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The UK government is likely to join Iron Maiden singer Bruce Dickinson as a shareholder in an aviation startup that is trying to bring Zeppelins back to Britain's skies.
The government's flagship startup support fund last year lent money to Hybrid Air Vehicles as part of a crowdfunding round that helped it survive the pandemic. The government's convertible loan is now highly likely to become an equity stake as Hybrid Air Vehicles eyes a new funding injection of £30m.
The government's Future Fund backed Hybrid Air Vehicles last July as part of a £1.8m crowdfunding deal. The government's participation in the deal was not reported on at the time, although it was disclosed to investors on crowdfunding website Crowdcube.
Hybrid Air Vehicles is a Bedfordshire-based startup that has spent over a decade building a "hybrid" airship that looks like a Zeppelin or blimp. The aircraft uses a combination of helium gas, aerodynamic lift, and rotating blades to gain altitude and navigate through the skies.
"This is something that’s a bit different to anything anyone’s seen before," chief executive Tom Grundy told Yahoo Finance UK. "It’s not the same as an airship, it’s definitely not the same as a fixed wing plane, it’s not the same as a helicopter."
Hybrid Air Vehicles was founded in 2007 and £120m has so far been spent on the development of its aircrafts, Grundy said. Backers include Iron Maiden singer Bruce Dickinson — a noted aviation enthusiast.
Investors are attracted to the low environmental impact of the company's technology. Hybrid Air Vehicles' aircrafts emit 75% less carbon than other modes of air travel and the aircrafts will soon be carbon neutral, Grundy said. The flagship Airlander vehicles could be used for transporting cargo, defence and surveillance, and city-to-city passenger transportation, he said.
Hybrid Air Vehicles was on the cusp of signing its first commercial deals last year when the pandemic struck and derailed plans.
“You don’t bring a technology like this into the market without some challenges along the way," Grundy said. "We weren’t, as nobody was, expecting anything along the scale of the pandemic."
The crisis forced Hybrid Air Vehicles to raise more money. The Future Fund was "very important" as it acted as "the capstone" of the investment round, Grundy said.
The government launched the Future Fund last year to help support startups that were locked out of other government-backed COVID loan schemes. Under the programme, startups could raise up to £5m via a convertible loan as long as the funding was matched by a private venture capital investor.
"Future Fund, now closed to new applications, successfully addressed the immediate funding challenge that many innovative, equity backed, UK companies faced due to Covid-19," said a spokesperson for the British Business Bank, which administers the fund on behalf of the government. "Funding was made available widely and swiftly."
Grundy and Hybrid Air Vehicles declined to say how much the Future Fund had invested but the matching mechanism suggests the government could have put in up to £900,000. The company declined to comment on that figure.
“For a company like us, what the Future Fund did was allow us to anchor in and grow a wider group of investors around some real solidity in what was a very uncertain situation," Grundy said. "It’s an example, I think, of how government intervention at a relatively small scale and at the right time can create confidence.
“It’s enabled us to keep pushing forward. It’s enabled us to be ready. We want to make sure that we come through this match fit and ready to be part of this expansion of greener industries, greener technologies."
A spokesperson for the British Business Bank said: "Ensuring these companies can continue their growth trajectory and reach their full economic potential is the purpose of Future Fund.
"Over 1,000 companies have been approved for convertible loans worth over £1.1bn. Innovative companies are crucial to driving the growth needed to support the UK’s long-term prosperity.”
Hybrid Air Vehicles has now resumed discussions with potential commercial clients. Grundy said the company would likely need another £140m to bring its Airlander crafts into production. Hybrid Air Vehicles is in active discussions to raise around £30m.
Such a deal would most likely see the Future Fund loan convert into shares. Under the terms of the three year loan deal, capital turns into equity if the business raises fresh money that totals more than the Future Fund investment.
"Generally, the scheme is set up to convert," said Henry Humphreys, a partner at Humphreys Law, law firm that has worked on several Future Fund deals.
Grundy said the Future Fund arrangement "would carry forward". The company declined to comment further.
UK chancellor Rishi Sunak last week announced the successor to the Future Fund, dubbed the Future Fund: Breakthrough. The will take direct equity stakes — rather than convertible loans — and will have an initial £375m to invest.
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