Pelosi and Khanna Request Assistance for VC-backed Startups

Speaker of the House Nancy Pelosi (D-Cal.) and Rep. Ro Khanna (D-Cal.) have asked the government to include venture capital-backed startups in stimulus packages, so they can receive small-business loans. Pelosi and Khanna sent a letter to Treasury Secretary Steve Mnuchin and Jovita Carranza, head of the Small Business Administration (SBA), to address a portion of the $2 trillion CARES Act coronavirus stimulus package that excludes venture-capital-backed startups from being considered a small business, rendering them ineligible to receive benefits.

Currently, a small business is defined as  “any business with fewer than 500 employees, but some companies that have venture funding are required to count all of the employees of any other startups that VC has invested in.” Pelosi and Khanna have urged Mnuchin and Carranza “to exercise the appropriate discretion under the law to secure coverage for as many small businesses under 500 employees as possible.” They expressed concerns for excluded businesses, who would be unable to participate in the Paycheck Protection Program (PPP), a part of the CARES Act. The PPP loans are to help small businesses cover payroll and other expenses during the coronavirus pandemic. Additionally, “[f]or these small businesses, as for many others across America, access to forgivable PPP loans will be critical to preserving jobs during the coronavirus pandemic and to securing America’s leadership in science technology and innovation.”

“Startups are the engine of America’s innovation economy and our districts in California’s Bay Area and Silicon Valley are home to thousands of these companies,” Pelosi and Khanna state in the letter. “Other high-tech hubs around the country with a strong startup ecosystem will also be in need of PPP financing to preserve jobs and survive.”

The current rule, derived from SBA’s affiliate rule, seeks to prevent large corporations from obtaining SBA loans. A company is considered an affiliate if one controls the other. However, that definition “is an overly fuzzy definition that will lead to confusion and possibly unnecessary rejection of small startups that are part of large venture capital portfolios” argued tech and startup advocates.

Additionally, more than 100 tech trade associations and lobbying groups also sent a letter to Secretary Mnuchin ad Administrator Carranza. They state, “we are gravely concerned that application of the current Small Business Administration’s (SBA) ‘Affiliation Rules’ to these companies will create confusion and delays in administering the program, and could effectively exclude many startups that are trying to survive this economic crisis.  Such a result would be contrary to the intent of the legislation to provide assistance broadly across all sectors of the economy.” The letter adds that “Without clear guidance enabling startups and small businesses supported by equity investment to access the loan facility, many of these startups may be rendered ineligible.  The confusion alone could lead to waves of preventable layoffs.” Startups may also no longer be able to conduct essential research and development, which could be beneficial in fighting the coronavirus.