As UK business prepares for a measured exit from lockdown, an online conference for early stage investors explored new ways for firms to survive and flourish in what will eventually become a ‘new normal.’ Unintended consequences are also likely to emerge, such as a reluctance for investors to match finance if their funds are excluded from Enterprise Investment Relief. The conference heard from experts and business owners on the financial impacts of the Covid-19 crisis, and was organised by PwC, Advanced Oxford, the Oxford Investor Opportunity Network and law firm Taylor Vintners.
Support from the government is addressing different challenges, from the furlough scheme to prevent layoffs on a mass scale, to grants for R&D through Innovate UK. Firms exploring what government loans are available will realise that many of its lending programmes are conditional on matched funding. For example, the coronavirus Future Fund offering convertible loans between £125,000 to £5 million opens for applications on May 20 and targets high growth companies. But there’s a danger that they will not be able to use it if EIS (Enterprise Investment Scheme) tax relief is not available to investors who provide the matching funds. PwC tax director Rebecca Reading said that although she didn’t believe disrupting EIS relief on past investments was an intentional policy, it was important to press the government for clarity on this, as well as how the regime would work for future and in particular matched funding contributions from investors and whether they would be eligible for this tax relief.
Tax relief issues aside, as investors assess how their funds are best deployed during the crisis, there was general agreement that funding for new startups is getting tougher. Inevitably, some pre-lockdown valuations will have to be re-examined and likely reduced unless the business proposition gains a very clear advantage in the current situation. A period of low interest rates is predicted, which would create opportunities, as David Ford, Chairman of SomaServe and an Oxford-based angel investor, pointed out, as they should make it easier for companies to use debt as part of their strategy.
Dr Rebecca Todd, investment director at Harwell-based Longwall Venture Partners, said that 2019 had been a boom year for funds, but that much of this money is likely to go into existing businesses. Investment organisations will be looking for new investors for their future funding rounds and may provide more runway as they complete investments of existing completed rounds.
There is little doubt however that the outlook for 2020 will be for a slower inflow of investment funds. But even so, with the onset of low interest rates, investors will be looking for opportunities with better returns than banks or government bonds can offer.
The government’s furlough scheme is expected to be extended beyond June, then potentially phased out selectively by sector. Kyle Grant, founder of eco-friendly laundry service Oxwash, pointed out that the retrospective claim for furlough costs makes it tough for companies with severe cashflow stress. He predicts a cliff-edge to occur at the end of the furlough support period when companies have to commit either to restoring furloughed employees to the payroll or making them redundant. He recommends the government introduces some form of transitional arrangement to avoid a cascade of redundancies.
On how to manage cashflow, CEO’s, investors and bankers taking part agreed that firms should do all they can to preserve cash at this stage in the crisis. While recognising that this is ‘easier said than done’ in many circumstances, there was consensus that where possible and without damaging the business, opportunities to reduce cash outflow should be taken.
Angel investor David Pritchard made the distinction between companies dependent on several investment rounds to sustain growth until profitability can be achieved, with those that can be cash-flow positive and want investment to accelerate growth. Anticipating an era in which risks will be assessed more conservatively, he felt more disposed to invest in the latter category.
One Oxford firm which has responded impressively to the rapid change brought on by the lockdown is Oxwash. Founder Kyle Grant explained how his business, which relied heavily on the hospitality sector including hotels, restaurants and AirBnB’s, has adapted to provide laundry services for GP surgeries and Oxford’s vaccine trial centres. His team is busy getting the disinfectant efficiency of their low energy washing processes validated to meet the NHS’s standards so that they can extend the market for their services to hospitals. Oxwash is part of the entrepreneurship incubator programme Oxford Foundry and has secured a £1.4 million consortium investment from a round which began pre-lockdown, and includes TrueSight Ventures, Biz Stone (co-founder of Twitter), Paul Forster (founder of Indeed.com) and Founders Factory.
While Oxwash must be applauded for its nimble response, investors recognise that different businesses face different challenges and many, like the firm’s clients in the hospitality sector, have been forced to stop trading altogether during the lockdown. The conference noted that the task for investors is to understand how their companies are affected, what help they need and what the options are for providing help.
Seven weeks into lockdown, most firms have explored available avenues such as agreeing payment holidays with creditors, eliminating discretionary spending, negotiating salary reductions for those kept on the payroll, and government support from the furlough scheme and VAT deferral. Looking ahead, business owners are advised to explore new avenues for borrowing, such as through the government’s CBILS and CLBILS loan schemes, do their research on available grants and sector-specific support financial or otherwise through professional bodies and organisations such as Innovate UK.