Apr 7 2020

SBA PPP Loans Aren’t for Everyone

There’s a healthy debate going on right now at many VC firms about whether venture-backed companies should apply to the SBA’s Payroll Protection Program (The Information had a good article on this yesterday (paywall), and Albert Wenger from Union Square Ventures put up an excellent post on the subject here). This program is designed to help businesses struggling with the Covid-19 crisis retain employees and pay for critical infrastructure (specifically rent, mortgage and utilities). I wrote an OpEd piece for CNBC yesterday with Elizabeth Macbride that outlined a number of ways that the program, as currently implemented, is failing to reach many of the businesses it was intended to support. The program is complicated, being implemented through only a subset of the banking sector, is being interpreted differently by different banks, and has a loan forgiveness formula that leaves out many critical businesses that are in desperate need of the money (specifically restaurants and hospitality businesses).

Venture backed companies employ 2.7m people in the US according to the NVCA. There is no question that there are many venture backed companies whose businesses have and will continue to be significantly affected by the economic crisis that has been caused by Covid-19. These companies can and should apply through the SBA’s PPP program. But there are voices in the venture – and broader – community that believe every company in the US should apply for a PPP loan. That this is “free money” from the government. It’s not and at Foundry we think it’s a mistake to view it that way. While the rules of the program are unclear, vague and subject to interpretation and subjective opinion, there are a number of things that companies need to certify to be true about their business. They include:

  • Current economic uncertainty makes this loan request necessary to support the ongoing operations of the applicant.”
  • “The funds will be used to retain workers and maintain payroll or make mortgage, lease, or utility payments.”

We believe that many companies will look at their businesses and determine that there is a clear and real need for the additional funds offered through PPP. But we’re encouraging all of the companies in the Foundry portfolio to take a step back and consider whether they truly qualify for the program and whether their participation will save jobs and result in the business being less threatened by the crisis. We understand that there will be many companies that fall into a grey area. We don’t know today just how serious the economic downturn will be and just how impacted many businesses will become. Hard calls will need to be made but we’re encouraging companies to make them with thought and compassion.

Below is the email that we sent to our portfolio last Friday outlining our views on how they should approach this. We thought that it was important to share it more broadly.


Foundry CEOs & CFOs,

First of all, we can’t begin to tell you how impressed we’ve been with the leadership that you have all exhibited over these last several weeks. These are very challenging times both personally and professionally and these are the moments where true leadership is demonstrated. We sincerely thank you for the thoughtful and compassionate approach you have all taken during this crisis so far.

We had over 70 participants on the CARES Act/SBA/PPP call last night and we’ve had countless one-on-one conversations on this topic with many of you over the last few days so we know there is a lot of anxiety around the application process at the moment. The high anxiety levels appear to come from a mix of excitement and uncertainty which is certainly understandable because both components are clearly at play here. Although we can’t immediately relieve the anxiety, we strongly encourage you to take a few deep breaths and step back for a moment of reflection.

As you reflect, we think it is important to start by asking yourself “Was this relief package created for my company?” We’ve heard many of you talk about how attractive the economics of the loan could be for your company. The term “free money” has been tossed around more than a few times. We’ve also heard plenty of excitement around how simple it could be to qualify in part because the qualification requirements are both broad and ambiguous. However, the reality is that receiving a loan for your business means it isn’t going to another business that might also deserve the money so receiving a SBA loan does come at a cost to the broader small business community. Given the already mentioned ambiguity, we can’t, unfortunately, rely purely on the letter of the law to make this qualification decision for us. We all have to apply our social conscience and good judgment to come to the right answer. From Foundry’s perspective, we believe PPP was designed to accomplish two things:

Save jobs

Stop businesses from failing that are gravely threatened by the current crisis

No doubt that all of our companies would benefit from more cash with attractive loan terms on the balance sheet so it isn’t surprising that the majority of you are considering applying for the loan. At the same time, we know that many of you have not eliminated jobs or have no immediate plans to eliminate jobs at the moment. If you aren’t definitely planning to eliminate jobs, should you apply? Will your business likely fail without this loan?

As the application process is currently written, you (and perhaps your affiliates) will have to certify “Current economic uncertainty makes this loan request necessary to support the ongoing operations of the applicant.” This statement is highly ambiguous and could be interpreted in numerous ways. We’re sure most of you could easily rationalize this statement to be true. At the same time, providing false information in this application is a federal crime that includes jail time. In addition to your social conscience, you should have real conviction and certainty that you qualify in your own hearts and minds.

If you have a strong balance sheet, have recently raised money, or have some certainty around a near-term capital raise, we think you should reconsider applying. Although things are chaotic at the moment and it might be possible to take advantage of a lack of controls in the system, that doesn’t mean we should necessarily do so. Imagine for a moment that three years from now, the WSJ or FBI does a deep forensic analysis on the small businesses that received loans during the crisis. Would you feel good about the details of your situation being revealed in that process?

You are all proven leaders who have repeatedly demonstrated the ability to take a thoughtful and compassionate approach to decision making. While we all sort through the details and logistics of the loan application process, we encourage you to take a step back and remember to consider the big picture.

Thanks for reading.