July 1, 2020

#92 Who Did the PPP Actually Save?

by The Pitch

We talk to three startup founders who got money from the Paycheck Protection Program and try to find out, what did the PPP money actually do?

And to find out why Jillian Manus convinced a founder to send $2 million in PPP money back, listen to our special episode called “Give the Money Back." It's only available on Spotify.


Transcript

From Gimlet, this is The Pitch. I’m Josh Muccio

In March, as the coronavirus pandemic was crashing the economy, the US government announced a program that sounded like free money. Small businesses could apply for a forgivable loan to get through the crisis, if they kept paying their employees. They called it the Paycheck Protection Program. And it seemed like it was going to be a real lifeline. So business owners everywhere started racing to get their piece of the pie.

And it got messy.

Margot: My Bank: We intend to participate in this program. Me: What do you mean you intend to? You're my bank. Should I go to another bank? No. Don't worry. We intend to participate. 

Josh: What?

That’s Margot Schmorak. Co-founder and CEO of Hostfully. 

Margot: So then I call up another bank and I'm like, Should I open an account with you? No, if you open an account with us, we will prioritize the customers who've had a line of credit with us for over six months. 

Josh: Right.

Margot: So it's probably not worth it. Okay. Bye. Then I go back to my original bank. Hey, original bank. You guys are our only hope. You better f**king… can I say that? You better freakin’ get it together because this is a lot of money. 

A lot of money is right. So far the US government has put $659 billion into the Paycheck Protection Program. 

Here’s the thing. One of the investors on our show, actually convinced one of her companies to send over $2 million dollars back. You can hear why in a special episode that’s available right now, only on Spotify. You can listen for free, just go to Spotify and search for The Pitch. The episode is titled, “Give the Money Back”

But on this episode… we’re talking to three companies who were able to get the money from the paycheck protection program. They’ve all pitched on the show before. And we’re asking them two basic questions, the only two questions that matter when the economy is in crisis. Has the PPP money helped you save jobs? And, has it helped save your business?

That’s coming up in just a moment. 


BREAK


Every founder I’ve talked to over the last few months remembers the moment they realized COVID was going to hit their business.

Courtney: I looked at him and I said, Babe, do you see this? And he said, Yes.

Tye: Yep.

Courtney: That is exactly what you said. 

Tye: We’re in a sh*tload of trouble! 

That’s Courtney and Tye Caldwell, the co-founders of ShearShare.  And they’ve built an app that helps beauty salons and barber shops rent out their extra styling stations to other stylists. It’s kind of like Airbnb but for stylists. 

When we spoke, Courtney and Tye said that the longer everything was shut down, the more they began to worry about the future.

Tye: I didn’t expect for it to last this long. And I didn't expect for it to break down and then break back into phases going back up.

Josh: Right. Yeah. Everybody was saying, Oh, it's going to be one of those V-shape recoveries. It's just going to bounce back.

Tye: Yeah.

Courtney: Yes.

Josh: And we're going to keep going. 

Courtney: No, no. Absolutely not a V recovery.

During this time, there was a lot going on behind the scenes for ShearShare. They’d just closed a $2 million seed round two months earlier. But they were still waiting on $1.2 million of that to actually hit the bank. And that was putting a strain on the business even before COVID.

Back in February, they needed a little cash to keep ShearShare going while their VCs took their sweet time. So they decided to apply for a home equity loan for $100,000 from their bank.

Tye: Courtney and I, we own our house and we’ve had a nice credit score. So went to the bank, filled out the paperwork. And got denied. Got denied on our own home, that we own.

Josh: What?!

Courtney: That's crazy. Like we own our own home. We own every asset that belongs to us. And the bank said, Nahhh.

Josh: What?! 

Courtney:  It’s alright, we're gonna pass. Yeah.

Tye: Yes, they denied us. And I asked the managers why. And they don't really want to tell you. I think that they're a little bit they can't say because you're black.

Josh: Ugh. So...

Courtney: So they just say they just say it's "high risk." We're like, But, but we own our home. Like, what do you mean "high risk?"

Tye: If we don't pay our bill, the lien is for you all to have our home. 

Josh: Yeah, this is a no-brainer loan for this bank to write, to someone with as good of credit as you guys have. 

Tye: Yes.

Courtney: Mm hmm.

Tye: We feel like our color played a part.

Courtney: Yeah. 

