This is a particularly hard time for small businesses and startups, especially if they are looking for funding to scale in the future. Growth companies find it harder than anyone to secure loans or financial support.
Morten Rongaard, Co-Founder of Reality Gaming Group – which recently managed to close a funding round just as the crisis hit – explains what the government needs to be doing in order to support creative startups.
It’s not just Europe’s growth companies who are being severely impacted by COVID-19 and the lockdown. Startups, of course, are also hugely feeling the effects.
As a games and tech start-up in the UK, we are trying our best to deal with the new COVID-19 World Order like everyone else, which means making some brave decisions.
We’ve been fortunate enough to close a second round of funding in the midst of the lockdown crisis, which was testament to the single-mindedness of our team and the forward-thinking nature of our lead investor.
But empirically and anecdotally, there are examples everywhere of growth companies like ours (and indeed outside tech) for whom the doors to investors have been slammed shut by the pandemic fallout. In a troublesome physical world, there’s always less appetite for financial risk.
Nothing suited to startups
Firstly, I’d like to acknowledge that the financial relief being offered to the business community by the UK government in the wake of coronavirus is both unprecedented and hugely welcome, including the Future Fund unveiled this week. It’s almost unthinkable to imagine what the current business climate would be like without it.
Unfortunately, however, the solutions made available so far aren’t really geared up for startups. How do I know? Because we’ve tried to make use of them before and during the crisis.
Historically there were the ‘Help to Grow’ growth loans administered by the British Business Bank, but these are no longer accepting new applications. There were also Start-Up Loans available up to £25,000, which are not really made for companies that are between startup and scale-up.
So, back when the reality of COVID-19 hit, the first option we discussed was, why not just go to the bank and get a loan to bridge the gap? Well, we’ve talked to the largest UK banks, but their products simply aren’t targeted at growth companies. It’s close to Mission: Impossible to get help in the form of a loan if, like most startups, a business has negative operations.
Of course, banks will lend to what they call ‘healthy’ companies, but the definition of what a bank perceives as healthy has not changed during the COVID-19 crisis. A healthy business, in their eyes, is still a company that can show positive operations in the latest financial year and has many physical assets. These criteria simply do not apply to growth companies. Even the healthiest are not healthy enough in banking optics.
The government needs a plan
So the government needs to come up with a plan if they want the growth companies to keep building the foundations for a future post-coronavirus and, indeed, post-Brexit. In my opinion, the solution is quite simple – requiring the government to only make funds available to companies that have already attracted capital from private investors.
Why? Because if a company needs capital in the future but has already secured funds from investors, it is a good indicator that the company is worth saving or investing in.
However, it’s also true to say that investors are unlikely to make as much money on such good terms as they normally would. Therefore, the overall school of thought among startups and entrepreneurs is that the state should team up with private investors to help mitigate their risk and in turn provide startups with the financial help so many of them need at this time.
In practical terms, this ‘Growth Fund’ would pay in the same amount as private investors; but multiply it by two or three, subject to the right discussions taking place between stakeholders. There should be a limit, of course, but the idea is that the Growth Fund portion of the investment takes the form of a loan on some reasonable terms.
These funds, ultimately, would come from actual banks, but the backing would be the British Business Bank, which is why we were very interested to see the government this week unveil its Future Fund. It’s a £500 million loan scheme for high-growth firms and part of a 50/50 partnership with the BBB.
This is great news, but I believe the government should really be providing backing for EIS and SEIS businesses specifically – this is because any business with advanced EIS/SEIS assurance has satisfied HMRC criteria for being a viable startup for investment. As such, there’s a unique opportunity for the government to back any coronavirus loans to these businesses in full.
The risk of fraud would be kept to a minimum as these businesses would have had to seek advanced assurance as part of the EIS/SEIS process prior to the coronavirus outbreak, so we would only see participation from businesses that are already set up. Under these circumstances, loans should be repayable based on a revenue generation metric – i.e. when revenue exceeds a certain % of the loan, it would trigger a loan repayment, much like student loans when the person starts earning over a certain amount.
Of course, it goes without saying that the needs of startups and entrepreneurs are very rightly secondary in the current situation, with the safety of the public and frontline workers of paramount importance at all times.
But perhaps, as we begin to see a flattening of the curve in many countries, we can start to turn a little towards a post-coronavirus future and discuss, for creative businesses at least, some innovative models that will stand us all in good stead 12 months down the line.