As UK unemployment increases by over 600’000 people and the economy shrinks by over 20% the scale of the Covid-19 shock is expected to be the deepest economic recession in 300 years. This might not be the best time for innovative technology startups to be looking for funding. That is not to say those start-ups should just give up!
One option to explore is the various innovation government funding grants which are being offered in various different forms around the world. Here in the UK, Innovate UK, part of the government innovation agency, is offering grants which are not tied to giving up equity or taking on the obligations of taking on a loan. For sure funds will be tight for start-ups, so if you are looking to bring an innovative proposition to market why wouldn’t you do this?
Following the VC money
Prior to the Covid-19 pandemic one of the well-trodden routes to funding was the Venture Capitalist avenue, granted here in the UK one might make a case that this wasn’t as mature as the Silicon Valley community, but with $13.2 billion invested in 2019 by UK VC’s this isn’t a small chunk of change to have reduced access to. So, what might happen, and could there be another option?
If we look across the pond at Silicon Valley for some guidance, according to recent reports Confluent, one of its hottest start-ups, expected to double in value when it began pitching investors for new funding earlier this year. This data management company, backed by blue-chip venture firms such as Sequoia Capital, Benchmark Capital and Index Ventures, posted almost 100 per cent annual revenue growth last year and counts Credit Suisse and Rakuten as clients. So, some seriously good credentials.
But the firm’s plan took a knock following a coronavirus-led stock market decline. The company, which had sought a $5bn valuation, instead settled for a $4.5bn estimate following negotiations with the tech investor Coatue Management, which led its $250m funding round last week. These were one of the lucky ones as their CEO noted “We actually feel really lucky. It’s a very hard time overall to raise money in the private markets.”
The re calibration of Confluent’s expectations reflects the increasing caution in Silicon Valley and VC’s around the world in the wake of the coronavirus crisis. According to data provider Pitchbook, As of the end of September last year Venture capital firms are sitting on a record $120.4bn of unspent cash. Yet the fear of missing out on the brightest prospects has largely evaporated, slowing their pace of investment.
Instead, company founders are having to accept tougher terms, if they can raise money at all. Keep in mind those in Silicon Valley could be argued to be the crème de la crème of the start-up world. Those firms that were in the lucky position turning away would-be investors won’t be doing that now as they announce deep job cuts and spending freezes to prove they can be disciplined about costs. Things are going to get difficult and if you are at the start of the tech start-up journey, these traditional routes of funding will be increasingly difficult to access. “At least for the short term, gone are the days where it is a founder’s world,” said Rachel Proffitt, a partner at the Silicon Valley-based law firm Cooley. “That is going to be a little bit of a stark reality for the current generation of young entrepreneurs.”
The difficulty with the venture capital business model is that it is based on optimism. With the current economic numbers looking like they are, it’s fair to say optimism may be a little light at the moment. Without that optimism, and the accompanying free-flowing money to power through losses as the tech start-up grows and captures market share, the entire system breaks down. That’s the real struggle facing many, not all, in the start-up and the venture capitalist firms. The new normal is bringing new business models and opportunities into focus as firms look to position themselves and their investments for this re-jigged world we are heading to. For example travel apps may be out but supporting remote working may be timed perfectly.
Not all doom and gloom
Governments around the world have recognised this challenge and have come up with a range of funding support programmes to stimulate and support the start-up community in these difficult times.
Here in the UK, the government recently announced a £1.25bn package for firms driving innovation which included £750m of grants and loans for research and development focused SME’s. The £750 million of targeted support for the most R&D intensive small and medium size firms will be available through Innovate UK’s grants and loan scheme.
Innovate UK, our national innovation agency has set aside a further £250m for grants. The understanding is that these grants will follow the de minimis state aid requirements and enable firms to apply up to £175k.
The details are still high-level, but there is a whole bunch of new information here. Guidance to-date is that they will take the form of fast-turn around competitions. These new competitions are approximately a month from announcement to decision in comparison to the more usual 3-6 month turnaround.
The first of these competitions, one for a £50k grant for Business-led innovation in response to global disruption was recently completed. The interest and response level was unprecedented with over 8600 applications, Innovate UK’s highest number ever – in fact this is more than all of their competitions in FY19/20 put together. This response shows businesses in the UK have the ambition to innovate and have identified these funding channels as a means of financial support in these difficult times.
The beauty of these grants is that you can have formed your company yesterday, with no trading history and you’ll not be penalized. It is the strength of your innovative idea and the supporting business case you are being accessed on. Also, a very attractive aspect of the support is that it is a grant, you don’t need to pay it back and you don’t need to give up a chunk of equity to investors. So, you could say it is free money. With terms like that why wouldn’t we apply?
In my experience, I’m not expecting the demand for funding grants will diminish over the coming months. In fact I believe it will become increasingly challenging as the response to the crisis moves to one of opening up the economy and a dialling down of some emergency support measures such as the furlough scheme and the Bounce-back loans. It is also important to note that the majority of the government support for businesses isn’t tailored for firms in R&D at all – they’re mostly loans with eligibility based upon turnover, and typically as a pre-sales company it’ll be hard to afford the repayments or have any turnover. I very much expect that the interest in the recent Fast-turn around competition and grant scheme will spill over into other forms of the Innovate UK programmes including the UK Smart Grants which we applied for. To emphasise this point the Innovate UK have put this programme on hold whilst they work through the recent batch of applications.
A note of caution, there are many companies out there offering to support grant applications, giving guidance on how to write answers in response to the limited word questions ensuring all the key elements assessors are looking for are covered. It is still a significant undertaking and in well over a week’s worth of work, even with support.
Applications are now purely online, with no interviews, multiple rounds of application or in-person selection; you can be pre-sales or even an SME formed the day before submission. Remember that if you decide to go down the path of choosing specialist grant application support not all that glitters is gold. As with most things you get out of it what you put into it, and be wary of folks who offer you a guaranteed path to success.
Due diligence on the prospective partners, expertise and process is a paramount first step. All indications from the first Covid-19 business challenge is that interest will be high, if you’re thinking of Grant funding a technology or innovation project feel free to give me a call/email and I will share our experience.