Tye: Our race played a part.

Courtney: There's nothing else that could be the answer. There's literally nothing else, Josh. Like on paper, it would have been, like you said yourself, it would have been a no brainer. 

Without that loan, and still waiting on the VC money, Courtney and Tye took another pretty drastic step. They stopped drawing a salary from the business. And that meant they had to ask for help to cover their personal expenses. 

Tye:  I will say that I had a few friends to give some loans and they were able to do that. My mother in law was able…

Josh: Oh, you asked your friends and family for loans? 

Tye: Yeah. My spiritual mom was able to... 

Courtney: Just give us, just to live off of.

Tye: Just to live off that. So that was that was good.

Josh: Wow. How much money did your friends and family give you?

Courtney: Honestly, a couple of thousand. 

Josh: Yeah.

Courtney:  It was not nothing to write home about, you know, but it meant everything, you know, in the moment.

Josh: Wow you guys. It's been really touch and go for a couple months, hasn't it? 

Tye: Yeah. 

Courtney: Yeah.

Tye: Oh, yeah. But, you know, you're living in your money because the bank won’t give you anything. You got to borrow from friends. 

Courtney: At least we didn’t have a mortgage.

Tye: At least we know we’re not going to be homeless. 

And then in March, COVID-19 forced salons and barber shops across the US to close their doors. And ShearShare’s revenues plummeted. 

That meant they weren’t gonna have enough cash to keep paying their 13 employees. Tye broke the news to the team that he wasn’t going to be able to make payroll. And, incredibly, the whole team decided to stay on and work for free till some money came in. 

It wasn’t long after that Courtney and Tye first heard about the Paycheck Protection Program: forgivable loans for small businesses in crisis because of the pandemic.

But the thing is, the rules for applying for the PPP were totally confusing. I remember in the beginning it wasn't clear if startups could even get the money, but it ended up that many of them could. 

Luckily for Courtney and Tye they had help from the start from one of their investors.

Courtney: It may have been within hours, honestly, that one of our investors had sent across an email saying, Hey, let's all jump on a virtual town hall meeting and talk you guys through what this really means. The team at Revolution has been, like, so beyond helpful

Josh: Revolution Ventures, is that what they're called?

Courtney: Yeah. Rise of the Rest with Steve Case. 

Revolution Ventures and Rise of the Rest are funds run by Steve Case, the billionaire who co-founded AOL way back in 1985. 

And they were ready to help their portfolio companies figure out the details of the PPP.

Courtney: They jumped on pretty quickly. And they were sharing with us the things that they were hearing.

Josh: Yeah.

Courtney: Especially around what types of, like, documents we were going gonna need to be thinking about. And this was back when the SBA is changing requirements every hour on the hour. And so those conversations were very helpful in that, you know, they may have said, We don't know what they're going to ask for, but at least have these 30 documents. And they, they may have only needed 10 of those. But... 

Josh: Right.

Courtney: ...that was really good for us to be able to say, Okay, we need to go ahead and collect all this information now so that when we can press that Go button, we'll have it. 

Tye: Yep. 

Josh: Yeah. Got it. So it’s because of one of your investors, Revolution…

Courtney: Yeah.

Josh: That you knew what to do.

Courtney: Those relationships.

Tye: Yep. 

And then three weeks later, in late April they got the PPP money! $39,000. Just enough to pay their employees back pay for March and cover them for April. 

And then, the money was basically gone.

Around that time, Jillian Manus called them to check in. Jillian invested in Courtney and Tye after meeting them on our show a few years ago. And when they told her everything that was going on, she wired them $50,000 so they could keep paying their employees.

Josh: So it sounds like the PPP money didn't, didn't save your company on its own.

Courtney: Not save, no. But it was there when we needed it.

Josh: But without the money from your friends and family, from Jillian stepping in and giving you 50 K. Like, how do you make it?

Courtney: Mm mm. I don't know. I don't even want to say it Josh. I don't even want to think it. 

Tye: You don’t know. 

Courtney: And, and, if our employees had not had said, Hey, you know, I can't wait. I don't know what would have happened if those folks had left.

Getting the extra 50K was clutch for Courtney and Tye. Because they are still waiting on the $1.2 million from their investors. But all during this time, They had another problem weighing heavy on their shoulders. ShearShare’s customers, the people who own beauty salons and barber shops across the country. Many of them haven’t been able to work for months.

