VCs defend the use of PPPs by companies
The federal paycheck protection program has served as a lifeline for struggling businesses, but it has also raised concerns that some well-connected businesses with access to alternative sources of capital have crowded out risky small businesses. .
Venture capital has been embroiled in this debate, with critics arguing that companies backed by venture capital should not accept funding intended for mom-and-pop stores.
Some local VC executives and legal experts oppose this argument, saying that the acceptance of PPP financing by companies backed by VC is both in spirit and in letter of the law.
“Anyone who is legitimately in distress, corporate backed or not, should not be discriminated against (in a PPP application),” said Eric Manlunas, founder of Wavemaker Partners. “If you meet the criteria, you should qualify. “
Manlunas argues that many VC holding companies are small businesses and employers, which does not make them any different from other recipients of PPP funding.
The idea that VC-funded companies necessarily have easy access to alternative capital is misleading, he argued.
“Theoretically, everyone has access to alternative sources of capital,” Manlunas said. “That doesn’t mean you can actually get it.”
Several companies in Wavemaker’s portfolio have applied for and received PPP funding, according to Manlunas.
Whether some venture capital backed companies are legally eligible to receive PPP funding has been a source of confusion since the program launched in early April.
Generally, qualifying businesses must have fewer than 500 employees. Under the Small Business Administration’s membership rules, a company that does not meet certain criteria may have staff from other companies in an investor’s portfolio added to its number of employees.
Majority ownership by an investor triggers these membership rules, although VCs typically take minority positions. Other membership criteria have been trickier for venture-backed companies, according to Caroline Cherkassky, a partner at Sherman Oaks-based law firm Stubbs Alderton & Markiles.
Venture capital firms with certain veto and control rights over portfolio companies often impose membership rules, according to the venture capital lawyer. “Usually the (rights) that trigger a finding of (membership) are those that affect the day-to-day operations of the business,” she said.
To avoid these problems and access essential PPP funding, Cherkassky said he has seen many companies negotiate changes to their contracts with VC sponsors.
The lawyer added that April’s rush to address these concerns was followed by greater success in the second round of the PPP.
Regarding questions about the spirit of the law and whether qualifying venture capital-backed companies should benefit from PPP funding, Cherkassky said it largely depends on the individual situation of the company. ‘business.
“The PPP was intended to protect paychecks and support businesses when funds were insufficient,” she said. “It will always be on a case-by-case basis… but there are certainly startups (supported by VC) that fit these criteria.”
Despite the ongoing debate, some of the pressure on venture capital-backed firms to exit P3s has eased as demand for finance has slowed. While the first round of capital was exhausted in less than two weeks, nearly 40% of the funding was still available three weeks after the start of the second round, according to figures from the SBA.
Alex Cohen, managing director of small business lender Liberty SBF, said the slower second-round leak was likely due to the different nature of the candidates. “Small businesses are finally able to eat a piece of apple,” he said in an email.
Shortly after the PPP rollout, large companies faced a public backlash following reports that they had accepted millions of dollars in funding. Coupled with the fact that many companies received financing in the first round, this helped to reduce the average size of PPP loans.
The average second-round PPP loan was just under $ 80,000 as of May 1, according to SBA data. This is a drop from an average loan of over $ 200,000 in the first round.
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