Out-Law News | 08 Apr 2020 | 3:15 pm | 2 min. read
Andrew Hornigold of Pinsent Masons, the law firm behind Out-Law, was commenting after the British Private Equity & Venture Capital Association (BVCA) called on the government to make £500 million worth of finance available to help early stage companies in the digital, biotech and life sciences sector companies stay afloat throughout the coronavirus, officially Covid-19, pandemic.
The BVCA has warned that "many promising companies" could fail if they cannot access the cash needed to survive the economic effects of the Covid-19 outbreak. It said a "straightforward solution and rapid implementation" is needed to offset the reduction they are seeing in the availability of "specialist sources of capital", which the companies rely on to fund their operations.
"The BVCA is proposing a bridge funding facility in the form of a convertible loan, a standard investment instrument, of up to £5 million per company, with government funding supplemented by existing investors," the BVCA has said. "Including money from the private sector, this would provide at least £625 million of capital to early stage businesses. The BVCA argue that it should be deployed rapidly into the market by the British Business Bank."
The UK government has outlined a raft of measures designed to support businesses in managing the impact of Covid-19. However, Hornigold said that some of the support mechanisms are either not open or will not be attractive to early stage digital, biotech and life sciences businesses.
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These are precisely the sort of businesses and sectors that the UK should be supporting if we are to remain globally competitive
"Most of these companies are in the early stages of growth," Hornigold said. "Many are loss making and some will be pre-revenue as they look to prove the concept of their ideas and move towards commercialisation. This makes them ineligible for 'standard' debt-based lending and much of the government’s Covid-19 based funding schemes."
"They are not in a position to furlough their employees. Most of their early employees are directly involved in developing their products and services – they generate the intellectual property (IP) on which the future success of the business depends, so they cannot easily put them in to a furlough arrangement and continue to operate. Their key workers – researchers, or software engineers, for example – are, in normal times, in high demand so if they are forced to let them go they might never be able to replace them," he said.
"This may be particularly exacerbated if one of the longer term implications of the pandemic is a flight by talented, entrepreneurial employees away from early stage businesses, and people founding their own start-ups, towards more secure, large scale employers who can offer a full package of employment benefits and a more secure employment outlook," Hornigold said.
"Many are heavily dependent on funding from high net worth individuals through tax efficient schemes such as the enterprise investment scheme (EIS) which, in the current environment, are likely to struggle to raise new money as individual investors may prefer to conserve cash until the effects of economic fallout become clearer," he said.
"Conversely, these are precisely the sort of businesses and sectors that the UK should be supporting if we are to remain globally competitive. There is little to be gained in the long term from supporting industries whose business model is proving outdated – this is thrown in to even more sharp focus in the context of an unprecedented global recession that will inevitably follow the devastating health impact of the pandemic," Hornigold said.
The BVCA said it had come up with its recommendation following "extensive consultation" with its members. Its proposal, it said, would "secure a bridge to the post-Covid-19 recovery period" for the businesses that benefit "while ensuring taxpayers’ interests are incorporated appropriately".
Michael Moore, director general of the BVCA, said: “The scheme seeks to address a serious market failure in the UK’s globally-competitive digital and tech economy caused by the urgent and necessary steps taken to address the Covid-19 outbreak. It is designed to support the sector at an unprecedented time, balanced with the need to protect taxpayers’ interests. The private sector must and will contribute but cannot solve this problem without help from the UK government."
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