Politics

Startups are racing against time for stimulus funds — and Washington’s efforts are falling short

Some VC-backed startups are considering modifying deal terms to get around vague stimulus guidance.

One hundred dollar bills

Many startups aren't clear on whether they qualify for stimulus funds earmarked for small businesses.

Photo: Liu Jie/Xinhua via Getty

Despite a mad dash by dozens of members of Congress and a lobbying frenzy by Silicon Valley, many venture-backed startups still don't have a cut-and-dry answer on whether they qualify for the billions of dollars earmarked for small businesses in the coronavirus stimulus package. So startups are making do with what little information they have.

Late on Monday, the Small Business Administration and Department of the Treasury released new guidance that clarified some of the rules that have tripped up startups and prevented some from applying. Now, investors Protocol spoke with said they're receiving requests from a large number of startups to change their voting and control terms to make them eligible for the grants.

"I think most startups are comfortable moving forward with applications based on last night updated SBA/Treasury guidance, although many startups are still evaluating the true level of their need [and] associated ethics of applying," said Trevor Loy, an investor at FlyWheel VC.

Even so, many banks and lenders are still reluctant to accept applications from VC-backed startups, citing the scattershot guidelines for the $350 billion loans program.

"The guidance from last night still seems to be insufficient, and lenders are still hesitant to make these loans," one Democratic congressional aide told Protocol.

Over 30 members of Congress have written letters, sent emails and set up meetings to encourage the administration to include VC-backed startups as it doles out funds from the SBA program, according to a count by Protocol. Speaker Nancy Pelosi and House Minority Leader Kevin McCarthy have gotten personally involved.

Congressional staffers involved in the process said their efforts have picked up in recent days. The small-business loans program, called the Paycheck Protection Program, officially opened up Friday.

Venture capitalists have seen the program as a way the government can help preserve jobs at companies affected by COVID-19 in a way that their own checkbooks cannot. In the last week, venture firms have scrambled to hold conference calls, send out guidance and host webinars to help educate their startups on how to apply.

There is increasing concern that the small-business funds will be depleted by the time there's more clarity about whether VC-backed firms are eligible for the money. Congress is starting to mobilize to potentially infuse more funds into the program through a standalone appropriations bill, but the path forward is unclear so far.

"The overall sentiment has been that the funds will go quickly … and there's going to be a huge shortage of companies that don't get what they need," Brad Luttrell, the co-founder of a hunting app called GoWild, told Protocol. GoWild, a VC-backed company, applied for the federal loan through Chase Bank on Friday, but has not yet received word on the status of the application.

Luttrel said he has received template communications from Chase but nothing substantial, and the clock is ticking.

"My office has been inundated with calls, emails and letters from small startups who cannot access this critically important economic lifeline," Rep. Anna Eshoo, D-Calif., said in a statement to Protocol. "I hope the SBA takes immediate action because this assistance is needed right now."

Lawmakers, hearing from startups and companies in their districts across the country, have made a number of requests, including that SBA waive its rules for VC-backed startups or that the agency put out specific and helpful guidance clarifying its stance. At issue are the SBA's affiliate rules, which generally indicate that startups with investors who can "control" actions — whether through owning the majority of stock or having voting shares that can block transactions — have to count investors and their other affiliates to the employee headcount, potentially pushing them over the small-business limit (typically 500 employees). Given the extraordinary situation, many have argued that the rules shouldn't apply now.

Despite McCarthy's promise that it was "going to be solved" last week and Silicon Valley's Rep. Ro Khanna's work to press the issue, the treasury department hasn't gone so far as to waive the rules entirely or draw a clear bright line that would make startups unquestionably eligible.

In one relevant addition to the guidance, the SBA confirmed that minority investors may still be considered affiliates if they hold certain control rights. But there are still many outstanding questions about the affiliates issue.

"There's obviously a lot of frustration in the startup community," said Scott Brovsky, the director of the Small Business Development Center at UC Riverside, which helps mentor tech startups in Southern California. Brovsky said most startups he has worked with have avoided applying so far because they aren't sure how to navigate the affiliates question.

Ed Zimmerman, a lawyer who specializes in venture capital and startups at Lowenstein Sandler LLP, said his firm has been working overtime to convince banks to accept applications from VC-backed startups. He said he has been in communication over email and over the phone with three separate banks who were reluctant to offer the loans, but have chosen to open up the process, particularly in light of the guidance released this week.

"Guidance is coming out in an unsteady way," Zimmerman said, noting that far more startups are likely eligible for loans than previously understood, but the chaos and confusion has led even potentially eligible firms to "take a step to the back of the line."

To get around it, some startups are now asking venture capitalists to amend their deal terms to relinquish specific control in order to meet the eligibility requirements. In a blog post, Upfront Ventures partner Mark Suster said getting investors to agree to the amended terms may be easier for companies that have a larger number of investors who all own around the same size of the company. But earlier-stage startups that may have one lead investor who does have more control may be less willing to agree to a change, he warned.

