By Larry Rulison, originally published in Albany Times Union on April 3, 2020 Updated: April 3, 2020 3:30 p.m..
Tech start-ups feeling financial pressure of pandemic too
ALBANY – It’s not just restaurants or bars that are feeling the financial pressures of the COVID-19 pandemic.
Start-up tech companies in the Capital Region and across the country are having to deal with potential layoffs as they seek to preserve cash and capital – often provided by venture capital and private equity firms that have to answer to investors.
That’s why start-up companies – which the public might think are immune to the pandemic – are being urged to tap into the federal government’s new Payroll Protection Program designed to keep small businesses solvent and allow them to retain their employees instead of laying them off and potentially losing them forever when the pandemic ends.
Jeff Schwartz, a partner at the law firm of Phillips Lytle in Albany who specializes in venture capital, startups and mergers and acquisitions, says that startups are just as much at risk from COVID-19 as other small businesses.
“I’m sure they all are because they are always strapped for cash,” Schwartz told the Times Union. “There’s no reason not to tap (into the Paycheck Protection Program).”
Of course start-ups funded by venture capital firms or private equity funds may have trouble navigating the PPP, Schwartz said because of the program’s eligibility terms. Companies of 500 or less are eligible, but as Schwartz points out, the legislation says that start-ups must count the employment of affiliates, which may be defined as other companies being funded by that venture capital or private equity firm.
Under the $349 billion loan program, small businesses can get loans through U.S. Small Business Administration-approved lenders to pay payroll and rent expenses and other costs to remain afloat and keep their employees working. The loans will be forgiven in some instances.
But Schwartz worries the rules regarding start-ups that get VC money could slow down the approval of some loans. Local chambers of commerce have also warned that there is a lot of confusion especially among banks on who is eligible.
“You still need a lender willing to take the risk in approving this loan for an entity for which eligibility is unclear,” Schwartz said.
Nasir Ali, CEO of Upstate Venture Connect, which fosters the start-up and venture capital sectors across upstate and the Capital Region, says that while start-ups might not have the debt of manufacturers and other traditional businesses, they are always conserving cash and struggle to keep the best employees.
“They (start-ups) are highly dependent on their workforce and extremely concerned about their welfare,” Ali said. “Again, tech companies can adopt to working remotely faster than traditional businesses, so that too is a silver lining.”
Ali says all small businesses, including start-ups, should look at accessing the loan program.
“Even those with cash on hand could use extra support during this period of revenue uncertainty, so it is wise for all eligible CEOs to take advantage of the PPP program,” Ali said.