This week, Southeast Life Sciences joined a national coalition to encourage the federal government to clarify that small businesses with equity investors will be included in the Keeping Workers Paid and Employed Act provision included in the Coronavirus Aid, Relief, and Economic Security (CARES) Act.
The imminent fate of hundreds of thousands of jobs across the Southeast and America hinges on the implementation of these rules. In order to survive, these companies must make difficult decisions over the course of the next several days. Rapid clarity on how these rules will be interpreted for purposes of the program can provide confidence to these vital small businesses that resources will be available and will mitigate the layoffs beginning to sweep across the startup ecosystem.
The Keeping Workers Paid and Employed Act is one of the most powerful small business recovery programs ever passed by the United States Congress. This program will provide loans of up to $10 million dollars to small businesses up to 500 employees. The benefits are carefully crafted to encourage the retention of middle-class jobs through the economic crisis caused by the COVID-19 pandemic. If this is effective then millions of jobs across America will be preserved, potentially preventing the downward spiral in economic activity created by widespread layoffs.
Most American startups are below 500 employees and are not yet profitable. Like other small businesses, these companies survive on a month-to-month basis, meaning their workforces are also particularly vulnerable in an economic downturn. Startups commonly take equity financing, and in an economic crisis, that capital must be used to keep the entity in operation. Companies must make difficult decisions fast on whether to lay off some of their workforce or run the risk of exhausting their available capital and destroying the business. Every single one of these companies are currently looking through their books to better understand how far they can stretch their current available capital to preserve the entity through the economic crisis. This timeline is often colloquially referred to as “runway.” Because such a high percentage of the capital is spent on payroll, often the only way for startups to extend their runway is furloughs and layoffs.
Thankfully, Congress responded to the crisis with the Keeping American Workers Paid and Employed program that is designed to prevent mass layoffs at small businesses. But how the Department of Treasury and the Small Business Administration (SBA) will apply the rules in upcoming guidance to implement the program is a central question to program access for startups and other small businesses with equity investors. If the current SBA rules on affiliation are applied, they will create significant confusion about eligibility, delay the application process, render many small businesses ineligible, and cause many more to forego the process. Each of these challenges will exacerbate layoffs.
In the last few days a brief survey of a cross-section of venture investors was conducted to gauge what the impact would be on their portfolio companies if they do not have access to the small business lending facility. The responses were dramatic, with many companies considering layoffs between 25 and 50 percent of their workforce. To provide a perspective of the impact of these layoffs on the workforce, about 34,000 companies in the United States have raised venture funding since 2015. Of the approximately 20,000 of these companies for which the employee count is captured, 97% have fewer than 500 employees. 1 As noted above, about 2.27 million Americans work at these companies, with many more people employed in support roles at other companies.
Failure to provide clarity that small businesses with equity investors are eligible for the loan facility will cost jobs not only at startups, but at many of the independently owned service oriented small businesses in communities across America. These startup workers, who include engineers, customer service representatives, and human resources professionals, are the very customers that service-oriented small businesses such as restaurants and coffee shops rely on for sales making an economic comeback post crisis even more difficult.
Finally, if the affiliation rules are not applied appropriately, our country will experience incalculable cost to our science and technology leadership. Venture capital backs the world’s most innovative companies, but without support from the government hundreds of research projects across the country are at risk of being shelved. This is potential progress that will pause overnight, and just as important, will set back American competitiveness in an increasingly global race for innovation leadership back by years.
About Southeast Life Sciences
Southeast Life Sciences is a regional non-profit organization dedicated to the growth of the life sciences industry. It was formed in 2019 through the merger of Southeast BIO and the Southeast Medical Device Association (SEMDA).
The mission of Southeast Life Sciences is to efficiently, effectively connect our industry’s innovators and entrepreneurs with the right investment and partners be they institutions, corporations, venture capitalists or angels.
We facilitate connections, conversations and capital investments through continuous networking, education and funding opportunities for life-science innovators of all shapes and sizes.