"If your company is in dire straits (let's say you're a transportation company or a hospitality company), then you're likely to find an amenable investor," he wrote. "If you're in a company where the investor views your application as more of a 'gray area,' then you may not easily receive consent for changes."

Zimmerman said he has heard from a slew of startups hoping to amend their deal terms at this point. "We are spending plenty of time reading venture deal documents to see if there are offending provisions and to ensure those provisions are irrevocably waived or amended out of those deals," he said.

Many startups are opting to try their luck and apply, instead of waiting for new guidance, due to escalating concerns that the money won't be there within days.

Wells Fargo had already stopped taking applications as of Monday morning, announcing that it reached the $10 billion cap it had set for loans. The administration on Monday said it had approved 130,000 loans worth $38 billion, amounting to about 10% of the program.

There's already been talk of expanding the loans program. Sen. Marco Rubio, R-Fla., who authored the PPP, said in a tweet that his office is working with the treasury department to "make a formal request for additional funds ASAP & with Senate leadership to get fast track vote ASAP."

And several lawmakers said they will likely try to ensure that the next economic stimulus package includes a fix to clarify the role of startups.

"We have been in contact with the Small Business Administration about these concerns, and we hope to get them addressed through fixes to phase 3 or possibly in phase 4," Rep. John Carter, R-Ga., said in a statement to Protocol. "It is my hope that the Treasury will rectify a number of these eligibility issues in their guidance."

Despite the rush by many VC-backed startups to try to get funding, there's a growing worry that some startups are applying for the loans without actually needing them, and investors are starting to push back against the frenzy. "This misconception that it's a free two months of payroll is bizarre to me," said one startup CEO, who decided not to go ahead with the application and spoke to Protocol on the condition of anonymity to discuss their company's finances. Some peers the CEO has spoken with applied to the program to stave off layoffs, but there are also companies who aren't in as dire of need who have also applied. "I think it's incredibly reckless of founders," the CEO said.

Enterprise

Why software releases should be quick but 'palatable and realistic'

Modern software developers release updates much more quickly than in the past, which is great for security and adding new capabilities. But Edith Harbaugh thinks business leaders need a little control of that schedule.

LaunchDarkly was founded in 2014 to help companies manage the software release cycle.

Photo: LaunchDarkly

Gone are the days of quarterly or monthly software update release cycles; today’s software development organizations release updates and fixes on a much more frequent basis. Edith Harbaugh just wants to give business leaders a modicum of control over the process.

The CEO of LaunchDarkly, which was founded in 2014 to help companies manage the software release cycle, is trying to reach customers who want to move fast but understand that moving fast and breaking things won’t work for them. Companies that specialize in continuous integration and continuous delivery services have thrived over the last few years as customers look for help shipping at speed, and LaunchDarkly extends those capabilities to smaller features of existing software.

Keep Reading Show less
Tom Krazit

Tom Krazit ( @tomkrazit) is Protocol's enterprise editor, covering cloud computing and enterprise technology out of the Pacific Northwest. He has written and edited stories about the technology industry for almost two decades for publications such as IDG, CNET, paidContent, and GeekWire, and served as executive editor of Gigaom and Structure.

COVID-19 accelerated what many CEOs and CTOs have struggled to do for the past decade: It forced organizations to be agile and adjust quickly to change. For all the talk about digital transformation over the past decade, when push came to shove, many organizations realized they had made far less progress than they thought.

Now with the genie of rapid change out of the bottle, we will never go back to accepting slow and steady progress from our organizations. To survive and thrive in times of disruption, you need to build a resilient, adaptable business with systems and processes that will keep you nimble for years to come. An essential part of business agility is responding to change by quickly developing new applications and adapting old ones. IT faces an unprecedented demand for new applications. According to IDC, by 2023, more than 500 million digital applications and services will be developed and deployed — the same number of apps that were developed in the last 40 years.[1]

Keep Reading Show less
Denise Broady, CMO, Appian
Denise oversees the Marketing and Communications organization where she is responsible for accelerating the marketing strategy and brand recognition across the globe. Denise has over 24+ years of experience as a change agent scaling businesses from startups, turnarounds and complex software companies. Prior to Appian, Denise worked at SAP, WorkForce Software, TopTier and Clarkston Group. She is also a two-time published author of “GRC for Dummies” and “Driven to Perform.” Denise holds a double degree in marketing and production and operations from Virginia Tech.
Workplace

Building an antiracist company: From idea to practice

Twilio’s chief diversity, inclusion and belonging officer says it’s time for a new approach to DEI.

“The most impactful way to prioritize DEI and enable antiracism is to structure your company accordingly,” says Twilio’s head of DEI Lybra Clemons.

Photo: Twilio

Lybra Clemons is responsible for guiding and scaling inclusion strategy and diversity initiatives at Twilio.

