The British Private Equity & Venture Capital Association (BVCA), the industry body and public policy advocate for the UK VC industry has added its voice to those of other key players in the startup ecosystem calling on the government to provide more appropriate relief to startups during the COVID-19 crisis.
Echoing the views expressed by crowdfunding platforms and over 4,500 startups that many early stage companies are at risk of being starved of cash and that the existing business support schemes tabled are unlikely to be available to loss-making early stage companies (more on that here), the BVCA is advocating for the British Business Bank to deploy a bridge funding facility for start-ups in the form of a convertible loan, supported by the start-ups' existing investors.
Convertible loans offer flexibility for early stage companies and investors at a time when it is difficult to forecast what a company's cashflow may look like in 6 to 12 months. Convertible loan instruments are also quite standardised, typically requiring less negotiation than pure debt or equity investment documents and so can generally be executed quickly.
If the BVCA's proposal is implemented, growth companies should be aware that the entry into a convertible loan is likely to be subject to its existing shareholders' rights of pre-emption under the Companies Act 2006 or the company's governing documents, as well as potentially investor or shareholder consent under any shareholders' or investment agreement in force in relation to the company. Where this applies, companies should liaise with the shareholders to obtain the necessary waivers or consents. No doubt they will be supportive if it's a matter of the company's survival, but it's best to avoid a technical breach.
Without a solution, the COVID-19 crisis will starve these companies of the cash they require to turn into mature self-sustaining businesses and will lead to many promising companies failing. The specialist sources of capital they usually access are increasingly unavailable, and they also do not meet the criteria of regular commercial lenders. This puts at risk their intellectual property and patents, with the prospect of strategically important UK know-how being lost to international competitors.