How so many start-ups got PPP loans

More than a dozen companies backed by venture capital firms obtained up to $117m in government loans, according to an analysis by Venture Capital Journal.

US Treasury Secretary Steven Mnuchin
US Treasury Secretary Steven Mnuchin. Reuters

Chalk up another victory for the creative thinkers behind the start-up economy.

When the US government announced a loan program for companies hurt by covid-19, many believed start-ups backed by venture capital firms wouldn’t be able to participate. That was because the start-ups looked much bigger than they were due to their “affiliation” with other companies in the portfolios of venture funds.

It came as a surprise when the government released details of its Paycheck Protection Program this week showing that VC-backed companies had in fact been able to get the loans. If you consider Silicon Valley Bank’s PPP loans to be a proxy, VC-backed companies to receive loans likely number in the low thousands. A preliminary analysis of the SBA data by Venture Capital Journal found more than a dozen VC-backed companies obtained up to $117 million in government loans.

What happened?

First, a bit of background. The PPP loans from the Small Business Administration were aimed at small businesses with no more than 500 employees. Common sense would dictate that a VC-backed start-up with 10 employees was eligible. However, some believed that such a start-up shouldn’t be viewed as a standalone business, and that it should be considered part of the larger portfolio of companies backed by a venture fund. If the larger portfolio of companies employed 1,000 people, then all of the companies in the portfolio would fall outside of the 500-employee threshold. Or so the thinking went.

Attorneys went to work to solve the problem.

While it was not initially clear if VC-backed companies could be eligible for the PPP program, it turned out that SBA’s regulations considered start-ups as standalone businesses as long as no one particular investor held majority ownership or contractual control, such as a right to block actions by the company’s board of directors, said Michael Torosian a partner with the law firm Baker Botts.

The rules precluded many private equity-backed companies from applying for the loan because all the PE firm’s portfolio companies would be automatically considered “affiliates” and likely exceed the 500-employee threshold.

But since VCs don’t normally own more than 20 percent of their investments, start-ups had to make sure that a single venture investor did not have voting control, such as a right to block the sale of the company.

A way around it is to adjust the company charter or potentially its financing documents so that one investor no longer has veto power by itself, Torosian said. Giving a second VC shared voting control of the veto power would also help start-ups comply with the “affiliation” rules, he said.

“But companies and their investors who are modifying these rights have to do this irrevocably,” he said. “For later-stage companies, for one investor to give up control is a big deal.”

VCJ’s sampling of the list

It is unclear how many of the companies in the SBA report have obtained venture capital. There are more than 660,000 company names in the report. A quick sampling by VCJ found at least 13 VC-backed companies that received PPP loans worth a combined $58 million to $117 million. Those same companies have raised a combined $2.5 billion in venture financing from 203 investors, according to Crunchbase.

The companies are supported by a host of prominent venture firms, including Accel, Bessemer Venture Partners, Andreessen Horowitz, Founders Fund, GV (formerly known as Google Ventures), Index Ventures, Kleiner Perkins, New Enterprise Associates, Sequoia Capital and SoftBank Vision Fund.

It should be noted that there is some question about the accuracy of the data in the SBA report. For example, the report showed Andreessen Horowitz, Foundation Capital and Index Ventures had received PPP loans, but all of those firms told Bloomberg the information was wrong.

Also, two venture-backed companies said they should not have been included in the report: Bird, a scooter-sharing service, and ZocDoc, an online service for finding and booking doctors.

Bird “was erroneously listed” in the SBA report, a company spokesperson said via email. “We did not apply for nor did we receive a PPP Loan. We decided as a company not to file an application as we did not want to divert critical funding from small and local businesses.”

Zocdoc told Protocol that it received a PPP loan but later returned it.

VCJ emailed the 13 VC-backed companies we identified in the SBA report asking them to confirm they had received PPP loans. Four confirmed to VCJ or other media outlets that they were loan recipients: Getaround, a car-rental service; NetBase Quid, provider of “social intelligence” to global brands and ad agencies;, a service to improve online reputations; and Revolution Foods, a maker of meal kits.

(We will update this story and table if we hear back from others.)

Revolution Foods obtained a PPP loan for $7.95 million, a spokesperson said. The company was able to retain 500 jobs with the loan, the SBA report states. Revolution Foods previously raised about $138 million from venture firms, including DBL Partners, Nuveen Investments, Revolution and The Westly Group, Crunchbase reported.

A Revolution Foods spokesperson said via email: “The loan has worked as designed, allowing us to keep our operations running throughout the pandemic both in our corporate office and across our eight culinary centers. As a result, we’ve been able to produce and deliver over two million healthy, delicious and affordable meals per week to the most vulnerable, food-insecure families and individuals across the country during these difficult times. We will continue our commitment to supporting those in need during the summer months and beyond by making nutritious food safely accessible while food insecurity is at an all-time high.”

The loan to NetBase Quid “provided much needed stability to us and many other businesses at a time of uncertainty,” a company spokesperson said. “The PPP allowed Netbase Quid to retain its highly talented team and absorb the adversity caused by covid-19. The implementation of the program was designed to help and stabilize businesses like ours, ensuring our dedicated team members can continue to provide world-class service and continue to develop innovative products, fulfilling our commitments and dedication to our business partners and customers.”

To get a sense of how many VC-backed companies might be in the SBA report, VCJ counted the number of companies that received loans from Silicon Valley Bank, which is a major lender to VC-backed companies. The bank made 2,187 PPP loans ranging from as little as $150,000 to as much as $10 million, according to our analysis. The combined dollar value of the loans ranges from $1.1 billion to as much as $2.7 billion.

Silicon Valley Bank’s PPP lending breaks down as follows: 28 loans were for $5 million to $10 million; 150 were for $2 million to $5 million; 295 were for $1 million to $2 million; 824 were for $350,000 to $1 million; and 890 were for $150,000 to $350,000, according to VCJ’s analysis of SBA data.