Surveys Show Startups Need Immediate Assistance
TLDR: Surveys conducted by Engine and other entrepreneurial organizations show that U.S. startups need further economic relief to sustain their operations in the midst of the coronavirus pandemic. Almost two-thirds of respondents to our survey said their startups are in need of emergency financial support, even as entrepreneurs told us they are still seeking certainty that they will be eligible to apply for existing government programs.
What’s Happening This Week: Despite 65 percent of respondents in our survey saying they plan on applying for the U.S. Small Business Administration’s COVID-19 related loans, startups and small businesses are still waiting for policymakers to clarify and expand upon the available emergency relief programs to help them survive the current economic uncertainty.
Last month’s Coronavirus Aid, Relief, and Economic Security (CARES) Act included $350 billion in Paycheck Protection Program (PPP) loans from the SBA to help small firms—companies with under 500 employees—cover basic expenses and keep their employees on their payrolls. But demand for the PPP loans has been high, and many VC-backed startups (40 percent of the startups in our survey) may still be excluded from the program. While there is growing agreement that $350 billion is not enough for PPP loans, lawmakers have not been able to agree on further funding or clarifications to the program so far.
Small businesses across the country have already rushed to secure PPP loans, and lawmakers are continuing to negotiate an additional aid package that would increase the program’s funding by $250 billion. This aid package also presents an opportunity for lawmakers to clarify and ease the SBA’s affiliation rules for VC-backed startups who need economic relief. Under the current rules, many VC-backed startups are concerned that they will be disqualified from receiving much-needed loans because they may have to count affiliates’ employees (their investor’s and other startups’ employees) as their own.
With millions of American workers already unemployed as a result of the pandemic, it is crucial for lawmakers to continue supporting the small businesses and startups that are trying to stay above water. Startups are, and will continue to be, an essential engine for job growth and innovation as we emerge from the current pandemic. Our survey—and similar surveys from other startup organizations—show that policymakers and federal officials need to do all they can to ensure that the U.S. startup ecosystem is receiving the economic support that it needs during this difficult time.
Why it Matters to Startups: With banks and the SBA already inundated with PPP loan applications, many startups are concerned that further delays in securing emergency funding could be disastrous for their businesses. Additionally, many early-stage startups—often self-funded and lacking outside investors—are concerned about their ability to maintain their businesses without any direct financial support and assistance.
Engine conducted a survey over the past week, and the results indicate that startups of all sizes need emergency liquidity. Sixty-four percent of respondents said they need emergency relief at this time to keep their companies in business and to prevent employees from being laid off, while 65 percent said they plan on applying for the SBA’s COVID-19 related loans if they qualify. Fifty-seven percent of the startups that plan on applying for SBA loans said they are portfolio companies of venture capital firms, likely making them ineligible for the loans under current law.
Layoffs are a particular concern right now, even though many of the startups that participated in our survey are doing everything they can to keep their employees on the payroll. Fourteen percent of respondents said that they had laid off employees as a result of the pandemic, and an additional 33 percent said they anticipated having to lay off employees in the next three months. Another 29 percent were unsure whether layoffs were in their immediate future.
If stronger financial measures are not brought forward to bolster the U.S. startup ecosystem, more small firms will be forced to lay off staff and slash budgets in order to avoid insolvency. Smoothing out access to the SBA’s PPP loans is certainly crucial—a sentiment that was frequently echoed by survey respondents.
Startups responding to our survey identified problems with the PPP program for companies without VC funding as well. Pre-seed startups and self-employed entrepreneurs may not be able to benefit from existing loan programs for a variety of reasons—because it is too difficult to navigate the application process, because payroll-based loan forgiveness is too uncertain at this time, or because early-stage companies may be looking to hire and covering current payroll expenses is irrelevant to their survival. Respondents pointed to these firms as being particularly vulnerable at this time, but also noted how important they are to the U.S economy. As one startup founder noted, “if a critical amount of these startups fail, we will fall behind in the innovation race.”
Surveys conducted by other organizations mirrored many of our results. 500 Startups, a venture capital firm, conducted a survey that examined the impact of COVID-19 on early-stage investments and found that 83 percent of investors said that the pandemic was having an impact on their investment activities or plans. Investors in the survey said that startups should take certain steps—such as increasing their runways and decreasing costs—in order to plan for a potentially extended economic impact.
A member survey conducted by TechGC—an organization made up of the general counsels from leading VC funds and high growth tech firms—found that 49 percent of respondents had already, or were in the process of, implementing a hiring freeze. And 30 percent had already or were expecting to conduct layoffs. Forty-five percent said they were negotiating rent concessions, and 43 percent said they were receiving requests to modify contracts and extend payment terms. But these measures—while good steps—are largely stop-gap moves, which are already not enough to stem layoffs. A prolonged recession caused by the pandemic would ravage startups regardless of the cost-saving measures that they can take at this time.
Startups believe that policymakers, federal officials, and state lawmakers can still take a variety of steps to strengthen emergency loan programs and provide additional support to small firms. Respondents to our survey floated a number of additional steps for safeguarding the country’s startup ecosystem, including:
Clarifying and easing the affiliation rules around VC-backed startups and eligibility for PPP loans.
Increasing limits and easing restrictions on Regulation Crowdfunding.
Offering other interest-free loans and grant opportunities to support startups through a potentially drawn out economic downturn.
Ensuring that underrepresented founders and minority-led startups are receiving the support they need at this time.
Considering additional relief options beyond loans and tax credits focused on payroll—for example, R&D tax credits, grants, or forgivable loans that look beyond payroll expenses.
As existing funding opportunities quickly dry up, it is critical for officials and policymakers alike to look at a variety of alternative steps to support startups. Whether it’s increasing state- and federal-level access to grant programs, supporting other economic initiatives that can benefit early-stage firms, or smoothing out fundraising roadblocks for entrepreneurs, policymakers at all levels need to do all they can to ensure that our country’s startup ecosystem does not falter during this difficult time.
