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Sand Hill Road can't save all the startup jobs by itself

Without help from the government's coronavirus stimulus package, venture capitalists say they may be able to save companies, but not all the jobs.

Sand Hill Road street sign

The idea that VCs should be left to bail out startups on their own is "an emotional reaction, not a logical one," said Justin Field, SVP of government affairs for the National Venture Capital Association.

Photo: Smith Collection/Gado via Getty Images

Startups and VCs who have been clamoring for inclusion in the government's $350 billion coronavirus stimulus package were given reason to hope on Thursday. House Minority Leader Kevin McCarthy, R-Calif., told Axios that treasury head Steven Mnuchin would soon "solve" the problem that had left startups technically excluded from the original stimulus act.

But even as California lawmakers and startups have lobbied to make venture-backed companies eligible for stimulus loans, others have questioned whether it would be fair for startups to get government assistance. They have argued that venture capitalists should be the ones in charge of stepping in and bailing out their portfolio companies — not the federal government. If it's an industry known for investing millions in people who just have a good idea, why can't the Sand Hill Road crowd redirect some of that money to help their existing portfolio companies stay alive and save jobs?

"People say the VCs are rich — why can't people go to the VCs and get the money from them?," Rep. Ro Khanna, D-Calif., said during a Virtual Meetup with Protocol's Issie Lapowsky on Thursday, summing up the critics' position. "The VCs will say, First plan: lay off half your employees. Is that what we want? To get the money from the private sector fund who will insist on layoffs?"

"The rule waiver will allow them to actually keep the employees. That's my focus. It's not just saving startups; it's keeping many people employed in startups," said Khanna, who said he is awaiting new guidance on the eligibility from the treasury secretary.

The idea that VCs should be left to bail out startups on their own is "an emotional reaction, not a logical one," said Justin Field, SVP of government affairs for the National Venture Capital Association.

It's not quite as easy a trade-off as people think, he said. Venture capitalists are focused first and foremost on a company's existential survival — a calculus that means some companies may have to part ways with employees in the short term in order to continue to exist. Venture capital firms are often giving some bridge money to companies, but that money is focused on making sure the company itself can survive, not on minimizing job losses. The CARES Act, though, is focused largely on retaining employees, which is why startups are planning to apply on Friday and hope to get the short-term cash from the government side.

Startups are in some ways more vulnerable than other sectors to layoffs right now because the majority of their expenses is often head count and people, compared to rent or vendor contracts like other businesses, said Gaurav Jain, managing partner of Afore Capital venture firm, which specializes in pre-seed investments. That means when a startup needs to extend its runway, or how long the company can continue to operate based on cash flow, head count is often the only thing that will move the needle, Jain said.

"These companies are getting hurt by what's happening with the health crisis and the economic crisis in the exact same way every other business is. It's not their fault, right?" he said.

Already, thousands of employees have been laid off or furloughed from startups around the country with sectors like travel and mobility being hit the hardest. Without the government loans, there could be even more.

"The only reason why you haven't seen broader layoffs across the startup ecosystem is people are holding a pause button to see their eligibility under this program," said NVCA's Field.

Venture firms do keep reserves on hand, normally to invest in later rounds to preserve their company ownership stakes. Still, it doesn't mean investors can hand out the money to everyone who asks.

For the last couple of weeks, venture capitalists have been "triaging" their portfolio companies to evaluate which companies are in trouble, who needs the cash and which companies, if given cash, are likely to succeed or not.

"If everyone calls on the bank, you can't give money to everyone," said one venture capitalist, who spoke on the condition of anonymity to speak about their portfolio company's finances. "We need to figure out which portfolio companies we are going to save, and which ones we can't." For example, giving more money to a travel company right now to avoid layoffs would be a hard investment decision to explain to a firm's limited partners, who are often pension funds and universities, the venture capitalist said. Firms also have investment limits that cap how much of a fund can be devoted to a company, making it harder to just hand out the reserve cash.

"It is actually really hard for an existing investor. We're fiduciaries of someone else's capital," Jain said. "Most companies will end up not being able to attract existing capital from investors."

Over the last week, venture firms like Jain's have scrambled to pull together webinars and issue guidance for their companies. When Lightspeed Venture Partners held a webinar on the CARES Act this week, over 150 portfolio companies (around half of their U.S. portfolio) tuned in, said Lightspeed growth partner Amy Wu, who ran the webinar and said she's been fielding calls around the clock from startups.

"There's virtually no company at this point with U.S. operations I haven't heard from either on the webinar or off the webinar. It is the number one highest concern for any company I'm talking to right now," Wu said.

All that training will be helpful for startups, but some worry it may come at the expense of small businesses who don't have a network to call on to understand the complexity of the stimulus loans. "Seeing that VC-funded tech startups are moving fast to educate each other (via lawyers, incubators, etc.) about the CARES Act forgivable loan programs. Makes me fear that VC-backed cos will absorb most of the bailout funds before most SMBs even figure out the application process," Webflow CEO Vlad Magdalin noted this week.

But for venture capital firms, educating their portfolio companies is the best way they can think to help right now. The reality, they say, is that they simply can't financially support every one of their companies — not if they are going to maintain any ability to keep funding new ones.

"We are bridging for a lot of our companies, but we literally don't have the funds to bridge every single one of our 300 U.S. companies or 450 global portfolio companies," Wu said. "If we were to do that, there wouldn't be this class of venture capital assets anymore to actually fund new companies and create those startups."


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If Mnuchin's expected new guidance makes startups eligible under the stimulus program, it could stave off the next wave of layoffs (at least for the next two months). But to Jain, the bigger benefit is to preserve the chance that the startups today could become the next Google or Zoom or Facebook, multibillion-dollar companies that end up employing thousands of people down the road.

"If we don't support these companies today, essentially we are taking the oxygen out of the entire ecosystem," he said.

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