Tech startups in US can apply for relief funds, but should they?

Most venture-backed companies are just trying to make it to their next financing round. If runway is running short, it might be tempting to take a government loan along the way to your Series B.
| Updated on Apr 10 2020, 06:28 PM IST
Should tech startups in US accept the relief funds?
Should tech startups in US accept the relief funds? (Getty Images/iStockphoto)

Should startups take money from the government? Silicon Valley is puzzling over the answer right now.

Some venture capitalists seem more than happy to say, yes, please take that sweet government money. "If the US government didn't want to support VC-backed businesses, they easily could have excluded them and they knowingly did not," writes venture capitalist Mark Suster.

The pool of cash we're talking about is the Small Business Administration's Paycheck Protection Program, part of Congress's coronavirus bailout effort. Small businesses of all stripes are now rushing to apply for the program's $349 billion in available loan money (and possibly another $250 billion if an expansion goes through). The so-called PPP loans turn into grants if companies keep their employees in their jobs.

At first it seemed like venture-backed startups, along with companies funded by private equity firms, didn't have much of a shot at getting government funding. But after a few tweaks in the requirements, the situation is now more ambiguous for venture-backed companies. The government is no longer requiring that minority investors risk criminal consequences if the startup misappropriates the funds—a breakthrough, even though startups will still have to make complicated disclosures about their investors. (Private equity-backed companies at this moment seem mostly out of luck.) 

ALSO READ: NASSCOM urges govt to support startups, SMEs amid lockdown

But just because tech companies can, doesn't mean they should. One legal and ethical wrinkle is baked into the language of the bill: As part of the application process, companies are asked to certify that 'current economic uncertainty makes this loan request necessary to support the ongoing operations of the applicant.' 

What's necessary? There's so much uncertainty in the world of startups. Most venture-backed companies are just trying to make it to their next financing round. If runway is running short, it might be tempting to take a government loan along the way to your Series B.

Indeed, some people think their companies should qualify like everyone else. Startup founder George Arison tweeted that the government shut the economy down and it "feels like eligible businesses should be treated equally."

If the goal of the loan program is to keep people employed, there is a logic to funding startups. Employees are usually one of tech companies' biggest costs, so cash-strapped startups lay off their employees to try to stay afloat like everyone else. Those layoffs are happening.

ALSO READ: Pune startups 'zoom' in to not go viral, but get ready for the pivot

And in general, these scrappy upstarts are more sympathetic than, say, Boeing Co., whose planes were crashing before the coronavirus slammed its stock. (Venture capitalist Chamath Palihapitiya made the case against bailing out shareholders in big corporations.)

But most startups, which raised near-record levels of funding last year, don't need the money in the way that local restaurants or repair shops need the money. And many laid off tech employees will find themselves better off than dishwashers or mechanics who lose their jobs. Indeed, some founders have concluded that the funds wouldn't be necessary for their companies' near-term survival, and that they therefore shouldn't apply. 

The problem, of course, is that the loan program is finite. Those restaurants and barbershops, without any access to VCs or other forms of capital, could lose out because a startup put in an application first. 

If the system works well, a business like Nopa—the San Francisco restaurant favored by tech types for its perfect $20 grilled cheeseburger—would get the bailout over the startup offering to do its delivery. Startups fail fast, pivot and come back, but beet hummus is irreplaceable. 

Other developments

Businessweek's latest cover story is a deep dive on Zoom. CEO Eric Yuan talks about sleepless nights worrying about Zoombombing, keeping the company's servers from getting overwhelmed with traffic, and the never-ending conference call grind. "It's too many Zoom meetings," he says, via Zoom. "I hate that." Read it here. 

And here's what you need to know in global technology news

Amazon is building a lab to test employees for Covid-19, part of an effort to protect its warehouse workers and delivery drivers from the disease. 

There are now more than 100 million people using Google Classroom, a free service teachers can use to send out assignments and communicate with students, double the number at the beginning of March. 

The conspiracy theory that 5G is causing coronavirus (that's won a few celebrity converts) may be fueled in part by a state disinformation campaign, researchers say. 

The economy is in crisis, but there's still money to be spent. Index Ventures has raised $2 billion for new funds. 

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First Published Date: 10 Apr, 06:28 PM IST
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