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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.

App store laws, Microsoft AR and Square buys Tidal

Welcome to this weekend's Source Code podcast.

Cole Burston/Bloomberg

This week on the Source Code podcast: First, an update on Google's user-tracking change. Then, Ben Pimentel joins the show to discuss Square buying Tidal, and what it means for the fintech and music worlds. Later, Emily Birnbaum explains the bill moving through the Arizona legislature that has Google and Apple worried about the future of app stores. And finally, Janko Roettgers discusses Microsoft Mesh, the state of AR and VR headsets, and when we're all going to be doing meetings as holograms.

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An interview with Tom Lantzsch, SVP and GM, Internet of Things Group at Intel

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Senior Vice President and General Manager of the Internet of Things Group (IoT) at Intel Corporation

Edge computing had been on the rise in the last 18 months – and accelerated amid the need for new applications to solve challenges created by the Covid-19 pandemic. Tom Lantzsch, Senior Vice President and General Manager of the Internet of Things Group (IoT) at Intel Corp., thinks there are more innovations to come – and wants technology leaders to think equally about data and the algorithms as critical differentiators.

In his role at Intel, Lantzsch leads the worldwide group of solutions architects across IoT market segments, including retail, banking, hospitality, education, industrial, transportation, smart cities and healthcare. And he's seen first-hand how artificial intelligence run at the edge can have a big impact on customers' success.

Protocol sat down with Lantzsch to talk about the challenges faced by companies seeking to move from the cloud to the edge; some of the surprising ways that Intel has found to help customers and the next big breakthrough in this space.

What are the biggest trends you are seeing with edge computing and IoT?

A few years ago, there was a notion that the edge was going to be a simplistic model, where we were going to have everything connected up into the cloud and all the compute was going to happen in the cloud. At Intel, we had a bit of a contrarian view. We thought much of the interesting compute was going to happen closer to where data was created. And we believed, at that time, that camera technology was going to be the driving force – that just the sheer amount of content that was created would be overwhelming to ship to the cloud – so we'd have to do compute at the edge. A few years later – that hypothesis is in action and we're seeing edge compute happen in a big way.

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Citizen’s plan to keep people safe (and beat COVID-19) with an app

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Citizen added COVID-19 tracking to its app over the summer — but its bigger plans got derailed.

Photo: Citizen

Citizen is an app built on the idea that transparency is a good thing. It's the place users — more than 7 million of them, in 28 cities with many more to come soon — can find out when there's a crime, a protest or an incident of any kind nearby. (Just yesterday, it alerted me, along with 17,900 residents of Washington, D.C., that it was about to get very windy. It did indeed get windy.) Users can stream or upload video of what's going on, locals can chat about the latest incidents and everyone's a little safer at the end of the day knowing what's happening in their city.

At least, that's how CEO Andrew Frame sees it. Critics of Citizen say the app is creating hordes of voyeurs, incentivizing people to run into dangerous situations just to grab a video, and encouraging racial profiling and other problematic behaviors all under the guise of whatever "safety" means. They say the app promotes paranoia, alerting users to things that they don't actually need to know about. (That the app was originally called "Vigilante" doesn't help its case.)

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Photo: CommonPass

There will come a time, hopefully in the near future, when you'll feel comfortable getting on a plane again. You might even stop at the lounge at the airport, head to the regional office when you land and maybe even see a concert that evening. This seemingly distant reality will depend upon vaccine rollouts continuing on schedule, an open-sourced digital verification system and, amazingly, the blockchain.

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Why the CEO of GoFundMe is calling out Congress on coronavirus

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Photo: John Lamparski/Getty Images

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And so after a year in which millions of people have asked for help from strangers on GoFundMe, and at least $600 million has been raised (that number could be as much as $1 billion or more now, but GoFundMe didn't provide fundraising data past August) just for coronavirus-related financial crises, Cadogan has had enough. On Thursday, he wrote an open letter to Congress calling for a massive federal aid package aimed at addressing people's fundamental needs. In an unusual call for federal action from a tech CEO, Cadogan wrote that GoFundMe should not and can never replace generous Congressional aid for people who are truly struggling.

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