A top Defense official in Silicon Valley who works with venture-backed startups to bring commercial technology to the military warned that struggling startups that don’t qualify for loans under the federal coronavirus stimulus package could turn to China or Russia for funding.
In a letter to the Small Business Association published by Inside Cybersecurity, the Pentagon’s Defense Innovation Unit Director Michael Brown urged the SBA to broaden its definition of small business to include venture-backed companies. Brown writes that without federal aid, startups with “mission-critical” technology may turn to Chinese and Russian investors, accelerating the transfer of U.S. technology used for national security purposes. U.S. officials already fear that an economic downturn could accelerate China’s economic and political influence as it provides access to capital to governments around the world.
“Many of these startups are either furloughing workers, laying off workers, or facing a potential shutdown,” Brown said.
The Pentagon’s Defense Innovation Unit scouts and prototypes technologies with interests in commercial cyber, space, artificial intelligence, autonomy, and human systems. Commercial space companies face the most acute stress, he said, but others are expected to soon follow.
Under the CARES Act, companies with venture-backed or private equity-backed financing don’t necessarily qualify as small businesses since all firms controlled by one investor can be deemed one entity under the so-called affiliation rules. The affiliate rule can be triggered under circumstances where that investor could be said to have some level of operational control. Brown asked the SBA to clarify whether private equity-backed and venture-backed companies would qualify under the rules.
“We feel strongly that without U.S. government aid, Chinese and Russian investors can more easily gain ownership stakes in these companies,” Brown wrote. “These tactics used by our adversaries will accelerate the transfer of critical U.S. technology with national security applications, and we must do whatever we can to prevent it. Failure to stem the tide of layoffs or stop U.S. adversaries from accessing leading-edge technology at startups could cost us years of progress and, ultimately, make the country weaker.”
Guidance posted by the Treasury Department late last week said that minority investors holding less than 50% of a business’s voting shares could still be considered controlling shareholders under some circumstances. Many startups don’t have one investor who holds more than 50% of their stock.
Congress provided nearly $350 billion in loans for small businesses to cover payroll and expenses as nonessential firms shut down to slow the spread of the coronavirus. Only companies with fewer than 500 employees are eligible.
