The writer is chairman and co-founder of Founders Factory and Firstminute Capital

The devastating impact of the coronavirus crisis on UK tech start-ups came home to me this week in a telephone call with a brilliant female founder, who was herself sick in bed with the disease.

Based outside of London, her company, which provides cash flow management to small businesses, had previously raised more than £4m. But her board is now urging her to cut half her staff because the Covid-19 epidemic has slashed the amount of time she has before she runs out of money.

Another £500,000 would buy her enough time to get a new product into the market and get ready for a much bigger fundraising and hiring more people once the shutdown is over. There are many conversations like this taking place across the country now. Should founders slash their staff; will they cut too deep so they can’t bounce back when the recovery comes; would a modest amount of cash help them save jobs and their company?

Some companies my organisation supports are finding ways to navigate through these choppy times. A tech company that provides instant access to airline and ancillary supply with a single interface is receiving interest from some of the biggest airlines and online travel agents. A business that provides cloud-based and mobile software for social care facilities is making it possible for family members get instant updates on their loved ones’ care even if they’re self-isolating or in quarantine. It is also giving away its software to help in the national effort.

That is the good news. The bad news is these early stage businesses have seen a swift and severe contraction of investor interest. Some have had funding termsheets pulled and investment deals collapse.

These are not companies like Deliveroo, Revolut and Stripe that have already received huge infusions of venture capital money. They are the pipeline of companies that will become big in the future and must rely on angel investors and small seed funds, a group that is highly sensitive to plummeting stock markets.

Chancellor Rishi Sunak has acted fast and at astonishing scale to support UK businesses. Some of his measures will help start-ups including tax holidays and his plan to cover 80 per cent of salaries for furloughed workers up to £2,500 a month.

However his current Covid business loan interruption scheme does not apply to lossmaking businesses. This creates a gap because start-ups are deliberately lossmaking in the short-term as they invest to grow. Despite recent complaints that some big companies lacked a path to profit, this is a defined, strategically sound and successful model that works.

Britain leads Europe on almost every measure, more than £10bn was invested in UK tech last year and the sector employs almost 3m people. Beauhurst estimates that more than 1,300 UK start-ups have raised seed rounds over the past two years and now need to raise more funding.

To keep them alive, the UK should create a Runway Fund to give extra time to these early-stage businesses. It would provide convertible loan notes with discounts to start-ups of up to £500,000 to give them at least nine more months of operations. The loan would then convert into equity at the next round. A British fund of £300m could invest initially in around 600 start-ups.

Done across a broad range of companies, such a fund should provide a profitable return to investors and salvation for early-stage UK tech. This is not a handout, it is an investment that should generate returns once we get back to a new normal.

The quickest route is for the funds to come from the Treasury or the British Business Bank or for commercial UK banks to group together and set it up. It could match private with public money, to ensure that taxpayers are not stuck funding the least promising businesses.

This model already exists in venture capital across the UK and Europe. We floated this idea last week and many UK tech founders are enthusiastic and more than 50 early-stage funds, accelerators and later stage funds are keen to support us. The start-ups funded should create economic value. Capital Enterprise estimates that start-ups that survive to reach the second stage of funding known as Series B end up raising 10 times as much money, supporting many more jobs.

Launching this fund would be a shot in the arm for UK tech founders, long term employment and tax revenue. It would almost certainly be emulated across Europe. Indeed the French have already launched this type of fund. Once again the UK can lead European tech policy and remain the growth engine for European tech.

Without it, we are in very real danger of losing a generation of companies. These are the businesses that we need to help both the old and the new economy bounce back after the crisis. We are in very real danger of stalling one of the few industries where the UK is a real global leader. And yet, with relatively little, it could be saved.



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