Viewing bailout funds as ‘free money,’ startups face scrutiny
Domio, a startup that offers short-term rentals, has its headquarters in a New York City loft that features beer on tap, a game room and a wall of house slippers for visitors. The fast-growing and unprofitable company has raised $117 million in venture capital, including $100 million in August.
When the coronavirus pandemic caused Domio’s bookings to dry up last month, it laid off staff but did not ask its investors for more funding.
Instead, Domio applied for a federal loan under the Paycheck Protection Program, the $349 billion plan to save jobs at small businesses during the outbreak. Jay Roberts, Domio’s chief executive, said it now most likely had enough cash to last until 2021. Three days after Domio received a loan, the program’s funding ran out, even as hundreds of hard-hit restaurants, hair salons and shops around the country missed out on the relief.
Questions about whether the funds were disbursed fairly and whether some applicants deserved them have drawn scrutiny to the program. Several companies that got millions in loans, such as the Shake Shack restaurant chain, faced criticism and eventually gave the money back. On Friday, President Donald Trump signed legislation approving a fresh $320 billion to replenish the program, which the Small Business Administration is directing.
Now, scrutiny has reached technology startups like Domio. While many of these young companies have been hurt by the pandemic, they are not ailing in the same way that traditional small businesses are. Many mom-and-pop enterprises, which tend to employ hourly workers and operate on razor-thin margins, are shutting down because of economic pain or begging for donations via GoFundMe campaigns.
But startups, which last year raised more than $130 billion in funding, have sometimes turned to the government loans not for day-to-day survival but simply to buy useful time. In Silicon Valley parlance, they want to extend their “runway,” or cash on hand, to a year or more. Many are backed by venture capital investors, who have accumulated record sums of capital — $121 billion as of the start of this year — that could be used to keep companies afloat.
The startup rush to tap the finite pool of government aid has stirred up a furious debate in Silicon Valley over whether these companies should have applied.
“They are doing it because they can,” said Chris Olsen, a venture capitalist with Drive Capital Partners in Columbus, Ohio. “They view it as free money.”
Silicon Valley Bank, which serves startups and is one of the lenders offering the Small Business Administration loans, said it had received 5,500 applications and that nearly two-thirds — more than 3,600 — had been approved.
Most tech startups have fewer than 500 employees, making them eligible for the federal loans. They needed simply to certify that current “economic uncertainty” made the funds necessary to support their “ongoing operations.” The loans can be forgiven if used to cover payroll. The government has not shared a list of recipients.
Some startups said they saw how they had an advantage over traditional small businesses in obtaining the loans. While the application process has been difficult to navigate, many startups leaned on their relationships with banks, investors, law firms and the lobbying group.
AltMarket, a Los Angeles startup that released cryptocurrency honoring the late Wu-TangClan rapper, O.D.B., received a federal loan on April 14, its chief executive, Bryce Weiner, said. He said his company, which has worked with financial regulators in the past, was better equipped to sort through the loan application. He added that he had worked closely with his lawyer for a week, contacting banks and loan providers.
“It’s clear that people who need this money probably don’t have access to what’s going on,” Weiner said.