This week, we launched Save Our Startups. Alongside ten other founding partner organisations, and a further eighteen support partners, we’ve come together to call for an equity based liquidity package for UK startups.
In part, this campaign is a response to the fact that the Coronavirus Business Interruption Loan Scheme (CBILS) isn’t fit for many entrepreneurs. But it’s not a matter of one or the other – UK startups and scaleups need both debt and equity options.
Fixing CBILS
By the terms of EU state aid rules, CBILS cannot be used where an applicant was an “undertaking in difficulty” as at 31 December 2019. The devil is in the definition of “difficulty”, which includes many ambitious startups whose businesses don’t currently turn a profit as they invest to scale up.
But while state aid rules aren’t stopping other countries from being more generous than the UK, the likes of Germany and France are also struggling to get money out the door. Not so in Switzerland, where business owners can fill in a one-page form and get money in a matter of days. They have already distributed more than SFr15bn to 76,034 businesses.
As reported in the FT: “The Swiss scheme has two elements. Under the first, businesses can apply for an immediate loan, worth up to 10 per cent of their annual revenue, capped at SFr500,000. The loan is interest free and provided by Swiss banks, which are underwritten with a full credit guarantee on the amount by the Swiss government. A simple declaration is all that is needed. The second facility lends up to SFr20m, also provided by the banking system. Bern guarantees 85 per cent of the loan, charged at 0.5 per cent interest. The bank assumes risk of the last 15 per cent, charged at a competitive rate.”
Toby Austin and Henry Whorwood of Beauhurst suggest we should copy Switzerland, and Christian Faes of LendInvest argues today in Sifted, it should be adapted to the UK market by opening up the delivery of funding to UK fintechs. There are rumours of more providers, which would be another welcome pivot after last week's changes. But it must happen quickly.
Miss the point
There is no getting away from the fact that debt isn’t suitable for many startups. That’s one reason Save Our Startups already has thousands of signatories.
Despite the odd bit of good news, on the whole investment deals are falling apart, extreme write-downs are taking place, and early-stage funding is drying up. Nevertheless, a couple of investors on Twitter have come out against what they call a “bailout for startups”. Their criticisms are based on a misconception of what is being proposed and a misunderstanding of the economics of the situation.
The misconception is that the Save Our Startups campaign precludes a co-investment approach – that is, an equity solution that requires co-investment from other investors alongside the government. While we think that such a fund won’t serve the bottom of the market – many angel investors don’t have the resources to reinvest now – it would certainly be better than nothing.
The misunderstanding is confusing what is happening with a normal economic crisis. I am sympathetic to the idea that you should let companies go bust in a normal recession. After all, there is a danger in supporting firms during most economic downturns, as it risks capital and people not getting reallocated to more productive uses and so dragging out the recession. But as economists across the ideological spectrum agree – most critically, including those of a free-market bent who tend to be against ‘bailouts’ – this time it really is different.
Arguing that many of these firms will go bust in the future is wrongheaded. Yes, many will go bust, but some will go on to great things. You can’t have the winners, without the losers.
The government’s stated aim is to keep businesses intact so they’re ready to go when things return to normality. If we let a generation of startups go bust, there will be no reallocation of resources, but the destruction of our startup ecosystem.
Need for speed
It's not just loans that should be delivered more quickly. Save Our Startups also calls for the payment of R&D Tax Credits and Innovate UK funding grants to be sped up.
The founders of Stripe, PayPal, Linkedin, Shopify, and Y-Combinator (among others), understand the need for speed. That's why they've created Fast Grants. These entrepreneurs are trying to replicate the National Defence Research Council (NDRC), but for US scientists fighting coronavirus.
During World War II, the NDRC accomplished a lot of research very quickly. In his memoir, Vannevar Bush recounts: "Within a week NDRC could review the project. The next day the director could authorise, the business office could send out a letter of intent, and the actual work could start."
A lesson, surely, for both the UK government and philanthropic founders.
Save Our Startups