Start-Ups Seek Rescue As The Government Rolls Out Stimulus Package For Established Businesses

The current volatile economic environment is dangerous for all business types but the most vulnerable class of them are the startups. These companies, working on perhaps the most innovative ideas, have not seen any revenues while the support from angel investors has also got disrupted as these investors themselves are contemplating deep spending cuts to deal with the pandemic. Should many of these companies fail, it will not only slam the entrepreneur spirit of the country but will also lead to a severe value erosion of the angel investors and other funds that support and promote start-ups. Consequently, in subsequent times the start-up ecosystem of the country might suffer with just few innovations and business ideas left to see the light of the day in the country.

The current stimulus packages announced by the government for the small sized companies does not extensively cover these start-ups as they do not have many employees to be eligible for the stimulus scheme. Taking this into consideration, top investors requested the government to come up with a rescue package for these small companies as well, so that they may also navigate through these difficult times.

Several listed as well as non-listed start-up in the country are doing some high value innovative work. Be it pharmaceuticals, Information technology, fashion, retail, military hardware and several other new and innovative fields, these companies are working on revolutionary ideas and their body of work are extremely important for the future of innovation and development of the country. The London Stock Exchange has a dedicated section called the Alternative Investment Market (AIM) dedicated to these companies. This section of the exchange not only helps these companies have access to a wider public platform for raising funds, but also have relaxed regulatory requirements unlike the ones mandated for the larger and more established companies.

It is to be noted here that the risk factors of a start-up is quite different from that of an established company. An established company has a significant revenue base and employs larger number of people, comparatively. These companies pay more taxes and contribute significantly to the development of the locality they are based in. Therefore, if such a company fails it will lead to a significant loss to the economy on multiple fronts. A start-up on the other hand has very few employees, nil or a little revenue generation and don’t contribute significantly towards the development where they are located. These start-ups are often dependent on their angel investors who promise to support them till they reach sufficient maturity levels so that are able to build the business and enter the revenue-generation phase. When the United Kingdom’s government announced the stimulus packages, their intention was broadly to protect jobs, well established revenue generating companies and country’s taxes. Although, start-ups not exactly fit-in to the list of objectives the government is currently focusing on, they have shown their future value creation capabilities which could be extremely valuable for the development of the nation in long run.

The officials have, however, explained the several challenges in incorporating an appropriate stimulus strategy for these companies. Unlike the case of other smaller companies where cash injection is announced in the form of part payment of salaries of staff and loan guarantee, the same measures could not be proved effective for the start-ups as they have very few number of employees. Direct cash injection will also not be possible as it will reportedly be against the competition laws of the country. Hence, the government is presently exploring unique ways to offer financial aid to these companies. There are several ways this is reportedly being planned; one way that is being strongly considered is to issue convertible loans to these companies so that they may be able to repay these loans at an appropriate time or these loans get converted to equity. However, this idea is not as simple to implement, for the government to extend loans to these companies it is considered imperative for their angel investors to contribute a similar amount, so that the government could function in accordance with the competition laws while ensuring that only well-supported start-ups come forward for financial aid.

Give the current scenario, it is difficult to convince the angel investors even to co-invest. Many of these companies are though covered by committed further funding stages but in the meantime they would require the government’s support to survive till that time. There are other avenues also that the government is looking at to support these companies, for example the scope and scale for research grants and innovation grants to many of these companies may be increased substantially so that they may continue with their work without worrying about the trading conditions in the country. The only problem with this idea is that only a few companies are there in the country to whom such grants can be extended to, most of the other businesses in the country will require government stimulus funding.

The government has indicated that it is willing to purchase equities in large companies in industries which have been particularly battered by the pandemic like the airline industry. However, it has also been indicated that it should not be expected that the government will come to the rescue of entire industry groups. It can very well be expected that the government will follow a standard approach in extending support to the start-up firms. The government would very well cherry pick companies which it thinks holds the maximum promise to succeed and create value for the country. For the rest of the companies, their angel investors could be the last resort.

Start-ups have one additional advantage that sets them apart from other businesses. These companies do not have significant employee costs or other costs that have to be born no matter what the business conditions are. Therefore, it is possible for several of these companies to halt their businesses during the ongoing choppy economic environment and continue when better times prevail.

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