Venture capital-backed startups in the UK may be struggling to take advantage of the government’s Coronavirus Business Interruption & Loan Scheme (CBILS), and are unable to take on debt finance under the current circumstances, leaving many of them at risk of collapse.
Those companies that are not yet profitable, or lack assets to provide security – as is the case with many technology startups – could also be locked out of the business continuity plans, warns the industry lobby group Tech Nation, having recently surveyed 116 scale-ups throughout Britain.
The vast majority, at 77 percent, expected to encounter cashflow issues due to the COVID-19 pandemic, while 80 percent flagged challenges around finding new customers. Over half of those surveyed, at 55 percent, did not intend to access either CBILS or the job retention scheme, despite foreseeing major hurdles in navigating the crisis.
In a statement sent to Techworld, chief executive of Tech Nation, Gerard Grech, urged more support to be provided by the government if the UK wishes to maintain contributions from the digital tech sector.
“Tech companies are finding that not yet being profitable or lacking assets to provide suitable security is restricting access to government schemes,” Grech said. “In addition, venture capital backing may restrict the option to take on debt finance. The crisis threatens to dry up much needed capital at this delicate stage of company growth.”
Grech suggests a new package to provide additional support for startups and scale-ups, consisting of:
- Working capital in the form of convertible loan notes, for companies that are ‘pre-product market fit’, are developing ‘breakthrough technology’, and are not yet profitable
- National Insurance and PAYE deferment
- Tier 2 visa holders who are fired to have their visas extended for 18 additional months, regardless of employment status, to keep tech talent in the country
- Speeding up R&D tax credits to provide cash liquidity for early stage companies, in particular those working on ‘breakthrough technology’
Grech added that some co-working spaces do not qualify for small business rate relief, and suggested that these are temporarily reclassified as hospitality businesses.
Harry Rhys Davies, AI programme lead at Tech Nation, told Techworld that on the venture capital side, VCs will “certainly be under pressure over the coming weeks”.
But, he added, they can “help founders by being as forthright and transparent as possible as to whether they have the capacity and willingness to invest, how long the fundraising process will take, and overly communicating with founds at a time of great uncertainty.”
Today the Treasury announced that fewer than 1,000 loans had been approved of more than 130,000 enquiries to the government.
For small businesses, government loans were only on offer for firms that were rejected a commercial loan from banks – with interest rates as high as 30 percent being charged in some cases, reports the BBC.
To tackle this, the Treasury announced some alterations to the scheme, including banning banks from requiring small businesses to guarantee loans with personal assets or property for loans of up to £250,000.
And the government will also open the scheme to companies that had not been rejected by commercial loans from banks.
Additionally, loans of as much as £25 million will now be made available to large businesses that draw in revenues between £45 million and £500 million.
While chancellor Rishi Sunak has said he is in talks with banks, no official interest rate restrictions have been introduced.
A worldwide problem
The situation looks stark internationally. Over in India, with its recently booming startup economy raising a record $14.5 billion in funding last year, major VC firms including Sequoia Capital and Accel have warned startups to prepare for the worst due to the macroeconomic situation.
In France, the Macron government has committed $4.3 billion to support the nation’s startup ecosystem in light of the pandemic. The package includes help towards short-term refinancing, as well as early tax credit returns and guarantees for some lost cash flow. However, as VentureBeat notes, the criteria for companies to qualify is yet to be established.
The spiritual home of the startup, Silicon Valley, has already seen companies responding to the crisis with mass layoffs.
Sherwood Partners’ Martin Pichinson described the impact of COVID-19 to the New York Times as the “great unwinding”, and noted that his firm, which restructures failed startups, had seen at least a three-fold boost in communications from struggling firms.
San Francisco-based startup WanderJaunt, a short-term home rental business, fired 56 of its 240 employees last week, while ClassPass, a rising star for gym membership classes, saw 95 percent of its revenue fall away in 10 days owing to a worldwide shutting down of studios and gyms.
And in China, which is beginning to slowly open up again after a period of lockdown, startups were already struggling to find funding before the crisis.