Should Venture Capital-Backed Startups Get Federal Stimulus Money?

Like small companies all over the country, Silicon Valley startups have been letting tens of thousands of people go. But does that mean venture capital-backed startups should receive small-business loans paid for by taxpayers? It depends on who you ask.

A few weeks back, U.S. Rep. Anna Eshoo, D-Palo Alto, signed a letter with other Congress members to the U.S. Small Business Administration arguing for VC-backed startups to be treated like other small businesses.

As the letter states: "Because startups can sometimes have dozens of investors – including angel investors, venture capital firms, and the investing arms of corporations — even determining if any given startup is eligible could be prohibitively onerous for these companies to apply for SBA resources."

That letter went nowhere, to the apparent surprise of congresswoman Eshoo, whose father owned a small business back when she was growing up in Connecticut.

"He was a jeweler and a watchmaker by trade. Business went up. It went down. It went sideways," Eshoo said. "These startups are the definition of small, and we want them to succeed!"

This week, Eshoo and Rep. Ro Khanna, D-Santa Clara, co-sponsored legislation that argues tech startups face the same kind of economic risk Eshoo’s dad did. New businesses commonly fail at the rate of 20 percent a year, according to the Bureau of Labor Statistics. Silicon Valley startups fail at the rate of 80 percent in 2019.

"There are going to be winners and losers. The startup environment has always been like that," said Rachel Massaro, vice president and director of research of the nonprofit Joint Venture Silicon Valley.

Massaro reminds us that seed and early-stage VC funding in the region has been shrinking over the last decade, as has the popularity of filing for an IPO. What has been on the upswing: an “exit strategy” other businesses commonly can't enjoy.

Large companies in Silicon Valley like to buy startups, for the people and the technology. If you have a lot of cash, and many tech giants do right now, a recession is what investors call a “buying opportunity.”

"They have more money. They have more ability to absorb the crisis and move past it. So they might very well pick out some of those small companies and integrate them into their own," Massaro said.

Tell that to someone whose employer hasn’t been snapped up yet. More than 400 U.S. startups have laid off more than 47,000 employees since early March, according to a pandemic-era startup tracker called Layoffs.fyi.

In a recent press call, congressman Ro Khanna said the legislation can help Silicon Valley rebound faster and better than it would otherwise. "The Valley has gone through this before. The biggest thing the federal government really can do is small business loans and continuing to make fundamental business investments in science and technology that could allow for that emergence."

The stimulus packages haven’t explicitly excluded Silicon Valley startups. But the rules that govern who gets to apply exclude companies more or less controlled by wealthy investors, like venture capitalists. Acknowledging concern about wealthy investors bellying up to the public trough, the Caring for Startup Employees Act of 2020 would bar startups from using money they received under the new waiver to pay their investors.

Tech trade groups like the National Venture Capital Association have lobbied for federal consideration. But many banks and lenders are still reluctant to accept applications from VC-backed startups without changes like the ones proposed in the legislation Congresswoman Eshoo has co-sponsored.

Fritz Morris is CEO and co-founder of Brightmind Labs, an online education platform focused on adults looking to beef up their career skills. "The idea is that there are a couple billion people in the world without access to good quality education, career skills training and mentorship," he said.

Morris has backing from angel investors and has not applied for a PPP loan, but he says he's sympathetic to the needs of other startups that feel the need to apply to stay afloat. "I know, though, that there are others who are really struggling. Especially at the early seed stage, or the founding stage, it can be quite scary to start a company in Silicon Valley."

"Having an extra $25-50,000, as small as that might seem to some people, would actually be pretty helpful when we’re going through some of these pilots," Morris said.

"But I do have sort of an ethical position on that where I feel like if the primary intention is to help people who really are struggling, then I do think probably the majority of those folks are outside of Silicon Valley. The mom-and-pop founders and the retailers and the folks who just otherwise would lose their business or lose their income completely," Morris said.

He added that it hasn't escaped him how a number of well-capitalized companies and schools like Shake Shack and Stanford have been embarrassed by negative press into giving paycheck protection loan money back to the federal government.