Priya Lakhani was just days away from a crucial moment in the life of her start-up, Century Tech, an education firm which uses artificial intelligence to track a pupil’s progress.
She had a signed term sheet from an investor, which is a big deal in the start-up world, as it typically confirms a substantial investment and lays out the commercial and legal terms of that deal.
But on 21 March, amid growing concern over coronavirus and with just 10 days to go before completion of the funding round, Century Tech’s investor pulled out, leaving Ms Lakhani and her team worried about what would happen next.
Term sheets are not usually legally binding, and pulling funding at such a critical point can leave start-ups in a precarious position.
At the time, the government was yet to announce any help for start-ups specifically, but it soon did with its coronavirus Future Fund, which enables UK-based start-ups to apply for government loans ranging from £125,000 to £5m, subject to at least equal match funding from private investors.
Ms Lakhani managed to get another term sheet from another investor – which would usually have taken months, and applied for the government’s Future Fund.
“We’re very lucky because without an investor it would have been very difficult,” she says.
Century Tech would have still raised the necessary funds without the government’s help but it would have done so on less favourable terms.
There are a number of cases of UK companies having investment commitment disappearing as a result of Covid-19, Ms Lakhani says, including many start-ups who have had to fold as a result.
“Not every company has a lead investor and if the lead investor pulls out they may not have a back-up, and if they have angel investors or family offices or venture capitalists (VCs), not all of them will be willing to give you the cash during the crisis when your revenue has dried up. Cash flow is not just tight, it is non-existent for many start-ups,” she says.
Research from government and private funded growth platform Tech Nation and Dealroom suggests that two-thirds of UK start-ups expect revenues to drop by more than a quarter, almost half have frozen hiring, and two-fifths of companies believe they have less than 12 months of funds.
The risk of investing during a crisis has led many investors to shy away or attempt to reduce the terms.
“We were in term sheet discussions with an investor, who wanted to change the terms really dramatically at the last minute when there was a huge panic [about coronavirus], while other investors could see through the immediate panic – so we decided to work with them,” says Mina Nada, the co-founder of electric bike start-up Bolt Bikes.
Malcolm Ferguson, partner at Octopus Ventures, agrees that when the going gets tough, investors should stand by their start-ups.
“After a lot of debate we took the view that VCs are judged for their behaviour… so we’ve stuck to the same price as we had agreed, and we kept to our word. Entrepreneurs will remember this and they’ll work with those who they can trust,” he says.
Tech start-ups are in a different position to others as the pandemic has put some of their technology at the forefront. Any firms offering e-commerce services, remote healthcare or education services would have attracted extra interest from investors.
Technology firms are an important part of the UK economy, attracting more than £10bn ($12.7bn) of investment in 2019 and employing almost 3 million people, according to Tech Nation, which represents UK technology firms.
James Wise, partner at Balderton Capital, believes that those companies in the software industry are well-equipped to adapt and come out of this situation.
“For example, a microbiome analysis start-up and an offline education start-up completely changed in the last six months. One now does remote education and the other has built the leading Covid-19 app, because they work with software and it’s far more adaptable,” he says.
Tech Nation chief executive Gerard Grech says that UK government schemes have meant only a small minority of UK tech start-ups have had to fold.
Germany and France moved more swiftly than the UK. The former said it would provide €2bn (£1.79bn) to help keep its tech start-ups afloat, while the latter launched a €4bn (£3.58bn) liquidity plan to support its start-ups’ cash flows.
Meanwhile, in the US, there have been a number of programmes at national and state level which have been focused on smaller companies with limited revenue and employee count.
In Silicon Valley, there’s a debate around whether government funding is even required, considering the amount of money that is washing around the area.
“Many Silicon Valley VCs actually pushed back on their portfolios taking any government loans, due to the potential for future backlash,” says Alastair Mitchell, partner at EQT Ventures.
“Morality was another key concern, with some VCs believing that money should go to the small businesses and communities that really needed a cash injection, rather than well-funded VC-backed businesses,” he adds.
There remain fears around a second wave of coronavirus infections and the impact this could have on revenue, as consumers are already less willing to spend and large businesses that subscribe to services from tech start-ups are pausing decision making.
Octopus Ventures’ Malcolm Ferguson believes the worst point from an investor perspective is behind us, but warns that both fear and confidence is heavily predicated on the number of coronavirus cases.
“The UK is in the middle because it has taken longer to get into lockdown and to get out of it, whereas in Germany, the Nordics and Eastern Europe, the markets have come back much quicker and reverted to a much more normal picture. In the US, there has been the opposite impact where cases are going up quite quickly and so there are higher levels of fear and lower levels of confidence,” he says.
For those investors that do take the plunge, it’s worth remembering that many of the biggest tech successes, including Airbnb, Uber, HP and Microsoft, were built in dark economic times.