Finance

More than 4,800 startups that applied for federal PPP loans in the coronavirus-led shutdown had raised venture funding in the last 2 years

  • According to new data from CB Insights, 2,267 investor-backed startups that applied for federal assistance through the Paycheck Protection Program had raised outside funding in 2019. That was the largest single group of applicants.
  • Three of the top five investors whose portfolio companies applied for loans were startup accelerators, which could indicate that many applicants were early-stage companies.
  • The investor-backed companies that had applied for or received investor funding in 2018, 2019, or 2020 exceeded the number of applicants compared with any other year.  Critics have argued that companies with access to investor funding should not have applied for the PPP loans. 
  • Although internet startups comprised the large majority of investor-backed PPP applicants, those in the healthcare and telecommunications industries also made up a large portion of PPP applicants.
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Thousands of investor-backed startups applied for federal loan relief during the coronavirus-led economic downturn. Of those, more than 4,800 had raised outside funding between 2018 and this year, with the highest number having scored investor funding in 2019.

Critics have claimed that companies able to draw on funding from their equity shareholders should not have tried to access federal financial assistance through the Paycheck Protection Program. Loans from the program were meant to tide struggling companies over during the business shutdowns ordered due to the coronavirus pandemic, and allow them to keep their employees on payroll.

It could be argued, however, that the young companies fueled by venture capital receive the money to execute aggressive and costly growth plans. Those that received investor backing, even in recent years, might already have spent much of their reserves by the time the pandemic hit. At the same time, fewer venture firms have been investing in new companies while they reserved a significant percentage of their money to help support existing portfolio companies, a Pitchbook survey from June 25 found.  

According to new data from CB Insights, 2,267 investor-backed startups that applied for federal assistance through the Paycheck Protection Program had raised outside funding in 2019. In 2018, 1,363 startups completed fundraisings, and 1,216 of the loan applicants had raised in 2020. The research firm based its report on data released on Monday by the US Treasury.

Three of the top five investors whose portfolio companies applied for loans were startup accelerators like Techstars and Y Combinator, suggesting that many of their PPP loan applicants may have been startups at the earliest stages of growth.

Early-stage startups, especially those that graduate from an accelerator program, typically receive a one-time investment from the organization that runs the program before they pitch to investors at massive Demo Day presentation events. Y Combinator’s Demo Day in September 2019, its last in-person event after the first 2020 Demo Day was moved online, showcased its largest cohort ever and had to be spread over two full days to accommodate everyone.

Although many startups leave Demo Day with term sheets in hand, much of the prospective investor funding has already been committed for pricey office leases and hires of top talent. That can contribute to a higher burn rate at early startups, a term that refers to a startup’s expenses relative to cash reserves and incoming revenue.

Still, despite the arguable need for venture-backed startups to grasp at government relief when the pandemic upended all their plans, their participation in the PPP program has been hotly argued, even among VCs and entrepreneurs.

“It’s a little vague in the rules, and you have to think about answering this question — am I doing this in good faith?” Erica Dorfman, VP of cash at fintech startup Brex, said in a webinar about the PPP program in April. “If that’s the case, you likely do need this to keep payroll up. You have to ask, does this make sense and is it something you need based on your budgeting needs for the next year.”

Dorfman explained that 75% of the funds, once allocated, must be used for payroll costs if founders want to be eligible for loan forgiveness down the road. The remainder can be used for operational needs, like lease payments or service costs, that keep the business operating as normal.

Back in April, Dorfman emphasized that whether or not startups should apply for PPP loans needed to be a case-by-case decision. She said that all teams should meet with board members and any additional stakeholders to evaluate all the options, and get started on gathering the mountains of information needed to complete the PPP application if that’s what’s decided.

Whatever decision a startup made on the PPP program, investors have been warning them to re-think their growth spending plans and hunker down.

“You can always easily dial back up the aggressiveness and risk profile if we get more optimistic visibility, but if you don’t take action right away — to preserve capital, cut your burn rate, have fundamentally attractive unit economics, edit the product to make more sense in the new world order — if you don’t do those right away, the opportunity to do those things and survive is probably lost forever,” Founders Fund general partner Keith Rabois said in a podcast in May.

CB Insights warned that the data released by the Treasury on Monday needed to be checked, because some venture firms and startups tallied in the government data have denied applying for or accepting PPP loans.

In all, more than 9,600 investor-backed startups applied for PPP loans, CB Insights says, although it is not clear how many of those companies received the loans. Of those, roughly 1,600 were internet startups, which includes everything from enterprise software to consumer e-commerce companies. Healthcare and telecommunications companies also made up a sizable portion of applicants, according to CB Insights. Roughly 1 in 4 companies were based in California, with other tech hubs like New York and Texas rounding out the top five markets.

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