March 31, 2020

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ICYMI: Start-ups struggling during coronavirus worry they won't qualify for new small business loans (The Washington Post)

The Technology 202: Start-ups struggling during coronavirus worry they won't qualify for new small business loans

The Washington Post

Cat Zakrzewski

March 31, 2020

Tech start-ups struggling during the coronavirus pandemic say there's broad confusion over whether they qualify for the small business loans made available in the massive stimulus package.

Even some companies that could assist with the response to the pandemic say the uncertainty is making it harder for them to keep operating.

Justin Bellante, chief executive of health care start-up BioIQ, says his company is looking into delivering in-home coronavirus tests and how its network could assist medical labs. But he is not sure whether his small company can get a slice of the $350 billion pie, due to Small Business Administration rules that predate the stimulus package that disqualify some companies that take checks from venture capital firms from taking federal loans.

“It’s almost schizophrenic,” Bellante told me in an interview. “We have an opportunity and obligation to be part of the solution. But on the other side, we have to play defense because we have to navigate through these rules.”

A small business loan, he says, could help the company avoid cost-cutting measures such as cutting contractors or even last-resort layoffs as its corporate customers tighten their belts.

The outcry from entrepreneurs has triggered a mad dash in Washington to clarify or waive the rules so that start-ups can take full advantage of the programs.

House Speaker Nancy Pelosi (D-Calif.) and Rep. Ro Khanna (D-Calif.) wrote a letter on Tuesday morning calling on the Trump administration to quickly issue guidance to ensure start-ups can access this form of credit.

"For these small businesses, as for many others across America, access to forgivable [Paycheck Protection Program] loans will be critical to preserving jobs during the coronavirus pandemic and to securing America's leadership in science, technology and innovation," they wrote in the letter to Treasury Secretary Steven Mnuchin and SBA administrator Jovita Carranza.

Though many venture-backed start-ups have less than 500 employees and thus appear to be eligible for the small business relief programs laid out in the aid package, they could get caught up in the SBA's complicated “affiliation rules.” The rules, as written, could be interpreted to mean start-ups backed by the same venture capital firm would be added together to determine a total number of “employees,” even though they are separate companies. Since VCs often invest across companies of varying sizes, that aggregate total would almost always exceed 500.

Two lobbying groups — the National Venture Capital Association and TechNet — also sent letters to the Trump administration calling for a fix, which were co-signed by venture capital groups from more than 30 states.

Venture capitalists and start-ups say any delay in getting companies federal assistance will come with major costs.

“Everyday that we don’t know, layoffs are happening,” said Darcy Howe, managing director of KC Rise Fund, which invests in start-ups in Kansas and Western Missouri. “I am empathetic that they’re building the plane as they fly it,” Howe said. “Things are being done quickly in terms of government timelines. But it’s not very quickly in start-up timelines.”

Jan Garfinkle, managing director of health care investing firm Arboretum Ventures, said revenue is already down at many companies she’s invested in. Healthcare companies can’t sell their products or services to hospitals that are totally overwhelmed by covid-19, and companies making medical devices have had to halt clinical trials.

“We are having to lay off between 20 percent – and in some cases 50 or 60 percent – of our workforces in each of our companies, because we don’t have enough capital to keep them employed,” said Garfinkle, who also serves as chair of the NVCA, which represents venture capitalists in Washington.

The companies each range in size from 10 employees to 150 employees, Garfinkle said, but because her firm has invested in more than 30 companies, the aggregate number of employees across the firm’s investments is well over 500, which could disqualify them all from receiving some federal aid.

At least four of the companies, including BioIQ, are working on technologies to respond to the coronavirus, Garfinkle said. And every single company she’s invested in would seek a small business loan if the affiliation rules were changed — but they can’t wait for Washington to act.

“We made decisions to lay people off last week,” she said. “We don’t have any time.”

Other lawmakers on Capitol Hill — especially those with ties to California’s Silicon Valley region — are calling for a quick fix to the problem.

