House Majority Leader Nancy Pelosi and Rep. Ro Khanna are asking the Trump administration to ensure that venture capital-backed startups aren't excluded from small-business loans under the coronavirus stimulus package.
In a letter sent Tuesday to Treasury Secretary Steve Mnuchin and Small Business Administration head Jovita Carranza, Pelosi and Khanna called attention to a quirk of the stimulus package that could make it impossible for venture-backed startups to be considered small businesses, and therefore, be eligible for loans under the $2 trillion CARES Act. Under the SBA's current definition, small businesses include any business with fewer than 500 employees, but some companies that have venture funding are required to count all of the employees of any other startups that VC has invested in. In a recent interview with Protocol, Khanna called the definition "absurd."
Now, he and Pelosi are urging the administration to "exercise appropriate discretion under the law" and issue guidance including VC-backed startups in the loan program.
"Startups are the engine of the innovation economy, and our districts in California's Bay Area and Silicon Valley are home to thousands of these companies," Pelosi and Khanna, wrote. "Other high-tech hubs around the country with a strong startup ecosystem will also be in need of … financing to preserve jobs and survive."
At issue is the SBA's so-called affiliate rule, which seeks to prevent large companies from getting access to SBA loans. The agency considers companies affiliates if one has control over another. That, many tech and startup advocates have argued, is an overly fuzzy definition that will lead to confusion and possibly unnecessary rejection of small startups that are part of large venture capital portfolios.
Over the weekend, more than 100 tech trade associations and lobbying groups including TechNet and the National Venture Capital Association sent a similar letter to Mnuchin and Carranza, asking for a fix. "Without clear guidance enabling startups and small businesses supported by equity investment to access the loan facility, many of these startups may be rendered ineligible," the letter read. "The confusion alone could lead to waves of preventable layoffs."
Join senior reporter Issie Lapowsky in conversation with Rep. Ro Khanna during Protocol's Virtual Meetup at noon Thursday. Sign up here.
Already, venture-backed startups have laid off and furloughed workers. Congress designed the CARES Act loan program specifically to discourage that. They designed the loans such that they turn into grants if a business doesn't lay off employees or cut wages before June 30. In his interview with Protocol, Khanna said he suspected VC-backed startups wouldn't have a problem getting the money up front, but that they might face questions when it comes to converting the loan into a grant later on.
"I would hope [the SBA] wouldn't interpret things in a way that defies common sense," Khanna said, "but there is that slight risk."