Courtney: People were calling in. Even if it was just like a crying session, to be honest, Josh. Like some people will call in and be like, I'm a shop owner and I have no idea what to do. And this is my issue. People were asking us, you know, What can I do next? And how can I get money in my account right now in order to feed my family? 

Josh: Yeah. 

Courtney:  And when you have so many people calling in or writing in and asking your team that same question over and over and over again, you all of a sudden put your cares and concerns and the challenges that are top of mind for your well-being, kind of push those aside because there are so many other people who need what you desperately have. And we knew that we could at least get information out to them.

Josh: Right. You're like, we just got our PPP money and here are the steps we use to get it. You can follow the same road map.

Courtney: That's exactly what we did. And we're so happy to say that over a hundred people who were first denied for their original PPP application, we helped them secure PPP funds afterwards. The second attempt.

Josh: You helped a hundred of your customers get PPP loans who had been previously denied?

Courtney: Yes, sir. We sure did.

Josh: Whoa. 

Courtney: I love that. If I don't do anything else this year, I'm good. 

Courtney and Tye knew they were fortunate. They cut through the red tape to get a PPP loan because they had a big-name investor in their corner. So they turned right around and shared that knowledge with a bunch of their customers, mostly Black-owned salons and barber shops. And those are business owners who needed help. A survey published in May found that only 8 percent of African American business owners that had applied for federal relief or assistance actually received the money. 

Now, Tye and Courtney say that by helping their customers get PPP loans, they’ve been able to grow engagement on their app. And they said that with salons and barbershops opening back up in some places across the country, they’re starting to see light at the end of the tunnel.

The bottom line, the PPP money helped save jobs and it helped save the company. But it certainly wasn’t enough, all on its own. They had help from two sets of investors, and friends and family. And their employees worked for free for a while. So the PPP was just one piece of the puzzle.

Coming up. A surprising effect the PPP money had on one startup. How getting a PPP loan can actually help you raise your next round.

That’s coming up, in just a minute.


BREAK


Welcome back. After speaking with Courtney and Tye about ShearShare we started wondering, What if, say, your startup was laying people off even before the pandemic? Could the PPP help turn things around?

So we got in touch with Tina Hedges, founder and CEO of LOLI Beauty, an organic, zero-waste skin-care company. 2019 was a rough year for Tina. To cut costs, she had to lay off all of her employees except for one. And when she tried to raise a seed round, no one was interested. 

Tina: I have found myself in that incredible vortex that startups do where I have enough success to prove something. But I’m not doing $2 million annual revenue year-over-year kind of situation.

So going into the COVID crisis Tina only had a couple months of runway. She’s got a small team, just one employee plus a few part-time freelancers. And she told producer Heather Rogers that if she got the money, it might be the only thing that could keep her business from going under. 

Tina: Our reality is how we're going to scramble to stay alive. So really getting this capital, you know, every dollar counts to giving us runway. 

Heather: Mm hmm.

Tina: Getting a PPP loan, that's potentially a month or more of run rate. 

Tina applied for the PPP. And eventually, her loan for $42,000 came through.

Tina knew she had to use most of the money for payroll. But, when she talked to Heather in late May, she didn’t know how she was supposed to use the rest of the money.

Tina: If you want forgiveness you have to spend the money in seven to eight weeks, although now there's rumors that they may extend that. But we don't know if they're going to extend it. 

Heather: Right. And you have to spend 75 percent of it on payroll.

Tina: 75 percent on payroll. But what else qualifies for that extra 25 percent? Because of the rules around how you have to use it and the time period you have to use it, it’s not free money and it’s not money that is like an extra cushion.

Heather: Because you can’t use it however you want. You have to use it in this really specific way.

Tina: Correct. 

This was confusing for a lot of business owners, not just for Tina.  Turns out, if you want the loan to be forgiven, you have to use the money on fixed expenses, like rent, utilities and interest on mortgages. And then the rules changed, now you have more time to spend the money and you can spend less of it on payroll. So a few weeks after we initially spoke with Tina, Heather called her back for an update. And come to find out, she had put two of her contract employees on payroll.

Heather: And how is that working out? 

Tina: It's fundamental. Everything from helping me with direct marketing, to customer service, to ops. 

Heather: So the money created jobs that are helping your company right now?

Tina: Correct. But it's not saving my business by giving me additional runway. 