“The archaic rules that discriminate against start-ups were drafted by bureaucrats who may never have met an entrepreneur and probably do not understand the meaning of the valley of death," Khanna told me in an email yesterday. “Literally hundreds of thousands of jobs will be lost if start ups with any VC backing are not able to access SBA loans. Ironically, this will harm innovative companies who are helping find cures and vaccines for covid-19, working to procure essential medical equipment, to support telehealth, and to use AI to better understand covid-19 data and help us plan a response.”

Rep. Anna G. Eshoo, another Democrat who represents Silicon Valley, sent a letter yesterday to the SBA yesterday calling on the agency to roll back the rules. More than a dozen lawmakers from both parties co-signed the letter, which said that Congress intended to help start-up workers with the small business relief provisions of the Coronavirus Aid, Relief, and Economic Security (CARES) Act.

Eshoo told me in an interview that lawmakers may not have known or understood the existing rules when the legislation was drafted. She said it would be most expedient for the SBA to issue a waiver, but that she would consider action in Congress if the agency did not. She said it could be a matter of life or death for many small companies.

“If they don’t have any help, they’re going to shut the lights off and it will be the end of their undertaking,” she said. “Innovation that comes from that sector, as small as they are in size, they’re very important.”

Efforts to relax the rules could run into a major optics problem on Capitol Hill— but Eshoo stressed this isn’t a bailout for Silicon Valley billionaires.

While many venture capital firms have raised record amounts of funding in recent years, Andreessen Horowitz managing partner Scott Kupor says no firm’s reserves were prepared for a global pandemic and the resulting economic consequences. Venture capital firms can deploy some capital into start-ups, he said, but many of his companies are still interested in participating in the small business loan program.

“The loans can be a potential complement to direct VC investment,” he told me in an email.

The SBA did not immediately respond to requests for comment on the calls to relax or at least clarify the rules. But Carol Wilkerson, a SBA spokeswoman, said the agency is presently trying to schedule a joint background briefing call with the Treasury Department.

Meanwhile, some entrepreneurs say they can't wait more than a week for clarity from the government before making tough calls. Mike Kujak, president and chief executive of the Minnesota medical device start-up, says the uncertainty means he has to "overplan in either having to furlough, let people go or take salary reductions.”

Without a loan, Kujak tells me that he may have to cut 15 percent of his staff. Employees at the 24-person company who remain will have to take salary reductions, with vice presidents and executives taking more significant cut.

“We'll have to do it by the April 15 payroll,” he said.

On Sunday, March 29, TechNet and the National Venture Capital Association led 126 local, state, regional, and national groups representing 39 states across the country in urging the Trump Administration to ensure startups and their workers are eligible for the emergency relief loan program included in the Coronavirus Aid, Relief, and Economic Security (CARES) Act. Since the letter was initially sent on Sunday, the number of signatories has increased to 132.

About TechNet
TechNet is the national, bipartisan network of technology CEOs and senior executives that promotes the growth of the innovation economy by advocating a targeted policy agenda at the federal and 50-state level. TechNet’s diverse membership includes dynamic American businesses ranging from startups to the most iconic companies on the planet and represents over three million employees and countless customers in the fields of information technology, e-commerce, the sharing and gig economies, advanced energy, cybersecurity, venture capital, and finance. TechNet has offices in Albany, Austin, Boston, Chicago, Olympia, Sacramento, San Francisco, Silicon Valley, Tallahassee, and Washington, D.C.

About National Venture Capital Association

The National Venture Capital Association (NVCA) empowers the next generation of American companies that will fuel the economy of tomorrow. As the voice of the US venture capital and startup community, NVCA advocates for public policy that supports the American entrepreneurial ecosystem. Serving the venture community as the preeminent trade association, NVCA arms the venture community for success, serving as the leading resource for venture capital data, practical education, peer-led initiatives, and networking. For more information about NVCA, please visit www.nvca.org.

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