There has been a lot of discussion of whether or not startups qualify for forgivable loans under the Paycheck Protection Program administered by the SBA (part of the CARES Act). I don’t want to rehash the arcana of affiliation rules here but make a totally different point instead: there is a money grab going on right now by some venture backed startups that this program absolutely should exclude.
Let me start by writing about the kind of business that I believe this is spot on for: the local construction company that has to stop all projects or the barber shop that has zero business right now. These businesses tend to be low margin and operate on very little cash (2-4 week maybe). Their revenues have gone to zero. They don’t have equity investors and are largely shut out from the credit markets. Their only alternative is bankruptcy.
By contrast many venture backed companies have many months or maybe even more than a year of burn sitting in their bank accounts. Their investors are often deep pocketed funds who should be well reserved for follow on investments. They can get sophisticated financial advice and can access the venture debt market (admittedly not right now but probably again in a couple of months). Many of these businesses operate in the digital realm and have seen limited impact on revenues – some have even seen their revenues explode.
Just to be clear. I think that some venture backed companies have a legitimate claim that they should be part of PPP. For example, we have some companies in our portfolio for which revenues have collapsed. But I fear that many more will apply and with a program that’s first-come first-served that will squeeze out small businesses for which this is the only lifeline.
I have been an entrepreneur myself and I understand the worry that maybe things look OK now, but what if my company falls off a cliff and I haven’t taken this money. All of these are legitimate considerations, but so is the realization that millions of small businesses already have fallen off a cliff and they need those funds. In this context it might be useful to keep in mind that there will be a public record of every company that avails itself of PPP.
So: I urge everyone who is running a venture backed company with a lot of money in the bank and limited COVID19 impact to think twice about applying for PPP. In the end this is obviously a difficult decision but we are in a crisis where true leadership means thinking beyond one’s own concerns.
