Startups Need Lawmakers to Find a Roadmap for Recovery
TLDR: U.S. startups are in need of further economic relief to support their business operations amid the coronavirus pandemic. In a recent survey conducted by Engine, a majority of respondents who received federal assistance said the financial support they obtained was insufficient, and entrepreneurs voiced support for a variety of more-targeted policy proposals—such as equity investments, forgivable loans, a startup fund, tax credits, and grants—that could help provide them with the assistance they need during this difficult time.
What’s Happening This Week: Though a plurality (46 percent) of startups in our survey said they need emergency assistance to keep their businesses open through the end of the year, Congress and the Trump administration are continuing to butt heads this week over the scope of a coronavirus relief package to support struggling Americans and small businesses.
Startups and small businesses rushed to receive emergency funding from the Coronavirus Aid, Relief, and Economic Security (CARES) Act that passed in March—legislation that included billions in Paycheck Protection Program (PPP) loans from the U.S. Small Business Administration to help small firms weather the economic uncertainty. Shortly after the bill’s passage, Engine conducted a survey in April which found that 65 percent of startups planned on applying for COVID-related loans—such as PPP—provided by the CARES Act.
Our most recent survey found, however, that the startup community is looking for Congress to move beyond PPP loans to provide additional economic relief to struggling entrepreneurs. While 54 percent of startups in our survey said they received emergency financial support within the past six months, 61 percent of those who received federal relief said it was not enough to support their business operations during the pandemic.
Despite mixed messages from the White House in recent weeks, policymakers are continuing to hold discussions about what to include in the next coronavirus relief package. Senate Majority Leader Mitch McConnell (R-Ky.) announced yesterday that the Senate will vote on a limited coronavirus relief bill later this month that includes new funding for PPP loans, although Speaker of the House Nancy Pelosi (D-Calif.) told House Democrats that the legislation is a nonstarter.
Why it Matters to Startups: Many startups and entrepreneurs continue to be in desperate need of emergency federal assistance, and the survey shows that Congress must act quickly on a coronavirus relief package that adequately supports the startup community. Instead of simply funding previous relief programs, Congress needs to examine other ways of supporting struggling startups and small businesses.
The goal of our recent survey was twofold: to better understand how startups have been able to utilize existing relief programs, and to determine additional steps that Congress can take to better protect startups from the economic fallout caused by the pandemic. While a majority of startups said they received federal relief over the past six months—and only 27 percent of respondents said they laid off workers—it’s concerning that a plurality of respondents in our survey also said that they need emergency financial support to keep their businesses open through the end of the year. This type of lingering concern across the startup community portends to worsening economic uncertainty if Congress does not decisively act on a comprehensive relief package.
Although PPP loans have received a lot of legislative attention, the program’s focus on loan forgiveness for companies that use the money for payroll expenses means that many early-stage startups—particularly those with few employees—are unlikely to receive the full benefits of assistance. And since PPP expired in August, startups have been stuck navigating the program’s murky rules and regulations while waiting for Congress to provide further financial relief.
Engine’s April survey of startups found that entrepreneurs wanted lawmakers to focus on more targeted relief opportunities for the startup community. After speaking with entrepreneurs and lawmakers over the past several months, Engine came up with a roadmap for recovery containing alternative policy proposals that could help bolster the startup community in future relief packages. In our recent survey, we asked respondents to consider some of these startup-specific policy proposals—such as federal equity investments, forgivable loans, a startup fund, tax credits, and grants. When given the choice between these five startup-focused proposals, respondents were largely divided between a designated startup fund (31 percent) and more expanded forgivable loans (30 percent).
By creating a designated “startup fund,” policymakers could support early-stage firms by eliminating the competition for funding they face from more-established companies. This type of fund could also bolster the long-term survival of startups by allocating a portion of future loan funding for high-growth startups, such as firms that have less than 100 employees or have launched within the past 10 years. Likewise, more expanded loan programs could better support the startup community if policymakers enlarge the scope of forgivable expenses and allow companies to use loans for purposes beyond employee salaries.
Respondents to our survey also provided their thoughts on a number of additional steps that policymakers can take to further support startups at this time, including:
Creating a federal angel tax credit to court out-of-state investors and attract new investors.
Revising the U.S. Securities and Exchange Commission’s "accredited investor" definition in order to unlock more capital for early-stage startups by increasing the number of individuals who can participate in equity-based financing.
Payroll tax relief for pre-revenue startups.
Widening the SBIR and STTR programs to include U.S. startups not receiving federal funding.
Automatic forgiveness for PPP loans under $150,000.00
Offering forgivable loans with a streamlined loan process that allows entrepreneurs to determine how funds are spent.
As Congress and the Trump administration continue to discuss the framework of the next coronavirus relief package, it is critical for policymakers and federal officials to consider how these alternative policy proposals would embolden the U.S. startup community. While PPP and other small business loans provided small businesses and startups with short-term support, these types of proposals would provide companies with the long-term assistance they need to drive our nation’s economic recovery forward.
To read a breakdown of our survey, please click here.
On the Horizon.
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