With the £1bn “Future Fund”, maybe the state can pick winners after all
Through the Future Fund, the UK government now has lots of stakes in small, start-up, high-growth companies. Time will tell whether that was wise, says Matthew Lynn.
Slightly over a year into his time as chancellor, some of us are starting to wonder if adding up is not exactly Rishi Sunak’s strong point. The furlough scheme has cost close to £50bn already – far more than the initial estimates – and it is still running. Eat Out To Help Out was meant to cost £500m, but came in at £849m. We can now add the Future Fund to the list. It was launched at the height of the first lockdown, when deal-making was frozen, to prevent a generation of start-ups being wiped out because they couldn’t stage a fresh funding round. At the time, the government put aside £500m in funding. The scheme closed on 31 January and the final amount spent has just been announced. It was £1.1bn. But heck, what’s a 100% rounding error at the Treasury these days?
The government places its bets
It is the first time the UK has tried anything like this since the launch of what became 3i in 1945 when the Industrial and Commercial Finance Corporation was created to invest in small and medium-sized businesses struggling for cash in the wake of World War II. For the last 30 years, we have stuck to the mantra that the government can’t pick winners, and shouldn’t bother trying. Indeed, for most of that time the government has mostly tried to get rid of any stakes it owned in companies, and certainly not tried to add to them (with the exception of the banks in the 2008 crash, but it sold those shares as fast as it could). The Future Fund has changed that, and may well be extended: at the time of writing, the chancellor was expected to launch a “Breakthrough” fund in the Budget that will invest in fast-growing technology companies.
Can it work? The fund has certainly made some really interesting bets. In total, the money was invested in 1,140 companies. The bulk – almost 70% of the total – went to companies in London and the south east, the UK’s start-up hub; the rest was spread around the country. For example, £30m went to new businesses in Yorkshire and the Humber. Some of the companies invested in include Habito, a digital mortgage broker, and TuningBill, which offers banking services for cross-border businesses. Those are precisely the kind of potentially fast-growing, tech-based businesses the UK is trying to encourage. Anecdotally, lots of companies took the cash to bulk up their balance sheet and skip the next funding round. The offer from the chancellor was a generous one, and the terms more than fair, so any start-up that thought it might need cash over the next couple of years had an incentive to take it now and park the money on its balance sheet. The result? The UK government now has lots of stakes in small, start-up, high-growth companies. And the companies have some cheap capital from a supportive long-term shareholder which won’t be pressuring them to list their shares or do their best to sell themselves to Google.
A gamble worth taking
We will find out what happens to them all over the next three or four years. There will inevitably be a few collapses – that is part of the venture-capital model. And there will probably be a few who spend their proceeds all on the traditional entertainments of entrepreneurs who are suddenly flush with easy cash. There will be some embarrassing headlines for the Treasury as a few spectacularly fail, taking a ton of taxpayers’ money with them. Yet there should also be a few that turn into stunning successes and make a lot of money for the Treasury.
We will see. But if it works, it is just possible that the UK will have stumbled across a funding model for creating more fast-growing businesses. And even if it doesn’t, we will have learned something valuable about what the government can and can’t do. For three decades, the UK has been firmly of the view that the state should get out of the way and let the markets decide which companies get backing, and which don’t. Largely by accident, we are now trying something different. Backing early-stages companies is a hard trick to pull off, but if it works, it could end up creating a lot of wealth for the country.