The Technology 202: Start-ups struggling during coronavirus worry they won’t qualify for new small business loans

with Tonya Riley

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Tech start-ups struggling during the coronavirus pandemic say there’s broad confusion over whether they qualify for the small business loans made available in the massive stimulus package. 

Even some companies that could assist with the response to the pandemic say the uncertainty is making it harder for them to keep operating. 

Justin Bellante, chief executive of health care start-up BioIQ, says his company is looking into delivering in-home coronavirus tests and how its network could assist medical labs. But he is not sure whether his small company can get a slice of the $350 billion pie, due to Small Business Administration rules that predate the stimulus package that disqualify some companies that take checks from venture capital firms from taking federal loans. 

“It’s almost schizophrenic,” Bellante told me in an interview. “We have an opportunity and obligation to be part of the solution. But on the other side, we have to play defense because we have to navigate through these rules.” 

A small business loan, he says, could help the company avoid cost-cutting measures such as cutting contractors or even last-resort layoffs as its corporate customers tighten their belts. 

The outcry from entrepreneurs has triggered a mad dash in Washington to clarify or waive the rules so that start-ups can take full advantage of the programs. 

House Speaker Nancy Pelosi (D-Calif.) and Rep. Ro Khanna (D-Calif.) wrote a letter on Tuesday morning calling on the Trump administration to quickly issue guidance to ensure start-ups can access this form of credit. 

“For these small businesses, as for many others across America, access to forgivable [Paycheck Protection Program] loans will be critical to preserving jobs during the coronavirus pandemic and to securing America’s leadership in science, technology and innovation,” they wrote in the letter to Treasury Secretary Steven Mnuchin and SBA administrator Jovita Carranza. 

Though many venture-backed start-ups have less than 500 employees and thus appear to be eligible for the small business relief programs laid out in the aid package, they could get caught up in the SBA’s complicated “affiliation rules.” The rules, as written, could be interpreted to mean start-ups backed by the same venture capital firm would be added together to determine a total number of “employees,” even though they are separate companies. Since VCs often invest across companies of varying sizes, that aggregate total would almost always exceed 500. 

Two lobbying groups the National Venture Capital Association and TechNet also sent letters to the Trump administration calling for a fix, which were co-signed by venture capital groups from more than 30 states. 

Venture capitalists and start-ups say any delay in getting companies federal assistance will come with major costs. 

“Everyday that we don’t know, layoffs are happening,” said Darcy Howe, managing director of KC Rise Fund, which invests in start-ups in Kansas and Western Missouri. “I am empathetic that they’re building the plane as they fly it,” Howe said. “Things are being done quickly in terms of government timelines. But it’s not very quickly in start-up timelines.” 

Jan Garfinkle, managing director of health care investing firm Arboretum Ventures, said revenue is already down at many companies she’s invested in. Healthcare companies can’t sell their products or services to hospitals that are totally overwhelmed by covid-19, and companies making medical devices have had to halt clinical trials. 

“We are having to lay off between 20 percent – and in some cases 50 or 60 percent – of our workforces in each of our companies, because we don’t have enough capital to keep them employed,” said Garfinkle, who also serves as chair of the NVCA, which represents venture capitalists in Washington. 

The companies each range in size from 10 employees to 150 employees, Garfinkle said, but because her firm has invested in more than 30 companies, the aggregate number of employees across the firm’s investments is well over 500, which could disqualify them all from receiving some federal aid. 

At least four of the companies, including BioIQ, are working on technologies to respond to the coronavirus, Garfinkle said. And every single company she’s invested in would seek a small business loan if the affiliation rules were changed but they can’t wait for Washington to act. 

“We made decisions to lay people off last week,” she said. “We don’t have any time.” 

Other lawmakers on Capitol Hill especially those with ties to California’s Silicon Valley region are calling for a quick fix to the problem.

“The archaic rules that discriminate against start-ups were drafted by bureaucrats who may never have met an entrepreneur and probably do not understand the meaning of the valley of death,” Khanna told me in an email yesterday. “Literally hundreds of thousands of jobs will be lost if start ups with any VC backing are not able to access SBA loans. Ironically, this will harm innovative companies who are helping find cures and vaccines for covid-19, working to procure essential medical equipment, to support telehealth, and to use AI to better understand covid-19 data and help us plan a response.” 

Rep. Anna G. Eshoo, another Democrat who represents Silicon Valley, sent a letter yesterday to the SBA yesterday calling on the agency to roll back the rules. More than a dozen lawmakers from both parties co-signed the letter, which said that Congress intended to help start-up workers with the small business relief provisions of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. 

Eshoo told me in an interview that lawmakers may not have known or understood the existing rules when the legislation was drafted. She said it would be most expedient for the SBA to issue a waiver, but that she would consider action in Congress if the agency did not. She said it could be a matter of life or death for many small companies. 

“If they don’t have any help, they’re going to shut the lights off and it will be the end of their undertaking,” she said. “Innovation that comes from that sector, as small as they are in size, they’re very important.” 

Efforts to relax the rules could run into a major optics problem on Capitol Hill but Eshoo stressed this isn’t a bailout for Silicon Valley billionaires. 

While many venture capital firms have raised record amounts of funding in recent years, Andreessen Horowitz managing partner Scott Kupor says no firm’s reserves were prepared for a global pandemic and the resulting economic consequences. Venture capital firms can deploy some capital into start-ups, he said, but many of his companies are still interested in participating in the small business loan program. 

“The loans can be a potential complement to direct VC investment,” he told me in an email. 

The SBA did not immediately respond to requests for comment on the calls to relax or at least clarify the rules. But Carol Wilkerson, a SBA spokeswoman, said the agency is presently trying to schedule a joint background briefing call with the Treasury Department. 

