‘Absolute tsunami’: Consumer startups are scrambling to receive disaster relief

He’s spent the last week poring over tax documents, speaking with colleagues and trying to demystify what seem to be very obtusely-written rules. One of the most important programs, the newly-enacted Paycheck Protection Program, would provide his startup with enough payroll funds so the company doesn’t furlough or layoff employees for the next few months.

“Much of our focus is on the PPP application,” this founder said, which is riddled with “confusion points.” At first, he couldn’t figure out if his employees who earn over $100,000 are completely exempt from being considered part of the relief program, or if it’s simply the portion of their salary that exceeds $100,000. (It turns out it’s the latter, but it required quite a bit of digging.)

Then there are the people who are setting out to de-mystify the process, all of whom are saying similar yet different things. “There’s a dizzying array of people out there who are trying to summarize and re-translate the legislation,” the founder said. “You have this absolute tsunami of PDFs and webinars and calls and emails.” Some of them, he went on, “leave you a little more confused.” Despite this, the founder has been trudging along and is hoping to be able to get some funds to make up for the lost business he’s witnessed as a result of the coronavirus’s spread and its effects.

He’s certainly not the only one. Digital startups and VCs have been scrambling to figure out if they are eligible for disaster relief. “Everyone is confused,” said one VC to Modern Retail earlier this week.

The uncertainties have stemmed from the myriad rules tied to the recently-enacted CARES Act. Some businesses — especially those with either venture capital and private equity backing — have been unsure if they qualify for the $350 billion being allocated in federal loans. Even beyond that, businesses have spent the last week reading their financials to figure out how much aid they are eligible for and if any of it could be forgiven.

Affiliation concerns
On Thursday afternoon, House minority leader Kevin McCarthy told Axios that the government was going to tweak the rules to allow VC-backed companies to be included in the program. Small businesses that are backed by PE firms, however, probably won’t be able to participate since the financiers likely have greater controls. For now, the startups wait as these new rules have yet to precisely worded and disseminated.

To the laypeople’s eyes, there seemed to be a clear way for small businesses to receive aid. The PP is governed by the Small Business Administration and provides companies employing fewer than 500 employees with a business loan to make up for lost payroll over the next few months. The most important part of it is that some of the loan amounts will be forgiven, if they adhere to the approved expenses and the funds are allocated within the given time window.

For businesses like restaurants and mom and pop shops, this is a clear way to try and tread water during these pandemic times. VC-backed startups, however, weren’t sure if they were eligible. The biggest issue boils down to the SBA’s regulations when it comes to affiliations. A small business usually means an entity with fewer than 500 employees. But there are other things to consider too. Before this new rule announced by McCarthy gets enacted, businesses had to make sure no other entity — namely, VCs or PE firms — held majority control. If they did, then the other businesses the firms have majority stake in would also be considered affiliated and be tallied in the headcount (almost certainly making them ineligible).

More questions than answers
But even with the VC uncertainties partially figured out, a bunch of other issues remain. For one, the sheer number of startups applying for these loans is unprecedented. “This may overwhelm the system,” said Joseph Lynyak, a partner at Dorsey & Whitney LLP during a teleconference earlier this week. The SBA, he explained “is not designed to this degree of scalability.” And even though banks will be acting as the lenders, they too will certainly be feeling the strain of this coming onslaught.

The banks have been preparing. JP Morgan Chase, for example, told clients that it will only help clients who have worked with the bank prior to February 15. Not only that, but the financial institution is trying to streamline operations further by not taking prospective meetings on the phone or at branches.

Silicon Valley Bank, an institution smaller than Chase, is facing its own difficulties. While it is an accredited SBA lender, the bank told the consumer-facing startup founder (of which his company is a client) that it hadn’t actually transacted an SBA loan for the last thirty years. (SVB confirmed to Modern Retail that it has not made an SBA loan in many years because “historically these loans have not been applicable to the majority of our client base.”)

“There’s been some pressure with SVB,” the founder said. While he feels somewhat confident, questions flicker in the back of his head; “Come on guys — can you do that? Are you going to be able to offer support?” The bank, he went on, told clients that it has an internal committee focusing specifically on PPP, has facilitated a few webinars and built a website dedicated to these new relief programs. “That being said, I get the sense they are just slightly in panic mode,” the founder went on.

Meanwhile, a pandemic ensues and businesses flatline. VCs are trying to pitch in where they can to offer support to portfolio companies. Many startups, said Michael Duda, managing partner at Bullish, “are still focused on their current business and keeping up some demand.” They are putting out internal fires, reallocating resources and simply trying to not close up shop before aid gets dispersed. “Startups are so busy,” said Duda, “they are usually like ‘what is in front of me now?'” As a result, he went on, “a lot of VCs are doing it on their behalf.”

Right now, it’s a mad dash as companies continue to hemorrhage money and try to not lay off employees so they can receive emergency funds to make up for their payroll. According to Duda, the good news is that the new process “seems to be as bullshit free as possible.” But if something small is done wrong, it may mean more delays.

“I want to make sure I’m not missing something,” the founder said, adding that he’s planning on bringing on a few pairs of extra eyes to ensure he’s filled everything out correctly and is receiving the maximum amount of aid. What comes next: applications will be turned in, more precise rules written and then examples will arise illustrating the SBA’s logic.

“If it’s in the wrong font, you’re in the back of the line and have to do it all over again,” Duda said. “This is not the spirit of the rules — it’s the rules themselves.”