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Startups tap small-business aid, face backlash


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 employees but did not ask its investors for more funding. Jay Roberts, Domio's chief executive, said it had no immediate need to raise more money and most likely had enough cash to last until 2021.

Instead, Domio applied for a federal loan under the Paycheck Protection Program, the $349 billion measure to save jobs at small businesses during the outbreak. It received a loan on April 13. Three days later, 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 aid program. Several companies that got millions of dollars in loans, such as the Shake Shack and Kura Sushi restaurant chains, 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.

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Now, scrutiny of the program 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 immediately because of economic pain or begging for donations in 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.

"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."

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."


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 of the startups leaned on their relationships with banks, investors, law firms and the lobbying group.

AltMarket, a Los Angeles startup that released a cryptocurrency honoring a Wu Tang Clan rapper, received a federal loan on April 14, its chief executive, Bryce Weiner, said. He said his company, which has relationships with financial regulators, was better equipped to sort through the loan application than, say, a restaurant owner. He added that he had worked closely with his attorney 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.


Field, the association lobbyist, said it was up to individual companies to decide whether they could truthfully tell the government that they required help.

"You have to certify need, there's no doubt about that," he said. "How do you define need is a subjective question that you have to figure out."

In recent weeks, prominent investors including Albert Wenger at Union Square Ventures, Mark Suster of Upfront Ventures, Seth Levine of Foundry Group and Olsen of Drive Capital, have published blog posts or letters urging most startups not to pursue the money.

"We just think those companies ought to not get in line in front of Main Street businesses," Wenger said.

Manny Medina, founder of Outreach, a sales software startup that has raised $238 million and is valued at $1.1 billion, said his board of directors and bank had initially pushed him to apply for a loan. His contacts at Silicon Valley Bank told him that the program would be a "free-for-all" and a "run to the money," he said. Outreach did not apply, he said, but "there was some real pressure."

Julia Thompson, a spokeswoman for Silicon Valley Bank, said that what Medina had described did not represent the lender's "official stance, but may have been one person's characterization."`

Business on 04/30/2020

Print Headline: Startups tap small-business aid, face backlash


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