Meanwhile, some entrepreneurs say they can’t wait more than a week for clarity from the government before making tough calls. Mike Kujak, president and chief executive of the Minnesota medical device start-up, says the uncertainty means he has to “overplan in either having to furlough, let people go or take salary reductions.” 

Without a loan, Kujak tells me that he may have to cut 15 percent of his staff. Employees at the 24-person company who remain will have to take salary reductions, with vice presidents and executives taking more significant cut. 

“We’ll have to do it by the April 15 payroll,” he said.  

BITS, NIBBLES AND BYTES

BITS: Both Facebook and Twitter removed posts from Brazilian President Jair Bolsonaro sharing coronavirus misinformation, Kurt Wagner at Bloomberg News reports. It’s an example of how the platforms, which normally refuse to police world leaders, are taking a more aggressive moderation stance when it comes to coronavirus misinformation. 

In the videos, Bolsonaro stated that the anti-malaria drug hydroxychloroquine was an effective treatment for covid-19. But the efficacy of the drug, which President Trump has also praised, is still under investigation by Centers for Disease Control researchers.

Facebook said the video violated its policies against sharing content that could cause users physical harm. Twitter cited its recently expanded content rules that prohibit the spread of unverified covid-19 information that could put users at greater risk.

Twitter deleted a similar tweet from Trump’s personal lawyer Rudy Giuliani over the weekend. 

Bolsonaro declined to comment on the Twitter removal.

NIBBLES: An Amazon worker says he was fired for helping to organize a walkout of 50 employees at the retail giant’s Staten Island warehouse yesterday, my colleagues Nitasha Tiku and Jay Greene report. The alleged firing could add more fuel to a growing protest movement of gig and retail workers fighting for safer working conditions and benefits during the coronavirus pandemic.

New York Attorney General Letitia James called for an investigation into the termination. “It is disgraceful that Amazon would terminate an employee who bravely stood up to protect himself and his colleagues,” she wrote in a statement.

Smalls was asked to stay at home with pay because he came in contact with a diagnosed co-worker, Amazon spokeswoman Lisa Levandowski told my colleagues. He was fired for ignoring that order and putting his co-workers at risk, she said. (Amazon’s founder Jeff Bezos owns The Post.) 

But Smalls alleges Amazon hadn’t previously warned him not to come in. “They are trying to silence me for speaking up on behalf of the people,” Smalls told Nitasha and Jay yesterday. “It’s retaliation.”

Only 15 of the warehouse’s 5,000 employees participated in the demonstration, Levandowski told my colleagues in a statement. Levandowski did not immediately respond to questions about Smalls’s termination.

Instacart workers also went on a nationwide strike yesterday and workers at Whole Foods, a subsidiary of Amazon, are planning a sickout today. But so far it’s unclear whether the strikes will push companies to meet workers’ demands. Instacart told my colleagues that orders were up compared to the week before. Amazon and Whole Foods both maintain they are taking appropriate steps to keep workers safe. 

The protests have drawn support from at least half a dozen Democrats, including presidential candidate Bernie Sanders (I-Vt.) 

BYTES: Facebook’s fact-checking partners are struggling to keep up with a deluge of viral coronavirus content, Jeff Horwitz at the Wall Street Journal reports. The pandemic poses a significant stress test for ramped-up fact-checking resources that Facebook helped fund ahead of the 2020 elections. 

One partner, Lead Stories, reached its fact-checking quota for its contract with Facebook by the middle of March, Jeff reports. Since March, the company has fact-checked 200 viral coronavirus claims, including viral posts claiming that a coronavirus vaccine for dogs was being withheld from humans. In the United States, the content is mainly a mix of misguided organic content such as false remedies and political misinformation, such as claims that 60 Democrats blocked coronavirus relief payments in the Senate. 

Lead Stories is just one partner of a coronavirus-specific fact-checking alliance, nearly half of which are funded by Facebook. Members call Facebook’s investments essential to increasing fact-checking efforts online.

“We were here before Facebook started working with us,” said Cristina Tardáguila, associate director at Poynter Institute’s International Fact-Checking Network, which coordinates the network. “But there is no other program like this.” 

PUBLIC CLOUD

New York regulators want answers about how the videoconferencing app Zoom, which has surged in popularity during the coronavirus pandemic, is protecting users’ data and privacyDanny Hakim and Natasha Singer at the New York Times report

New York Attorney General Letitia James expressed concerns that Zoom might not have the resources to deal with a boom in users that has made the platform an attractive target for hackers and scam artists. She also wants to know how the company dealt with past security bugs, including a vulnerability that allowed hackers to access users’ cameras. 

The letter also asks what other companies Zoom is sharing user data with, noting a recent Motherboard report that the company shared data from its iPhone app users with Facebook. (Zoom has since removed the feature.)

Zoom might also be violating state requirements that companies protect student data as more teachers flock to the service to teach remote lessons, James said. 

Zoom pledged to cooperate with James’s requests and told the Times it takes “its users’ privacy, security and trust extremely seriously.” 

— More news from the public sector:

PRIVATE CLOUD

— Peak traffic on Comcast’s network is up 32 percent since March 1, the company reported yesterday. That number has increased up to 60 percent in some areas during the covid-19 pandemic. A shift to teleworking played a big role: Video and voice-over-Internet conferencing is up 212 percent while VPN traffic is up 40 percent, the company reported.

— More news from the private sector:

#TRENDING

— News trending around the web:

CHECK-INS

  • The Alliance for Securing Democracy  will hold an interactive webinar to discuss narratives and long-term trends in China’s information manipulation efforts at 10:00 a.m. ET.
  • The Stanford Institute for Human-Centered AI  will livestream its COVID-19 and AI conference on Wednesday from 9am- 4pm PT.

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