THREAD A debate has started up about what if anything UK govt should do to back high-growth firms during #Covid19. Smart people disagree on the right course of action and it’s probably best not to impugn anyone’s motives or financial interests, but I wanted to share my views 1/25

If you don’t think the Govt should act or that startups aren't so important or that people who do risky things should embrace the ultimate risk of life under #Covid19 etc etc then this thread isn't for you. Don’t bother 2/25

My presumption is that UK esp post-Covid19 and post-Brexit has a strategic interest in (and will have a competitive advantage) in a strong startup ecosystem. There are over 1300 companies that have recently raised between £100k - £2m who are a key part of that ecosystem 3/25

If action is not taken, the UK economy will lose two years of technology innovation: circa 6,000 jobs today but also crucially undermining companies expected to provide 50,000 + high wage jobs in next five years 4/25

Let’s start by making clear why existing government schemes don’t work. The CBILS financing is not an option. because growth-focused startups are loss-making, even with Government loan guarantees venture-backed startups will not qualify for loans under the scheme 5/25

Rates Relief and grants based on payment of business rates won’t help.​ Startups are much less likely than average firms to pay business rates as they are often either subletting or in coworking spaces 6/25

Startups can furlough workers and are but that doesn't save the sector. EasyJet has also furloughed and still the Govt has deemed it useful to support the whole company. The same logic applies to the sector 7/ https://www.theguardian.com/business/2020/apr/06/easyjet-secures-600m-coronavirus-loan-from-uk-treasury-and-bank

First, UK is an outlier - it’s so far the only large country in Europe and US to not launch a package of support for high-growth startups. To believe that does not put the UK at a competitive disadvantage is to believe the ecosystem is so much stronger that it doesn’t matter 8/25

I believe we are facing a unique crisis - not like 2008, 2002, or even like 1983. Govt is intervening massively across the economy and no part of the economy - bar a few VCs - are arguing against that in other sectors. That feels odd. 9/25

It also feels odd that people seem willing generally to accept govt funding via the @BritishBBank in pro-cyclical times but not in counter-cyclical times. If you believe there was a market failure before, why don’t y believe there isn't a market failure now? I don’t get it 10/25

Why not rely on the ‘dry powder’ of the venture sector? Well, because for the earliest startups it’s just not there. Angels, small VCs and regional funds don’t have any powder in this crisis. Beauhurst data shows a 50% fall in new deals from February to March 2020. 11/25

Some argue Govt has no role in underwriting risky firms, although many who argue against backing loss-making startups believe in backing loss-making scaleups. What’s the principle? Size? If it’s chance of survival, size is unlikely to be indicative. What’s post-Covid19 PMF? 12/25

And in a world where we can’t fly or will want to fly less we don’t seem to be against backing @easyJet which feels a lot riskier to me than backing an early stage startup producing technology for the NHS. Therefore the argument “many will fail” seems unserious. 13/25

The Government has taken a decision to help companies through the crisis (as a once in a lifetime intervention), and the existing help (unintentionally) is not available to tech startups. That doesn’t seem right whatever the risk 14/25

If you accept it’s valuable to intervene, the issue is where do you intervene; and how, bearing in mind risks and (increasingly flexible) state aid rules 15/25

A two-pronged intervention is key - one that backs startups and one that backs scaleups. We need both. In terms of startups, I am focused on an intervention to back the 600 innovative tech startups with on average £500k each to carry them safely over the next 6+ months... 16/25

That’s roughly half of those who have raised £100k - £2m in the past two years. Many of these will go bust, but many will not. Indeed, there is more chance of a return of government money than the Govt’s support for hairdressers, airlines etc 17/25

The logical vehicle @BritishBBank but I wld be concerned about just going to existing funds in its network for several reasons. They represent a small part of the ecosystem. The argument that they are better means you have to believe Govt is able to choose the best VCs 18/25

I also think the risk of those VCs just propping up their portfolios is high, even with constraints put down. I have heard mention of a 50/50 split which sounds high to me. And I also there is too much of a London bias 19/25

I believe in getting money out of the door to startups as soon as possible. This could look like the Irish scheme which frontloads payment of the credit - or could simply mean Ministers bashing HMRC on the head until they pay out faster. But it’s not enough 20/25

That’s why i think the best way forward is for a not-for-profit Fund that would see the Govt allocate capital via @BritishBBank to invest in convertible ‘SAFE’ notes in up to 600 seed stage companies 21/25

This would be run via an independent structure staffed by fund managers from across the ecosystem and have a mandate to deploy capital as quickly as possible to help companies through the crisis 22/25

The fund would be focused on companies that have raised less than £5m total previously, had not raised significant funds in the past 3 months, and based on a quantative criteria as much as possible 23/25

The most important part of this structure is the convertible mechanism. These ‘SAFE’ instruments are the best way to get money into these startups because they could convert at the company’s next funding round - this gets around the challenge of how to value these firms 24/24

Because the Govt wld be investing in up to 600 firms across different verticals it wld effectively be buying an ‘index fund’ of early stage UK tech - enough of these great companies would succeed. I am keen on private co-investment and a separate effort for scaleups 25/25