I’ve been in the corporate diversity, equity and inclusion space for over 15 years. In that time, I’ve seen the field evolve slowly from a “nice-to-have” function of Human Resources to a rising company-wide priority. June 2020 was different. Suddenly my and my peers’ phones started ringing off the hook and DEI leaders became the most sought-after professionals. With so many DEI roles being created and corporate willingness to invest, for a split second it looked like there might be real change on the horizon.

Keep Reading Show less
Lybra Clemons
Lybra S. Clemons is a seasoned C-suite executive with over 15 years of Human Resources, Talent and Diversity & Inclusion experience at Fortune 500 companies. She is responsible for guiding and scaling inclusion strategy and diversity initiatives across Twilio's global workforce. Prior to Twilio, Lybra was global head of Diversity & Inclusion at PayPal, where she managed and oversaw all global diversity initiatives. Lybra has held critical roles in Diversity & Inclusion with Morgan Stanley, The Brunswick Group and American Express. She serves on the board of directors of Makers and How Women Lead Silicon Valley Executive Board of Advisers, and has been recognized by Black Enterprise as one of the Top Corporate Women in Diversity.
Boost 2

Can Matt Mullenweg save the internet?

He's turning Automattic into a different kind of tech giant. But can he take on the trillion-dollar walled gardens and give the internet back to the people?

Matt Mullenweg, CEO of Automattic and founder of WordPress, poses for Protocol at his home in Houston, Texas.
Photo: Arturo Olmos for Protocol

In the early days of the pandemic, Matt Mullenweg didn't move to a compound in Hawaii, bug out to a bunker in New Zealand or head to Miami and start shilling for crypto. No, in the early days of the pandemic, Mullenweg bought an RV. He drove it all over the country, bouncing between Houston and San Francisco and Jackson Hole with plenty of stops in national parks. In between, he started doing some tinkering.

The tinkering is a part-time gig: Most of Mullenweg’s time is spent as CEO of Automattic, one of the web’s largest platforms. It’s best known as the company that runs WordPress.com, the hosted version of the blogging platform that powers about 43% of the websites on the internet. Since WordPress is open-source software, no company technically owns it, but Automattic provides tools and services and oversees most of the WordPress-powered internet. It’s also the owner of the booming ecommerce platform WooCommerce, Day One, the analytics tool Parse.ly and the podcast app Pocket Casts. Oh, and Tumblr. And Simplenote. And many others. That makes Mullenweg one of the most powerful CEOs in tech, and one of the most important voices in the debate over the future of the internet.

Keep Reading Show less
David Pierce

David Pierce ( @pierce) is Protocol's editorial director. Prior to joining Protocol, he was a columnist at The Wall Street Journal, a senior writer with Wired, and deputy editor at The Verge. He owns all the phones.

China

Why China is outselling the US in EVs 5 to 1

Electric cars made up 14.8% of Chinese car sales in 2021, compared with 4.1% in the U.S.

Passenger EV sales in China in 2021 jumped 169.1% to nearly 3.3 million from a year ago.

Photo: VCG/VCG via Getty Images

When Tesla entered China in 2014, the country’s EV market was going through a reset. The Austin, Texas-based automaker created a catfish effect — a strong competitor that compels weaker peers to up their game — in China’s EV market for the past few years. Now, Tesla’s sardine-sized Chinese competitors have grown into big fishes in the tank, gradually weakening Tesla’s own prominence in the field.

2021 was a banner year for China’s EV industry. The latest data from the China Passenger Car Association shows that total passenger EV sales in China in 2021 jumped 169.1% from a year ago to nearly 2.99 million: about half of all EVs sold globally. Out of every 100 passenger cars sold in China last year, almost 15 were so-called "new energy vehicles" (NEVs) — a mix of battery-electric vehicles and hybrids.

Keep Reading Show less
Shen Lu

Shen Lu covers China's tech industry.

SKOREA-ENTERTAINMENT-GAMING-MICROSOFT-XBOX
A visitor plays a game using Microsoft's Xbox controller at a flagship store of SK Telecom in Seoul on November 10, 2020. (Photo by Jung Yeon-je / AFP) (Photo by JUNG YEON-JE/AFP via Getty Images)

On this episode of the Source Code podcast: Nick Statt joins the show to discuss Microsoft’s $68.7 billion acquisition of Activision Blizzard, and what it means for the tech and game industries. Then, Issie Lapowsky talks about a big week in antitrust reform, and whether real progress is being made in the U.S. Finally, Hirsh Chitkara explains why AT&T, Verizon, the FAA and airlines have been fighting for months about 5G coverage.

For more on the topics in this episode:

Keep Reading Show less
David Pierce

David Pierce ( @pierce) is Protocol's editorial director. Prior to joining Protocol, he was a columnist at The Wall Street Journal, a senior writer with Wired, and deputy editor at The Verge. He owns all the phones.

Latest Stories
Bulletins