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UK government involved in third of startup funding deals in 2020

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·Senior City Correspondent, Yahoo Finance UK
·3-min read
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In this photo issued by 10 Downing Street, Britain's Business, Energy and Industrial Strategy Secretary Alok Sharma speaks during a coronavirus media briefing in Downing Street, London, Tuesday, May 12, 2020. (Pippa Fowles/10 Downing Street via AP)
Former Business Secretary Alok Sharma spearheaded the Future Fund. Photo: Pippa Fowles/10 Downing Street via AP

The UK government was behind almost 10% of investment into British startups last year through its Future Fund.

The government contributed around £1 ($1.38) in every £11 invested into startup and scale-up businesses in 2020, according to new data from Beauhurst, which tracks the venture capital industry. The Future Fund was involved in about a third of deals by volume in the UK venture capital space last year.

The Future Fund was set up by the business department last April to help startups through the COVID-19 pandemic. The government agreed to make convertible loans of up to £5m to startups, provided they could match the funding with private capital sourced elsewhere.

READ MORE: UK startups get £1.25bn COVID-19 support from government

Beauhurst’s data shows that the number of funding deals in the UK’s startup and scale-up sector would have been relatively stagnant last year were it not for the Future Fund. The government scheme helped push total deal numbers up to 2,928 — a 48% increase on 2019’s tally.

Henry Whorwood, head of research and consultancy at Beauhurst, said the Future Fund “played a significant role in propping up the figures in 2020, which hides some of the difficulties faced by early-stage companies, particularly those seeking investment for the first time.”

First time funding dropped 15% year-on-year. The Future Fund excluded very early stage startups by requiring qualifying businesses to have already raised outside funding from venture capitalists.

Watch: What UK government COVID-19 support is available?

READ MORE: Government urged to name tech startups backed by Future Fund

“The Future Fund was a show of confidence in the UK’s companies,” Beauhurst said in its report. “But it isn’t without its problems.

“It seems that startups and scaleups that were already on the equity ladder needed little support in securing funding. Instead, it’s those businesses that haven’t raised equity before— the ones actively excluded from the Future Fund—that struggled the most to find capital.”

The government initially allocated £500m to the Future Fund but ended up increasing the size due to demand. Just over £1bn was invested in more than 1,000 startups before the fund closed to applications at the end of January 2021.

READ MORE: Vegan restaurant, wind farm, and soft drink maker get Future Fund backing

Money is structured as a convertible loan, meaning the loan turns into shares in the business if the startup cannot pay it back. The government has so far resisted pressure to name the companies supported through the fund, despite the fact that the state could end up with stakes in many of them.

Last year Yahoo Finance UK named several firms that received funding through the scheme, including a vegan restaurant, a wind farm, and a soft drinks maker. Other businesses have subsequently been named in the press, including a sex party organiser and a toilet company.

The British Business Bank, which operates the Future Fund, last year warned then Business Minister Alok Sharma that the fund was not “well-targeted” and “companies may be supported which did not need the intervention.” The bank’s chief executive said taxpayer value for money was “highly uncertain.”

READ MORE: UK warned of 'very high' risk of Bounce Back loan fraud

While venture capital deal numbers rose in the UK last year, Beauhurst said the total invested declined by 8% to £11.7bn.

Notable deals include a £446m investment in fintech Revolut, £386m for online security startup OneTrust, and a £365m funding round for second-hand car marketplace Cazoo. London attracted the lion’s share of funding, with £6.6bn going to startups based in the capital.

Whorwood said the tech sector had gone “ from strength to strength” despite “challenging circumstances” and would “undoubtedly play a key role in driving the UK’s economic recovery.”

Watch: Why can’t governments just print more money?

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