Start-Ups Pursue ‘Free Money’ With Relief Funds, Prompting Backlash

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The New York Times | Erin Griffith and | Apr 27, 2020

small businesses in America - Start-Ups Pursue ‘Free Money’ With Relief Funds, Prompting BacklashSome young companies have turned to the government loans not for day-to-day survival but simply to buy useful time.

Domio, a start-up that offers short-term rentals, has its headquarters in a New York City loft that features beer on tap, a game room and a wall of house slippers for visitors. The fast-growing and unprofitable company has raised $117 million in venture capital, including $100 million in August.

When the coronavirus pandemic caused Domio’s bookings to dry up last month, it laid off staff but did not ask its investors for more funding. Jay Roberts, Domio’s chief executive, said it had no immediate need to raise more money and most likely had enough cash to last until 2021.

See:  COVID-19: A Test Of The Stakeholder Approach

Instead, Domio applied for a federal loan under the Paycheck Protection Program, the $349 billion plan to save jobs at small businesses during the outbreak. It received a loan on April 13. Three days later, the program’s funding ran out, even as hundreds of hard-hit restaurants, hair salons and shops around the country missed out on the relief.

Questions about whether the funds were disbursed fairly and whether some applicants deserved them have drawn scrutiny to the aid program. Several companies that got millions of dollars in loans, such as the Shake Shack and Kura Sushi restaurant chains, faced criticism and eventually gave the money back. On Friday, President Trump signed legislation approving a fresh $320 billion to replenish the program, which the Small Business Administration is directing.

Now, scrutiny of the program has reached technology start-ups like Domio. While many of these young companies have been hurt by the pandemic, they are not ailing in the same way that traditional small businesses are. Many mom-and-pop enterprises, which tend to employ hourly workers and operate on razor-thin margins, are shutting down immediately because of economic pain or begging for donations via GoFundMe campaigns.

But start-ups, which last year raised more than $130 billion in funding, have sometimes turned to the government loans not for day-to-day survival but simply to buy useful time. In Silicon Valley parlance, they want to extend their “runway,” or cash on hand, to a year or more. Many are backed by venture capital investors, who have accumulated record sums of capital — $121 billion as of the start of this year — that could be used to keep companies afloat.

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The start-up rush to tap the finite pool of government aid has stirred up a furious debate in Silicon Valley over whether these companies should have applied.

“They are doing it because they can.  They view it as free money.”

said Chris Olsen, a venture capitalist with Drive Capital Partners in Columbus, Ohio. “They view it as free money.”

Justin Field, the senior vice president of government affairs at the National Venture Capital Association, a lobbying group, said start-ups were justified in seeking the federal aid.

“These are potentially some of the most important companies for America’s future competitiveness,” he said.

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NCFA Jan 2018 resize - Start-Ups Pursue ‘Free Money’ With Relief Funds, Prompting Backlash The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org

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