Armed with £375m and a punchy title, the government’s new investor-led funding initiative is open for applications with a clear mandate to make equity investments in growth-stage R&D intensive UK companies operating in breakthrough technology sectors.
At a Glance:
- Future Fund: Breakthrough is targeted at R&D intensive companies looking to raise a minimum of £30m.
- The investee company must be UK based with significant operations in the UK.
- The application for funding must be led by a qualifying lead investor, which will likely be an established venture capital investor.
In Detail:
The Future Fund: Breakthrough (or “FF:B”) is operated by British Patient Capital, a commercial subsidiary of the British Business Bank. It will be a highly targeted programme targeting innovative, R&D intensive UK companies operating in breakthrough technology sectors, such as quantum computing, cleantech, and life sciences, that have longer lead times to product commercialisation. So, how do you apply?
The first point to note is that applications can only be made by a qualifying lead investor. This means that in order to obtain the support of FF:B, funding applications cannot be made by companies, and will require a lead investor (UK based or otherwise) to make the application who meets one of three set criteria:
- The investor can be any fund managed or advised by an FCA (or equivalent) authorised firm with private sector investment making up greater than 50% of the total fund size and who is currently managing an active fund greater than £100m. The fund must have raised capital from at least three independent LPs (or equivalent) and the fund must have a written investment strategy that aligns with the FF:B investment strategy.
- The investor can be any fund or investment vehicle with an appropriate investment strategy, managed or advised by a fund manager which has applied to and obtained an investment from a member of the British Business Bank group (e.g. those supported by British Patient Capital and by the Enterprise Capital Funds programme).
- The investor can be another equivalent investment vehicle i.e. those with greater than £100m of investment capital, a broad range of independent investors, and an appropriate investment strategy, where these have been approved by the FF:B.
The role of the lead investor is obviously an important one as they will ultimately make the application, be the first point of contact for British Patient Capital and orchestrate the introduction between British Patient Capital and the investee company.
The application process involves an initial application made by the lead investor, followed by an investment paper setting out the rationale for making the investment and including information about valuation, business plan and any follow-on funding expectations.
Provided that the lead investor is deemed eligible and passes reputation and customer due diligence checks, the next hurdle will be an assessment of the eligibility of the investee company.
The eligibility test for the investee company has four components:
- The investee company must be incorporated in the UK and have at least half of its overall employment base and half of its research staff based in the UK.
- The investee company must be carrying out R&D in the UK which meets all the following thresholds
- R&D spending will have been at least 10% of the total operational cost base on average over the last three years, or at least 15% in one of the past three years.
- The purpose of the R&D is to develop defensible intellectual property in the UK which is expected to be the investee company’s main revenue source. ‘Defensible intellectual property’ in this context will most likely mean (i) an invention which is patentable by the investee company or (ii) a product / process which is confidential and protected as a trade secret or is otherwise protected by IP rights belonging to the investee company.
- The investee company intends that 20% or more of its employees will be carrying out research for at least three years from the date of investment, in roles that require a relevant master’s degree or higher.
- The investee company must have raised at least £5m of equity investment from third party investors in previous funding rounds in the five years prior to the FF:B investment.
- The investee company must be raising a minimum investment round size of £30m. On this point, it is worth noting that the maximum share FF:B will take is 30% of the funding round, meaning the minimum amount of private sector funding in a potentially eligible round needs to be £21m.
Once the eligibility of the investee company has been established, next comes the due diligence phase whereby the investee company and its technology are analysed with reliance on financial and legal due diligence reports shared by the lead investor. The final decision on FF:B investment will rest with British Patient Capital’s investment committee.
Further information on the Future Fund: Breakthrough can be found on British Patient Capital’s website. If you any questions on the material covered in this update, or would like practical guidance on how to prepare your company for the next stage of investment, please do get in touch with a member of our Tech Funding team.
If you haven’t seen our North West Tech Funding report, this is available for download on our dedicated page on the Brabners website. We have also prepared a video around the report’s findings which is available on our video hub.
