange array of firms the government, albeit through an intermediary the British Business Bank, has decided to invest in.
Here we will take a further look at some of the recipients and consider who might be the real winners behind over £1 billion of government funding that went into the potential innovators and stars of tomorrow.
A quick reminder, the Future Fund allowed eligible companies to secure a loan between £125k and £5m via a convertible loan agreement (CLA) with the UK government. The scheme required at least equal match funding from private investors such as venture capital funds. The interest rate of the loan was negotiable between the lead investor and other investors but had to be at least 8%. Repayments were due at exit, with a maturity (36 months), or on default of the company. As the loans begin to be converted to an equity holding by the government intermediary UK FF Nominees Limited we can begin to see the extent of the investments made. Figures released recently by the British Business Bank show a list of the 158 startups backed by the government, via the Future Fund.
The Business Bank has previously published statistics describing the regions where the companies are headquartered, the gender and ethic breakdown of the senior management teams as well as the sector the startup is looking to disrupt. Outside of the individual press releases made by the firms themselves we are only now beginning to see who the beneficiaries actually were and can begin to consider whether the £1billion will deliver its return on Investment.
Conflicts to current and future government policy
In August, The Future Shapers highlighted the case of Killing Kittens, a sex orgy platform , as one of potentially hundreds of applications where the receipts value proposition is of very tenuous benefit to the UK and in some cases is directly counter to current and future government policy.
A good example of this is the case of Nebeus, a London and Barcelona-based FinTech startup, that raised €955K through Seedrs along with support from the “Future Fund ” of the British government. Nebeus’ platform allows users to buy, sell and exchange crypto. It offers crypto asset-collateralised loans, with proprietary and integrated margin calls, health monitors, and volatility alerts. The company also offers financial services such as international cash transfers, withdrawals and deposits at physical locations, and mobile phone top-ups. This investment raises questions at a time when the Bank of England is urging caution on the cryptocurrencies and seeking insight on new forms of digital money.
Changing sector and considering government policies for climate change, there is the case of Flypop, a new Indian low cost airline that still needs to fly its first plane, who received in their words “a significant investment from the UK Government’s Future Fund”. What makes this case particularly odd in the context of a conflict with the UK government’s climate change agenda is that, the cabinet minister who heads November’s U.N. climate talks also oversaw the government loan for a new budget airline without conducting an environmental impact assessment. The £5-million loan to a high-emissions industry was made while Alok Sharma was championing a global green recovery from the pandemic. Sharma was business secretary and COP26 chief in November when Flypop announced it had received the UK government investment.
The fund was set up by Sharma’s Department for Business, Energy and Industrial Strategy (BEIS) as an emergency stimulus measure to help businesses hit by the pandemic. In its urgency to move money, the fund did not include any due diligence on climate impacts, according to an analysis of the process and interviews with people familiar with the bid-writing requirements.
Apart from some checks on diversity and gender balance, scrutiny of those businesses’ environmental, social and governance impacts, known as ESG, were non-existent.
“It’s important to take into consideration that this was an emergency response scheme,” a spokesperson for the British Business Bank was reported as saying “There’s a specific set of eligibility criteria for the Future Fund for companies and for investors. And providing those eligibility criteria were met, the companies received funding.”
Second tier companies
Initially, the Future Fund was expected to include a board to screen investments. But that idea was scrapped because it would have taken too much time to get money out of the door amid the early days of the pandemic, according to reports from the early stage of the process.
To make it as easy as possible for companies to receive money, the fund purposefully had few internal checks. Instead, businesses wanting to tap the fund also had to secure additional matching private investments. Outsider investor’s due diligence was used by the government as “a proxy for not having to do your own assessment.” This can be seen as much of the reason for the high number of funding applications processed using the crowdfunding platforms.
“The value for money outcome from this scheme is highly uncertain,” British Business Bank’s now-former chief executive Keith Morgan wrote to Sharma in May 2020. He warned public money would go to “second tier” companies.
In a letter to Morgan in October, Sharma said the “urgent need” to back investments in start-ups meant there was “limited time available to conduct selection processes and due diligence on individual companies.”
This very much speaks to the issue highlighted in August that the process was a box ticking exercise which has left the UK government with equity stakes in a dubious array of firms and sectors.
Perhaps one of strangest examples of a potentially “second tier” company is the case of Enso, who is developing sustainable tyres for electric vehicles, and looking to deliver sustainable mobility by improving the performance and environmental impact of tyres.
Enso’s pitch via a crowdfunding platform involved the idea of operating a “pay per mile” direct to customer commercial model. The Future Shapers are currently investigating the viability of this claim as in practice it would mean that each tyre has sufficient levels of IoT sensors as well access to the automotive supplier’s engine management systems to be accurate. Not impossible but a substantial technological ask.
These firms don’t currently appear on the recent list of 158 companies that the Future Fund has a shareholding in.
One notable name backed by government potentially offers some insight into what happened to the money. Tickr Ltd, a green investment app Tickr, which recently rebranded to Circa5000. The value proposition being it allows users to invest in impact-oriented companies and offset their carbon emissions via its mobile app. The London-based company raised £2.5m (of which one can expect half came from Her Majesty’s Government in February this year. Tickr aka Circa5000 give the impression they have burned through the recent fund injection as less than 9 months later they are fundraising again, this time down the crowdfunding route. Did the funds go into generating real tangible advances in products and service with these future disruptors or were the funds just an alternative to investors funds that were burned through to keep the lights on?
The winner are – Seedrs, Crowdcube and CSC
If the evidence is to be believed they may be on to something as the real winners look to the crowdfunding platforms Seedrs, Crowdcube and CSC, the Delaware headquartered equivalent to the infamous Mossack Fonseca, star firm of the Panama Papers and Laundromat movie fame.
Equity crowdfunding platform Seedrs facilitated public participation in 65 funding rounds while Crowdcube was involved in 49 funding rounds. While it is admirable that companies have managed to successfully raise funds from the public during the pandemic, this finding does raise a question around whether taxpayers have received the best value for money. Companies that raise money via equity crowdfunding will not receive the same level of scrutiny as those that raise money from institutional investors. As a result, companies using these platforms can achieve higher valuations than institutional investors would stomach.
Taking into account the £5m cap, taxpayers may have funded as much as £132.5m worth of loans to companies that raised money through equity crowdfunding platforms. Considering the typical fee structure of 7%, which there is no evidence to suggest the firms waived, this would equate to almost £10m landing in the coffers of the two players for use of governments scheme to respond to Covid-19.
As opposed to the crowdfunders, the case for CSC being a net beneficiary is a little less front and centre. Following investigation at Companies House, CSC are the management service provider for UK FF Nominees Limited the legal entity that owns the equity stake in Future Fund recipients.
The Future Shapers has gone back to British Business Bank for comments on this story.