What would a coronavirus start-up aid package mean for UK fintech?
The UK start-up industry could have a financial support package heading its way, as the Financial Times reports ministers are keen to help early-stage companies avoid total collapse.
Many start-ups have called for alternative aid, as a majority are excluded from current government loan packages due to their lack of “viability” as businesses – largely down to the fact many are still not making a profit.
This was made clear in a letter sent by the Founders Forum, led by entrepreneur Brent Hoberman, which told UK prime minister Boris Johnson that “without support, thousands of start-ups will fold in the coming months”.
Officials and investors have told the FT that the Treasury is considering proposals about how best to support the country’s start-ups during coronavirus. One option being considered is to offer convertible loans to be repaid by the businesses after the crisis, or to be converted into equity stakes owned by the state.
This could require venture capital firms to match government investments so EU state aid rules which prevent simple cash injections can be circumvented, whilst also making the government’s own investment slightly more solid.
This is the model the government is currently trying to follow with larger companies, in bid to avoid saving whole industries.
As many early-stage fintechs struggle to secure funding amid the worsening pandemic, this start-up package could act as a real lifeline to help them keep their businesses on track.
Co-founder of UK-based fintech ikigai, Maurizio Kaiser, tells FinTech Futures that the current climate “could completely wipe out a generation of start-ups, and also wipe out investors who won’t be able to invest in the next set of start-ups”.
“Very early stage investors have downside protection in the form of Seed Enterprise Investment Scheme (SEIS) and Enterprise Investment Scheme (EIS), but founders do not. They tend to forego a salary in the early stages and might even have invested their own savings,” Kaiser adds.
In his opinion, the immediate need is for start-ups to get help in covering costs which bridge this time, such as rent reductions.
Kaiser notes that the likes of WeWork, home to many of the country’s start-ups, have refused to give out any rent reductions or rent holidays despite the buildings being empty and their own staff greatly reduced.
In the longer term, consensus amongst the fintech start-up community seems to be that ‘convertible’ support would be the best option.
“Early stage businesses, by their very nature, are not generally suited to straight debt finance,” B-North’s CEO and founder Jonathan Thompson tells FinTech Futures.
“If such a [convertible finance] scheme is executed well, it has the potential to sustain or even accelerate the UK’s position as an innovative hotbed, particularly for fintech.”
Officials are also exploring the potential for additional grant funding for start-ups provided through government body InnovateUK, and whether to extend tax credits to areas such as research and development.
But whilst the fintech start-up scene continues to lack fresh capital, the likes of B-North, a small and medium-sized enterprise (SME) lender, are seeing huge opportunities grow out of the coronavirus.
“With banks such as Metro and Nationwide scaling back their SME ambitions, £100 million of BCR grants returned, and others ceasing front book lending activity, the need for an innovative SME-focused UK lending bank is greater than ever,” says Thompson.
Various fintech start-ups are already benefitting from this opportunity. SME finance marketplace Funding Options said that in March it saw 10,000 businesses apply for more than £1 billion worth of loans.
But many early-stage start-ups will only be able to take advantage of these opportunities if they have the funding to do so.
Snoop’s co-founder, Scott Mobray, tells FinTech Futures that for start-ups in need of funding, “fast tracking payments from public funding schemes and efforts to stimulate private equity investment make a lot of sense”.
But he says ultimately the question for the government, “given the high failure rate of promising, but unproven start-ups”, is whether they are prepared to do whatever it takes to support “potential winners” and “take the hit on the many that may not have survived anyway.”
Some investors say a large proportion of start-ups will need relatively little government support to survive in the interim leading up to their next fund raise, but as more funding avenues dry up, it’s hard to predict how long this interim period will last.