The guidelines regarding affiliation were not originally developed to disadvantage VC-backed businesses. They were put in place to prevent subsidiaries of large corporations from taking advantage of programs which were meant to aid small businesses with limited access to funding and other resources. The rise of private equity and VC firms came about when certain start-ups came up with credible concepts but failed to get adequate funding for their ventures.
Considering that sources of funds for small businesses include personal funds (77%), bank loans (34%), and borrowing from friends and family (16%). Larger business ventures, particularly in technology, usually require significantly large capital outlays that cannot be shouldered by personal funds and familial sources and may be considered too risky for banks and other financial institutions. Although VC firms are relatively minimal in their contribution to the total startup funding pool (3%), their impact is profound. The average small business requires about $10,000 to open their doors and launch a business. On the other hand, the 0.05% of startups which manage to raise venture capital have an average seed round of $2.2 million. Although a significant number of these business ventures could fail, VC-backed companies represent some of the most innovative concepts and ideas with the potential to make a profound global impact.
VC firms and their backers are likely to be impacted by this global crisis, like everyone else in the American economy. They are less likely to be well-positioned to weather the storm than large corporations. As such, the CARES Act failing to distinguish between corporate and VC-backed startups is likely to have unintended consequences for vulnerable companies which are incubating potentially big ideas. Considering that running out of cash is the second leading cause of small business failure, a lack of adjustments to this bill to address the VC-backed startup gap is likely to result in a significant loss of employment and opportunities.