Yachts to yoghurt: inside the UK government’s venture capital portfolio

The UK government’s venture capital fund has invested in a Netflix-style streaming service for jazz, a manufacturer of alcoholic teas, a yoghurt bar company, a talent agency for social media influencers and a yacht rental service, the Financial Times can reveal.

These are among 200 companies identified as having filed the final paperwork for the Future Fund, a scheme through which the government invested £1.1bn in 1,190 companies as part of its efforts to support the UK economy during the pandemic.

The government keeps the Future Fund investments confidential, only revealing them when they are set to be published elsewhere. It has resisted repeated attempts to force publication.

Rishi Sunak, chancellor, said it would help “to commercialise breakthrough products such as new medicines and green technologies”. The Treasury has boasted of support for Vaccitech, a start-up involved in the Oxford/AstraZeneca vaccine.

But only about one in seven of all the identified companies give their sector as pharmaceutical or scientific work. The Financial Times has identified a crypto-focused bank, a TV drama production company and a podcast network. Mina, a recipient of Future Fund investment that simplifies claiming tax reliefs, advertises that dealing with the Treasury “can be a nightmare”. 

The portfolio of Future Fund investments is administered by the state-backed British Business Bank at arm’s length from ministers — and is expected to make a profit.

Rob Jolly, chief executive of Onto, an electric car subscription service, said: “We’ve gone up by an order of magnitude in what we’re worth so I hope they’ll hold on to us. If at some point we IPO, which we hope to do, there should be a decent windfall for the taxpayer.” 

However, the fund may still cause political controversy. At its launch, Sunak said the fund “will enable innovative businesses in every corner of the UK to access the finance they need to scale up”. But about a quarter of the companies now identified, including companies disclosed elsewhere, have their headquarters within two miles of Whitehall. Just under half are within five miles.

FT analysis estimated that 87 per cent of directors of the known participating companies were men. One in three have no women directors. The Treasury said: “Almost 80 per cent of funding was provided to mixed-gender senior management teams. The government did not make individual investment decisions.”

The Future Fund was intended to help companies when venture capital sources for early-stage companies froze up early in the pandemic. Participating companies were issued three-year convertible loans — debt that the government can convert into shares when the companies next raise fresh investment.

The government did not do commercial due diligence. It invested only if the proposal met a set of criteria and if an independent external investor would go in on the same terms. The scheme was open for applications from May 2020 to the end of January 2021. The Treasury initially allocated £250m for the scheme, but allowed it to expand to more than £1bn. 

Ministers may struggle to defend certain investments that fail, even if the portfolio is profitable overall. Arthronica, a medical research start-up, entered liquidation last month. It was joined last week by Cleaning Club, a mail-order detergent business.

Insolvency filings reveal that the Future Fund was owed £250,000 by Isotek Microwave, £920,000 by UserReplay, £795,000 by Catapult Ventures, £1.3m by Mrs Wordsmith and £2m by Roli — companies that are in administration, liquidation or have been restructured without the loans converting to equity.

Founders praised the speed of the rollout, in particular, for helping them. Romanie Thomas, chief executive of Juggle, a job-matching platform, said it had taken “less than eight weeks from writing the submission to the money being in the bank. Many private rounds don’t move that quickly.”

Most of the 1,190 companies involved in the scheme, including almost all of the 200 newly identified by the FT, hold unconverted loans. The government has released the names of only 158 companies where the debt had already been converted into shares — and would be published in share listings.

The 158 were those most quickly able to raise additional private finance and tend to be larger businesses than the 200 companies identified by the FT that are yet to convert. “If we’ve got a British Google, it’s in the first converters,” one Treasury official told the FT.

The companies analysed by the FT showed shadows of older attempts to diversify the UK’s start-up scene. Universities are shareholders in 18 per cent of the supported companies outside London — the consequence of years of encouraging spin-offs. About 10 per cent of the non-London businesses are already part-owned by state-funded regional development entities.

The Future Fund will create novel questions for ministers. Companies unable to raise equity within three years can be asked to repay the loan with an 8 per cent interest rate, plus a 100 per cent “redemption premium”. 

The British Business Bank said: “The purpose of the convertible loan is to provide a bridge to a company’s next equity funding round, where the loan then converts to equity . . . As the term . . . is three years, there is a considerable period of time to raise additional capital.”

One senior official told the FT that they expected about half of the companies to convert. Those that cannot find new investors may be forced to repay — something that could force them into insolvency if the government did not relent. “We would not be interested in holding shares in companies that have not gone anywhere in three years,” the senior official told the FT.

Some companies that think they will not be able to raise fresh investment are worried that the British Business Bank will enforce these hard terms if they try to restructure. One chief executive described the loan as having become a “poison pill”.

Some warnings about potential future issues with the portfolio have emerged. To protect taxpayers, the external investors who matched the government’s money were required to be “not connected” to the company when the loan was issued — nor immediately prior.

In some cases, this definition appears to have been stretched. Isotek Microwave, an electronics company, went into administration owing the Future Fund £250,000. The administration process revealed that all £250,000 of the matching funding came from an investor identified as Prof JD Rhodes.

Rhodes is the founder of Isotek, and his family owned 52 per cent of the company where he remained a director. He was listed as a person with significant control until last year. Rhodes said: “I didn’t know how they would rule on it.” The British Business Bank said there were no breaches of the rules in this case.

There is also concern that the scheme may have attracted companies that could not go elsewhere. Roli, a music hardware company, made a loss of £33m in 2019. Filings report it had tried to convince “hundreds” of investors to give it significant backing before the pandemic — when it accessed the Future Fund for £2m. The taxpayer lost that loan plus £2.5m of back taxes in a restructuring. The company did not respond to a request for comment.

Some companies also raised concerns about the British Business Bank’s oversight. It has 10 employees supervising the portfolio, though that number is being expanded.

Fund beneficiaries

The Yaar Bar is a “Nordic yoghurt bar”. The Treasury is backing “the thick & creamy taste of yoghurt with the consistency and texture of cheesecake”.

Jazzed offers a text, video and sound experience that it hopes will be an immersive offer for fans of the genre.

The podcast network Auddy has published podcasts on true crime, sports and the medium of podcasting itself.

Kyra is a “Generation Z media company”, which claims to represent some of “the most influential creators online” and reach 133m young people each month.

Borrow A Boat is a yacht and boat rental or charter company. Like Airbnb, it allows customers to rent out their own craft. The boating company is planning to float in 2022.

ClearScore is owned by a Jersey-based company. The credit rating business was allowed in as a UK-active company that had incorporated abroad just to take advantage of a foreign accelerator scheme.

Letter in response to this article:

Every successful fund expects some early failures / From Paul Forster, Angel Investor, Former Chief Executive and Co-Founder, Indeed Cambridge, Cambridgeshire, UK