Entrepreneur

Why venture-backed startups were left out of CARES loans


The giant coronavirus relief bill that was signed into law last month, known as the CARES Act, is supposed to help small businesses, but most startups that have venture capital investment are excluded from financial assistance. It was an oversight. Congress didn’t intend to leave startups out, but it still means they can’t apply for help until it’s fixed. Now, the venture firms that fund these companies are working to get it changed. 

I spoke with Aziz Gilani, a managing director of the Houston-based venture capital firm Mercury. It has about 40 companies in its portfolio, many of which are at risk. I asked him how this happened. The following is an edited transcript of our conversation.

Aziz Gilani. (Photo courtesy of Gilani)

Aziz Gilani: The reason why venture-backed startups weren’t initially included in the stimulus bill is because we’re not a particularly large industry. The initial focus of the bill was on the vast majority of small businesses that don’t have external investment. Once folks realized that we weren’t part of the program, everyone immediately started to scramble to try to fix this oversight.

Molly Wood: Got it. So what you’re saying is [that] all along the Small Business Administration had not necessarily included venture-backed companies as small businesses, and then it snowballed?

Gilani: That’s exactly right. As a result of that, because the Small Business Administration became the mechanism that Congress used to send the money to small businesses, venture-backed startups weren’t included.

Wood: Does that worry you at all? Do you think there’s some reason to believe that somebody might have decided “Maybe they don’t need a fix”?

Gilani: I’m very sympathetic to all the folks at the SBA and at Treasury who have had to stand up this program out of thin air in a very short period of time. It’s important to remember that in just seven days these folks took a law that got passed on a Friday night, and started handing out [Paycheck Protection Program] checks immediately on the following Friday. So a lot of things and a lot of moving pieces had to be put in place to get this program initiated. The challenge we run into, though, is that the stimulus bill and the way it hands out money is on a first-come-first-served basis. As a result of that, all of the corner cases and edge cases, and folks like venture-backed startups, may end up at the back of a line that may get fully handed out before we get a chance to submit our applications.

Wood: Could investors bail out their companies?

Gilani: The challenge we run into is that our funds are not limitless either. The reality is that the bulk of our money is coming from pension programs and endowments. We have to provide them with a rate of return just like everyone else. This isn’t a bottomless well. We are trying our best to be good stewards and fiduciary of their money.

Wood: Is there less sympathy for the argument that venture-backed startups might need help?

Gilani: I think that it’s important to remember that to even be eligible for this program, the startups involved have to show that they have a real need based off of the current emergency. It’s also important to remember that there’s a cap in terms of the salaries that are involved, and that the purpose of the program is not to backstop the underlying investors in the company, but to actually pay rank-and-file employees. In fact, the Treasury has put a test on the program to make sure that the money is specifically spent on salaries for rank-and-file employees up until a certain salary level. Regardless of who you think the investors are in these companies, we don’t see a nickel of this stuff. This all goes directly back to the employees in the form of payroll.

Wood: What will you do at your fund, and what do you think the industry will do if for some reason this doesn’t get fixed, if this continues to fall through the cracks?

Gilani: We’re working real hard with the Small Business Administration and through our trade group to try to get clarity in terms of our participation in the programs. Additionally, we’re working really hard with banks to make them feel comfortable with the idea of lending to us. We’re not going to give up on the program. But the reality is, in a world in which there’s finite funding for a stimulus program like this, every bit of uncertainty doesn’t help. If our companies can’t get access to these programs, the real victims are going to be the overall economy and the employees at our companies which these programs were meant to protect.

Wood: How bad is it for the firms, for Mercury or any venture capital firm, if a bunch of portfolio companies have to go out of business because they can’t get assistance?

Gilani: At the end of the day, we’re in the business of trying to grow startups. We’re in the business of trying to participate in the economy. We’re in the business of trying to build long-lasting companies. In a world in which there aren’t customers, in a world in which we can’t produce the revenues we’d like, it’s going to be very challenging and it’s going to be really hard for us to fulfill our mission.

Above are some of the companies that Mercury Fund invests in. (Photo courtesy of Mercury Fund)

Related links: More insight from Molly Wood

Business Insider is running a list of venture-backed startups that have laid off employees. Those numbers are already in the thousands. Not all the layoffs have been handled all that well, either. One report said the scooter startup Bird laid off more than 400 people over a Zoom webinar that many people think was prerecorded. The entire process took about two minutes. 

The direct-to-consumer clothing retailer Everlane laid off 42 of its customer experience people after all its stores were closeda move some of those employees now say was illegal union-busting. 

On the other hand, Airbnb, which had frozen hiring and cut about $800 million out of its marketing budget, has actually raised $1 billion from two private equity firms, although it’s still not clear whether the company will go ahead with the IPO it had planned for this year.

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