Future Fund: Breakthrough is successfully increasing later stage capital to deeptech and life science companies
Future Fund: Breakthrough is successfully addressing the equity funding gap affecting highly innovative R&D intensive companies, according to a new assessment published today by the British Business Bank.
The Process Evaluation and Early Impact Assessment, undertaken by Ipsos UK, reveals the Future Fund: Breakthrough (FF:B) programme is addressing the late-stage equity funding gap in R&D intensive companies by increasing round size and crowding in third party capital.
Further findings include that deep tech and life sciences companies are using FF:B to increase employment, greater investment in R&D activities and support commercialisation of products. However, the report also finds that the programme has experienced structural and market issues, including FF:B’s inability to lead deals and the lag of the UK venture capital market behind the US.
Launched in 2021, the £375m Future Fund: Breakthrough programme is targeted at addressing the later stage equity funding gap faced by innovative, R&D intensive UK-based companies with cutting edge technologies. Its main objective is to encourage private investors to co-invest in high-growth, breakthrough technology companies. In the last Autumn Statement, the chancellor announced that FF:B is being extended with at least an additional £50m to invest in high-growth, innovative firms. The programme is delivered by the Bank’s commercial subsidiary, British Patient Capital.
Louis Taylor, CEO, British Business Bank said: “This assessment confirms that Future Fund: Breakthrough is increasing both access to, and availability of, long-term, patient finance playing an important role in enabling the development and growth of the UK’s R&D-intensive companies to scale up and fulfil their commercial potential. The assessment shows that the programme is having a catalytic effect by crowding in third party capital and is well-regarded by market participants.”
FF:B tackles the late-stage equity funding gap
The assessment found that there is a clear rationale and role for FF:B in tackling the later stage funding gap constraining UK R&D intensive companies. Whilst UK VC investment in R&D intensive sectors has increased, with the volume of such investment roughly doubling between the periods 2018-20 and 2021-22, the UK still lags behind the US in terms of funding going to R&D intensive companies showing there is a continued market need for FF:B. The average size of later stage R&D intensive deals also increased by approximately 34% between the periods 2018-20 and 2021-23, but remains lower than deal sizes in the US.
Ability to lead deals and lower round sizes
The programme’s design is broadly appropriate given FF:B’s commercial and policy objectives, with the chosen direct co-investment model leading to lower delivery costs compared to the use of fund structures. However, the assessment reveals that the programme’s impact is limited by its inability to lead deals, as well as the market’s desire for round sizes lower than £30m. The report states that greater economic additionality could potentially be secured if FF:B could lead deals and intervene at earlier investment stages.
Consulted interviewees suggested that a lower round size criterion could allow more innovative companies with significant growth potential to benefit from the programme. As a result, effective immediately, the minimum round size for FF:B has been lowered from £30m to £20m and the fund will be able to provide term sheets to help catalyse investment.
On track to achieve its objectives
According to the assessment, FF:B is broadly on track to achieve its delivery objectives by the financial year 2024/25. As of August 2023, FF:B had invested and committed £111.4m of funding into 16 companies, alongside £724m of third-party capital investment. This represents higher leverage than the scheme’s objective to invest at least two times the £250m initial investment. Evidence suggests that the programme has invested in round sizes significantly larger than the UK deeptech later stage median between 2022 and 2023 (£35m compared with £21.2m for the wider deeptech market).
Impact in deeptech and life sciences sectors
Further to the larger round sizes, the report finds that a good sectoral balance has been achieved across R&D intensive sectors (deeptech and life sciences) which matches closely with the intended market profile, which was ‘predominantly UK based, R&D intensive – often university spin-out – pre- or limited-revenue businesses with long term development programmes’. Most (57%) of the FF:B deeptech portfolio companies sit within one sub-sector, Future of Computing, whilst 44% of life sciences firms are categorised as Platform Therapeutic companies.
A well-regarded investor forming an important part of the funding ecosystem for R&D companies
Evidence suggests that British Patient Capital is widely regarded as a high-quality investor by other market participants. Its involvement is widely seen as having a positive influence on firms and sponsor investors. This perception is especially pertinent in terms of signalling a company’s growth potential. FF:B is making a substantial contribution to the market. FF:B was involved in 9% of all UK R&D intensive sector Series B+ deals in 2022.
Decision making processes
Within the assessment, sponsor investors and firms highlighted delays in communications and decisions, particularly at the Investment Committee (IC) and later due diligence stages and that decision making processes could be quicker. As a result, changes have already been introduced to the investment decision processes during the programme which have help alleviate some of the issues raised.
Future potential
Finally, the assessment found a strong consensus amongst stakeholders that the quantum of money associated with FF:B (£375m) needs to be significantly larger if it is to make a major long term impact on the UK deeptech and life science sectors. Despite FF:B contributing to closing the funding gap, the US still invested significantly more than the UK in its R&D intensive companies in the 2021-22 period, with its VC investment as a share of GDP being 0.45%, compared with 0.3% in the UK.
