Politics

Pelosi, Khanna plead for stimulus to include VC-backed startups

In a letter, the lawmakers ask the Trump administration to include the "engine of the innovation economy" in stimulus package loans.

House Majority Leader Nancy Pelosi

House Majority Leader Nancy Pelosi convened a vote on the stimulus Friday.

Photo: Sarah Silbiger/Bloomberg via Getty Images

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."

Issie Lapowsky

Issie Lapowsky ( @issielapowsky) is Protocol's chief correspondent, covering the intersection of technology, politics, and national affairs. She also oversees Protocol's fellowship program. Previously, she was a senior writer at Wired, where she covered the 2016 election and the Facebook beat in its aftermath. Prior to that, Issie worked as a staff writer for Inc. magazine, writing about small business and entrepreneurship. She has also worked as an on-air contributor for CBS News and taught a graduate-level course at New York University's Center for Publishing on how tech giants have affected publishing.

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Protocol | China

Everything you need to know about the Yuanxin Technology IPO

Image: Yuanxin

Yuanxin Technology doesn't hide its ambition. In the first line of its prospectus, the company says its mission is to be the "first choice for patients' healthcare and medication needs in China." But the road to winning the crowded China health tech race is a long one for this Tencent- and Sequoia-backed startup, even with a recent valuation of $4 billion, according to Chinese publication Lieyunwang. Here's everything you need to know about Yuanxin Technology's forthcoming IPO on the Hong Kong Stock Exchange.

What does Yuanxin do?

There are many ways startups can crack open the health care market in China, and Yuanxin has focused on one: prescription drugs. According to its prospectus, sales of prescription drugs outside hospitals account for only 23% of the total healthcare market in China, whereas that number is 70.2% in the United States.

Yuanxin started with physical stores. Since 2015, it has opened 217 pharmacies immediately outside Chinese hospitals. "A pharmacy has to be on the main road where a patient exits the hospital. It needs to be highly accessible," Yuanxin founder He Tao told Chinese media in August. Then, patients are encouraged to refill their prescriptions on Yuanxin's online platforms and to follow up with telehealth services instead of returning to a hospital.

From there, Yuanxin has built a large product portfolio that offers online doctor visits, pharmacies and private insurance plans. It also works with enterprise clients, designing office automation and prescription management systems for hospitals and selling digital ads for big pharma.

Yuanxin's Financials

Yuanxin's annual revenues have been steadily growing from $127 million in 2018 to $365 million in 2019 and $561 million in 2020. In each of those three years, over 97% of revenue came from "out-of-hospital comprehensive patient services," which include the company's physical pharmacies and telehealth services. More specifically, approximately 83% of its retail sales derived from prescription drugs.

But the company hasn't made a profit. Yuanxin's annual losses grew from $17 million in 2018 to $26 million in 2019 and $48 million in 2020. The losses are moderate considering the ever-growing revenues, but cast doubt on whether the company can become profitable any time soon. Apart from the cost of drug supplies, the biggest spend is marketing and sales.

What's next for Yuanxin

There are still abundant opportunities in the prescription drug market. In 2020, China's National Medical Products Administration started to explore lifting the ban on selling prescription drugs online. Although it's unclear when the change will take place, it looks like more purely-online platforms will be able to write prescriptions in the future. With its established market presence, Yuanxin is likely one of the players that can benefit greatly from such a policy change.

The enterprise and health insurance businesses of Yuanxin are still fairly small (accounting for less than 3% of annual revenue), but this is where the company sees an opportunity for future growth. Yuanxin is particularly hoping to power its growth with data and artificial intelligence. It boasts a database of 14 million prescriptions accumulated over years, and the company says the data can be used in many ways: designing private insurance plans, training doctors and offering chronic disease management services. The company says it currently employs 509 people on its R&D team, including 437 software engineers and 22 data engineers and scientists.

What Could Go Wrong?

The COVID-19 pandemic has helped sell the story of digital health care, but Yuanxin isn't the only company benefiting from this opportunity. 2020 has seen a slew of Chinese health tech companies rise. They either completed their IPO process before Yuanxin (like JD, Alibaba and Ping An's healthcare subsidiaries) or are close to it (WeDoctor and DXY). In this crowded sector, Yuanxin faces competition from both companies with Big Tech parent companies behind them and startups that have their own specialized advantages.

Like each of its competitors, Yuanxin needs to be careful with how it processes patient data — some of the most sensitive personal data online. Recent Chinese legislation around personal data has made it clear that it will be increasingly difficult to monetize user data. In the prospectus, Yuanxin elaborately explained how it anonymizes data and prevents data from being leaked or hacked, but it also admitted that it cannot foresee what future policies will be introduced.

Who Gets Rich

  • Yuanxin's founder and CEO He Tao and SVP He Weizhuang own 29.82% of the company's shares through a jointly controlled company. (It's unclear whether He Tao and He Weizhuang are related.)
  • Tencent owns 19.55% of the shares.
  • Sequoia owns 16.21% of the shares.
  • Other major investors include Qiming, Starquest Capital and Kunling, which respectively own 7.12%, 6.51% and 5.32% of the shares.

What People Are Saying

  • "The demands of patients, hospitals, insurance companies, pharmacies and pharmaceutical companies are all different. How to meet each individual demand and find a core profit model is the key to Yuanxin Technology's future growth." — Xu Yuchen, insurance industry analyst and member of China Association of Actuaries, in Chinese publication Lanjinger.
  • "The window of opportunity caused by the pandemic, as well as the high valuations of those companies that have gone public, brings hope to other medical services companies…[But] the window of opportunity is closing and the potential of Internet healthcare is yet to be explored with new ideas. Therefore, traditional, asset-heavy healthcare companies need to take this opportunity and go public as soon as possible." —Wang Hang, founder and CEO of online healthcare platform Haodf, in state media China.com.

Zeyi Yang
Zeyi Yang is a reporter with Protocol | China. Previously, he worked as a reporting fellow for the digital magazine Rest of World, covering the intersection of technology and culture in China and neighboring countries. He has also contributed to the South China Morning Post, Nikkei Asia, Columbia Journalism Review, among other publications. In his spare time, Zeyi co-founded a Mandarin podcast that tells LGBTQ stories in China. He has been playing Pokemon for 14 years and has a weird favorite pick.
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How to make remote work work

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Tech giants want to hire Afghan refugees. The system’s in the way.

Amazon, Facebook and Uber have all committed to hiring and training Afghan evacuees. But executing on that promise is another story.

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