How does an entrepreneur take out a government loan to avoid layoffs when his company’s snack bar offers free kombucha on tap?
The answer: Very carefully. Or, better yet, not at all.
Joking aside on the quirky technological advantages, the issue is at the forefront for entrepreneurs in Silicon Valley in this phase of the coronavirus crisis.
As part of the recently passed coronavirus relief bill, the federal Small Business Administration is offering loans under the $ 350 billion paycheck protection program (through approved banks). The loans are intended to provide temporary help for small businesses to carry out their payroll.
Hundreds of thousands of family businesses have rushed to get loans to avoid layoffs, despite a myriad of reports of bottlenecks in the process.
Meanwhile, many struggling small businesses funded by venture capitalists are trying to decide whether asking for this government money is a good idea or whether they should look only to their investors for relief.
After all, these businesses often have access to a lot of capital, unlike most small businesses, such as restaurants or retail stores, which operate with only a few weeks of cushion.
“It’s a choice between the devil we know with possibly onerous investment terms, and the unhealthy look of taking money from companies that have no other choice,” said a start-up founder, who did not want to be named because he is in the process of thinking about layoffs. “We’re supposed to take risk as entrepreneurs, but it’s a lot harder to follow that rhetoric right now.”
It is still not clear whether venture-funded start-ups are actually entitled to the money, which has come to be known as PPP loans. The language of the Small Business Administration is not clear: Loans are available for businesses with fewer than 500 employees, but some “affiliate” organizations cannot obtain the loans. This could mean start-ups if they are bundled with the VCs that fund them. If all the companies in an investment portfolio are considered one, a large number of venture-funded start-ups would not be eligible for loans unless changes are made to the governing documents. It is not easy, but neither is it impossible.
As many VCs have done in recent weeks, Upfront Ventures’ Mark Suster posted this to help explain:
“There is nothing in the rules that says companies funded by VC are not eligible. There are certainly people who are saying publicly that VC funded companies should not take government money. There are businessmen who think this is ethically bad for a VC backed company with a highly educated founder, and there will likely also be populist cries that the money should have been earmarked for Main workers. Street and not to tech workers.
Bingo. When I texted him after his post was published, Mr Suster said he believes every business should do what’s best for its survival. “Many tech start-ups are affected by a sharp change in demand and are considering laying off employees,” he said. “If the government’s goal is to protect jobs, then the P3 loan program is a smart way to keep more technicians working. We just have to make sure that the startups don’t take advantage of it – it’s not free money.
No, it’s taxpayers’ money, which is why the idea annoys many people who don’t want to foot the bill with venture capitalists who can then keep their own powder dry for the inevitable turnaround. It’s clear to many people I’ve spoken with that a lot of venture capitalists don’t want to attract the wrath of those who think the tech-rich should permanently distance themselves socially at the bottom of the line.
That said, venture capitalists also don’t want to hand out good money after bad, if there is to be a showdown. Many I spoke to this week argue that they have a duty to their investors, which often include public pension funds, so that they cannot put capital at risk for companies that are now in dire straits. .
One way to hedge is to use what is called a “bridging loan,” which Airbnb has just announced, whose roommate business has been hit hard by the coronavirus pandemic. Airbnb’s deal – with giant private equity firm Silver Lake, which recently broke in to help Twitter’s Jack Dorsey out of a militant traffic jam, and Sixth Street Partners – is a combo of debt and $ 1 billion shares (and some reports say new investors got an even better deal). Airbnb, which was planning an IPO this year which I suspect will be delayed, also recently lowered its valuation from $ 33 billion to $ 26 billion.
And if a star startup like Airbnb is to fold, small businesses have even less leverage, so a relatively unconditional government loan might sound good enough right now.
This is clear from a recent Times article who quoted a Silicon Valley startup advisor who called it “the big deal” – a perfectly apt term. The article noted that there had been layoffs or holidays of 6,000 workers in 50 start-ups. The article also indicates that a large venture capital firm, Sequoia Capital, has called Covid-19 “the black swan of 2020”.
How to recover from an apocalyptic situation like this presents a difficult choice. As one tech investor pointed out to me: “If you’re a founder and it helps you keep jobs, and the alternative is that a VC is trying to upgrade your business because they overpaid in the last round. , you might not want the VC money properly. now.”
What is also clear is that expectations have changed, and the idea that all of these small start-ups will be acquired or go public at high valuations is on hold for now. This is the new reality.
So, should tech companies take advantage of the government’s loan program? It depends. “If you are a small start-up in danger of going bankrupt or losing jobs, this seems to be designed for you,” said investor and entrepreneur Jason Calacanis. “If you have Over 18 months of track and hire, this is obviously not the case. “
Another way to put it: Tech Bro, can you spare us from asking for a PPP?
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