Heather: So maybe it’s got some short term effects, but the long term effects don’t seem to be materializing.

Tina: Correct.

So did the PPP money save Tina’s business? For the time being, yeah. But LOLI Beauty wasn’t really doing well before COVID, and she’s still struggling now. 

Did the PPP money save jobs? Well, Tina converted 2 contractors to full-time employees with the money. But those jobs will only last as long as the cash does.

So both companies we’ve heard from so far, the money helped them a little. But their businesses are still on the edge. And then we talked to a founder, where the PPP money helped her business in a really unexpected way.

Remember Margot Schmorak from the top of the episode? She was the one trying to get a straight answer from her bank. Well, she ended up getting almost $160,000 for her business, Hostfully. It’s a platform that Airbnb hosts use to manage reservations.

Immediately after she got the money, she made a big software engineer hire, someone she’d be eyeing for a while, and another part-time developer, she bumped him up to full-time. And the two of them have already done a lot for the business. 

Margot: I can already see in 30 days from now, we will have really stepped ahead with our innovation on our product. That would not have happened had we not gotten that money. 

Josh: And how has that helped your business? 

Margot: I would say that's like. It allows us to build some semblance of getting on track. 

And getting on track was critical for Margot because she was also in the middle of a million dollar fundraise. During a pandemic.

Josh: Do you think it means you raised less money from investors than you would have otherwise?

Margot: No, I actually think we raised more money from investors because of, because of it. 

Josh: What? 

Margot: It’s like the PPP loan, it's not so much about the money for investors. What it is, is it’s a demonstration of how solvent your business is. It's like, can you get your, can you get your sh*t together enough to apply for this program in short order and have your finances in good shape so that you can, like, just do better for your business? They put it in the bucket of like, is this business doing everything it can to grow? 

So getting a PPP loan was a signal to investors that Hostfully was solid. Within a couple weeks Margot had closed the round.

But that PPP money did something even more fundamental.

Margot: Startups are oriented towards growth and fast decision making and looking ahead. Right. Like, that is what our investors want. That is what we want. That is what our employees want. That's what our customers want. 

Josh: Yeah. 

Margot: And I think the coronavirus, it did this really, like, uncomfortable thing for startups, including us, psychologically, which is it forced us to, like, actually go backwards. And for the three weeks or four weeks that we couldn't think like a startup without the PPP, it was devastating. And it felt like a downward spiral thought process, right? Because as soon as you start telling people on your team, Go backwards and tighten up, like, they start thinking smaller. So then they start thinking, I really shouldn't do something that's risky because it's not in the best interests of the company.

Josh: Right.

Margot: What I feel the PPP money did is, it allowed us to change the orientation of the business, like more forward looking again. Now, it's like, Okay, what are the new features that our customers need us to deliver? And like, where do we want to be by next year? And it just allowed us to to just keep the arrow pointing in the same direction that it had been before

Josh: Yeah. It allowed you to act like a startup again. 

Margot: Exactly. 

Josh: To hit the outcome you need to, you have to be taking risks always.

Margot: Risks. Exactly. 

Josh: That's how this game works. 

Margot: But if you feel like you’re cash strapped, you're not going to do that. Right. You're gonna be hesitant to make a decision. Then you're not gonna learn anything. Like, the whole thing just kind of falls apart.

After talking to these founders, and many others over the last few months. It does seem like the PPP can delay layoffs, but when the money runs out, those jobs are in jeopardy again, like with ShearShare.

Can the PPP save a company? From what we could tell, if they were in trouble going into the pandemic, the way LOLI Beauty was, the money can help them stay afloat for a little while. But that's it. On the other hand, if a company was already strong, like Hostfully who was raising a round during a pandemic, a PPP loan can actually make you stronger.

But the fact is, the PPP money was only meant to cover several weeks of payroll and bills. Back in March, there were a lot of people that thought this would be over in a couple months. It's clear now that the effects of this pandemic will be measured in years. And the government needs to look for solutions as big as the problem.

But if you listen to investor Jillian Manus, she says that the government should not be giving any help to some startups. And she even convinced one of her companies to give their PPP money back.

You can hear that in a special episode that’s available right now on Spotify. Just search for The Pitch, and the episode is titled “Give the money back.” You’ll hear Elizabeth Yin in that episode too, she’s got a provocative idea for how the money could have actually helped workers. Head over to Spotify. You can only hear it there.