Representatives for venture-backed startups are pushing for the companies to get access to $349 billion in small business loans authorized by Congress as part of its economic relief plan for Covid-19. So far it appears that many such businesses won’t qualify.
On Tuesday, the Treasury Department and the Small Business Administration provided new details about which businesses could get the funding, aimed at companies with 500 or fewer employees. While many young tech companies are small enough, provisions on disclosures and investor ownership may prevent traditionally structured startups from being eligible for the loans.
Not adjusting these rules could lead to more economic pain, and not just for startups, according to Justin Field, senior vice president of government affairs for the National Venture Capital Association, or NVCA. “I think you’re looking at several hundreds of thousands jobs lost across the country and many more in businesses who rely on these workers as customers,” he said. “I think you’re going to have a huge sweep of layoffs in several weeks if they can’t get this figured out.”
The proposed rules would put heavy requirements on minority shareholders with more than a 20% stake in the business. They’d require venture investors to risk being held criminally liable if a startup misuses money it receives as part of the program, Field said. There are also other complicated disclosure requirements that could make qualifying for the money difficult for most startups, according to Field. The Treasury Department and the Small Business Administration did not respond to requests for comment.
Startups have been shedding thousands of employees as state-level stay-at-home orders shut down whole sectors of the economy. Struggling companies could benefit from the loans, which turn into grants if they’re used to pay employees—often startups’ biggest expense.
Industry groups for tech and venture capital have been pressuring officials to state explicitly that startups would be eligible for the loans under the existing rules, or to issue new guidelines. Given the urgency of the need, advocates for startups would would like to see the administration waive rules about minority investors. Private equity firms are similarly lobbying the government to allow their companies to qualify for the funds. So far those efforts have been unsuccessful.
Startup advocates argue that venture capital firms’ investments are often too complicated to meet the disclosure requirements and that minority shareholders don’t typically have sufficient control over the companies that they invest in. “Our guys want the money to go to payroll, the government certainly wants the money to go to payroll here,” said Field of the NVCA.
Some people in the tech industry have framed the changes they’d like to see as technical fixes. On Monday, venture capitalist Fred Wilson wrote on his blog, “It is my hope that this ‘bug’ in the law will get fixed over the next week or so.”
But there are plenty of reasons that startups would be treated differently than other small businesses. Unlike restaurants or hair salons, there is an ecosystem of deep-pocketed investors dedicated to funding them. Also unlike most small companies, venture-backed startups are built on the idea of striking it big or flaming out trying. There is no shortage of businesses in need, and officials may prefer to focus elsewhere.
Groups representing startups are vociferously arguing to that they are subject to the same virus-related headwinds as non-tech companies, and provide important benefits to the economy. “Similarly to other small businesses in New York, many New York founded startups are experiencing financial hardship,” wrote Julie Samuels, executive director of Tech:NYC, an industry group, in a letter to the Small Business Administration on March 27. She said Wednesday that she had not received a reply.
—Eric Newcomer (Bloomberg)