How does an entrepreneur take a loan from the government to avoid layoffs when his company’s snack lounge has free kombucha on tap?
The answer: Very carefully. Or, better yet, not at all.
All joking aside about quirky tech perks, the question is front and center for Silicon Valley entrepreneurs in this phase of the coronavirus crisis.
Under the recently passed coronavirus relief bill, the federal Small Business Administration is offering loans through the $350 billion Paycheck Protection Program (by way of approved banks). The loans are aimed at providing temporary help for small businesses to make payroll.
Hundreds of thousands of mom-and-pop businesses have been rushing to get the loans to prevent layoffs — despite myriad reports about bottlenecks in the process.
Meanwhile, many small and struggling companies funded by venture capitalists are trying to decide if applying for that government money is a good idea, or if they should be turning only to their investors for relief.
After all, these companies often have access to a lot of capital, in contrast to most small businesses, like restaurants or retail stores, which operate with only a few weeks of cushion.
“It’s a choice between the devil we do know with possibly onerous terms for investment, and looking bad for taking money away from businesses that have no other choices,” said one start-up founder, who did not want to be named since he is in the middle of contemplating layoffs. “We are supposed to embrace risk as entrepreneurs, but it’s a lot harder to walk that talk right now.”
It’s still not certain that V.C.-funded start-ups in fact qualify for the money, which have become known as P.P.P. loans. The Small Business Administration’s language is unclear: The loans are available to enterprises with fewer than 500 employees — but some “affiliated” organizations are barred from getting the loans. That might mean start-ups if they are grouped with the V.C.s that fund them. If all businesses in an investment portfolio are considered as one a lot of venture-backed start-ups would not be eligible for loans, unless changes are made to the governing documents. That’s not easy, but it’s also not impossible.
Like many V.C.s have done in recent weeks, Upfront Ventures’ Mark Suster posted this to help explain:
“There is nothing in the rules that state that V.C.-backed businesses are ineligible. There are certainly some people who are publicly saying that V.C.-backed businesses shouldn’t take government money. There are some businesspeople who think this is ethically wrong for a V.C.-backed business with a highly educated founder, and there are also likely to be some populist outcries that the money should have been reserved for Main Street workers and not tech workers.”
Bingo. When I texted with him after his post went up, Mr. Suster said that he thought every company should do what is best for its survival. “There are many tech start-ups that are hit by a sharp change in demand that are planning to lay off employees,” he said. “If the goal of the government is to protect jobs, then the P.P.P. loan program is a smart way to keep more tech people employed. We just need to make sure that start-ups don’t take advantage of it — it’s not ‘free money.’”
No, it is taxpayer money, which is why the idea rankles many people who don’t want to foot the bill for venture capitalists who then can keep their own powder dry for the inevitable turnaround. It is clear to many people I spoke with that many venture capitalists do not want to attract pitchfork anger from those who think the well-to-do of tech should permanently social distance themselves to the very back of the line.
That said, venture capitalists also do not want to hand out good money after bad, if there is to be a culling. Many I talked 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 businesses that are now badly distressed.
One way of hedging is through something called a “bridge loan,” which is just what Airbnb, whose home-sharing business has been hard-hit by the coronavirus pandemic, has just announced. Airbnb’s deal — with the giant private equity firm Silver Lake, which recently swooped in to help Twitter’s Jack Dorsey out of an activist jam, and Sixth Street Partners — is a $1 billion debt and equity combo (and some reports say the new investors got an even better deal). Airbnb, which was planning on an I.P.O. this year that I would guess will be delayed, also recently lowered its valuation from $33 billion to $26 billion.
And if a star start-up like Airbnb has to bend, smaller companies have even less leverage, so a relatively strings-free government loan might look pretty good right about now.
That is clear from a recent Times article that quoted a Silicon Valley start-up adviser who called this “the great unwinding” — a perfectly apt term. The article noted that there were layoffs or furloughs of 6,000 workers at 50 start-ups. The piece also said that a major V.C. firm, Sequoia Capital, called Covid-19 “the black swan of 2020.”
How to mount a recovery from a doomsday situation like this presents a tough choice. As one tech investor noted to me, “If you’re a founder and this helps you keep jobs, and the alternative is a V.C. trying to re-price your company since he overpaid in the last round, you may not want V.C. money right now.”
What’s also clear is that expectations have shifted, and the idea that all these small start-ups will be acquired or go public at lofty valuations is on pause for now. This is the new reality.
So should tech companies take advantage of the government loan program? It depends. “If you are a small start-up in danger of going out of business, or cutting jobs, it seems to be designed for you,” said the investor and entrepreneur Jason Calacanis. “If you have 18-plus months of runway and are hiring, it’s obviously not.”
Another way of putting it: Tech Bro, can you spare us applying for a P.P.P.?
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