It’s not easy to turn down financial help from the government, especially during an economic crisis. But that’s exactly what two venture capital-backed Pacific Northwest tech startups did recently with their Paycheck Protection Program (PPP) loans.
The decision to refrain from accepting money in the midst of a global pandemic reflects larger confusion around the $660 billion program to support U.S. small businesses and what types of companies should receive loans.
Glowforge CEO Dan Shapiro said his Seattle 3D-printing startup had its PPP application approved, with $1.85 million ready for the taking. But the company, which raised $10 million two years ago from investors, ultimately declined to accept. Shapiro said it was “hard to walk away from what’s basically free money (from) the government.”
“We’ve been looking for ways to help, from 3D printing PPE to sheltering in place to avoid spreading the disease,” the CEO said. “Once it became clear to us that we could avoid layoffs and survive the crisis, we knew the way to help was to step aside so someone else could use that money instead of us.”
Portland-based marketing startup Lytics followed a similar path. The 80-person company, which raised $35 million in February 2019, was approved for around $2 million as well, but turned it down.
“It wasn’t about feeling bad,” said Lytics President Jascha Kaykas-Wolff. “When we look at what the needs are for small and medium-sized businesses, and we look at access to capital in different places, we sit in a different group. Because of that, and the intention of this particular loan, it made it easy for us to make the decision we did.”
In other words, your favorite bar down the street doesn’t have easy access to venture capital firms or other funding sources in case the bank account hits zero.
That ethical dilemma has caused many money-losing startups — especially those backed by big-name venture capital firms — to question whether it’s right to take the government loans. As one example, Outreach co-founder Manny Medina, whose Seattle company has raised $238 million, decided not to apply for the PPP despite what he told The New York Times last month was “real pressure” to do so from his bank and board.
Kaykas-Wolff lamented the communication flow from the government in regard to what types of companies should apply for the PPP.
“If we knew what we know now, we probably would have never applied,” he said.
The PPP is “designed to provide a direct incentive for small businesses to keep their workers on the payroll,” according to the Small Business Administration. The loans are forgivable for qualifying small businesses with 500 employees or less that retain their workforce or use the money to rehire laid-off employees. Businesses can apply for up to 250% of their monthly payroll.
But after the first round of loan approvals — which went quickly — many giant companies ended up with PPP checks, while other small restaurants and local mom-and-pop shops were left empty-handed.
Now more than 40 publicly-traded companies will return their PPP loans, The Hill reported, after Treasury Secretary Steven Mnuchin threatened legal action. Other publicly-traded companies — like Seattle area companies Bsquare, RealNetworks and MicroVision — have held onto the PPP funds. In Bsquare’s earnings announcement Monday, the company — which boosted revenue during the quarter and moderately added to its cash balance — said it secured PPP funds “as part of a series of contingency planning efforts and to ensure it remained staffed appropriately to fulfill its role as an essential supplier.”
VC-backed media startup Axios returned its $4.8 million loan late last month, citing “a public backlash against a variety of companies for taking the PPP, including us.” Others are returning loans amid “vague guidance,” Bloomberg reported.
Ethics aside, it is difficult for any company to turn down money as most struggle to find revenue amid the shutdown. More than 400 tech startups have slashed 45,000 jobs since March.
“I don’t know any startups that aren’t legitimately worried about the impact of the pandemic on their business, either on their business model, the loss of a few key employees, their customer base or their ability to raise capital next time they need it,” said Lewis Horowitz, chair of Lane Powell’s taxation team. “Very few are so flush cash that they feel they have sufficient capital to forego (or return) the PPP.”
Shapiro said Glowforge is seeing sales momentum as customers use the company’s 3D printers at home during shelter-in-place orders. Glowforge is still hiring.
Kaykas-Wolff said Lytics has enough cash on hand and customers to weather the COVID-19 storm. “We have confidence in the path we are on,” he said.
A new WTIA survey of startup leaders from the Seattle region found that 39% of startups have received PPP loans, while “very few” had their applications rejected. “Some have returned the PPP due to the remaining uncertainty around terms for repayment,” the WTIA noted.
New guidance from the SBA on April 23 forced VC-backed startups to “recalibrate their stance,” Protocol reported.
There are questions about which tech startups qualify for a loan. Company leaders have criticized an ambiguous application process due to complex SBA “affiliation” rules related to their investors. A company may be deemed an affiliate of a larger entity, such as an investment firm, which could disqualify a PPP application.
The WTIA survey also found that less than a quarter of startups have commitments from investors to provide additional capital if needed.
The Wall Street Journal reported last week that the SBA did not follow some congressional mandates with the PPP rollout, according to an inspector general for the agency.
Federal prosecutors last week charged the first company involved in an alleged PPP scam.
Congress added another $310 billion for the PPP last month after the initial $349 billion went quickly. There is still $123 billion remaining in the second round.
Editor’s note: GeekWire applied for and received a PPP loan. More here.
