Startups Venture Capital

Should Tech Startups Have Taken PPP Loans

I’ve been reading a lot of commentary recently on tech companies that took PPP loans during Covid. Was this right? What’s definitely not right is our government bailing out bloated corporations during the pandemic. If you believe in capitalism then we should let the free markets take their path and prune the weak. One would argue that this infusion of cash saved jobs. Not sure how true that ultimately will become in October when the stipulations attached to the loans disappear. I bet we’ll see more layoffs, lots of them. US airlines have already made announcements for layoffs as soon as they are legally able.  So basically taxpayers have funded a short term experiment on borrowed time that was setup for failure from the beginning. Harvard economists agree, the program has had little impact on employment at small businesses to date. 

The vast majority of small/medium businesses in America have not raised money from venture capitalists and therefore cannot tap into these monetary resources. Scott Galloway, a professor of marketing at NYU, believes startups shouldn’t receive PPP loans.  If entrepreneurs can’t convince their VC investors to put more money in during these challenging times to save the business then the ‘company should be shut down.’ There’s a misconception, however, that VC’s have unlimited pools of capital to work with. This is not the case.  VC’s are not banks; they have fiduciary duties to their LP’s as well as a set amount of capital put aside for each of their portfolio companies for follow on rounds, etc. They can’t just loan money out to their portfolio, which is what many think they should do, in lieu of taking the government cash from Uncle Sam.   

I think a new model could have been developed that would have placated both sides of the argument. For example, could the loans to venture backed companies have been structured with warrants or as true debt vs. essentially a grant. Startups still employ 2.2 million people here in the US and are not immune to the current challenges, but they’ve also been more fortunate in having capital to scale and grow without the risk that comes from bootstrapping.   

Ultimately, the entire stimulus from this pandemic is a bust in my mind. I’m not much of a believer that trickle down economics really works. I’d rather see every single American get an extra $100,000 in their pocket than we pump billions into airlines.  That would jumpstart the economy!

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