Silicon Valley Bank collapse worries founders of color
In the hours after some of Silicon Valley Bank’s biggest clients began withdrawing their money, a WhatsApp group of startup founders who are immigrants of color ballooned to more than 1,000 members.
Questions flowed as the bank’s financial status worsened. Some desperately sought advice: Could they open an account in a major bank without a social security number? Others asked if they had to be physically in a bank to open an account, because they are visiting parents abroad.
A clear theme emerged: a deep concern about the broader impact on startups led by people of color.
As Wall Street struggles to contain the banking crisis following the rapid demise of SVB ̵[ads1]2; the nation’s 16th largest bank and the largest to fail since the 2008 financial crisis — industry experts predict it could become even more difficult for people of color to secure financing or finance. at home supporting their startups.
SVB had opened the doors for such entrepreneurs, and provided opportunities to form crucial relationships in the technology and financial environments that had been out of reach in larger financial institutions. But smaller players have fewer means to survive a collapse, reflecting the perilous journey minority entrepreneurs face as they try to navigate industries historically fraught with racism.
“All these people who have very special circumstances based on their identity, it’s not something they can just change on their own, and that makes them unbankable by the top four (big banks),” said Asya Bradley, board member of a number of startups which has seen the WhatsApp group grapple with SVB’s demise.
Bradley said some investors have asked startups to switch to larger financial institutions to hedge against future financial risks, but it’s not an easy transition.
“The reason we go to regional and community banks is because these (big) banks don’t want our business,” Bradley said.
Banking expert Aaron Klein, a senior fellow in economic studies at the Brookings Institution, said SVB’s collapse could exacerbate racial disparities.
“It’s going to be more challenging for people who don’t fit the traditional credit box, including minorities,” Klein said. “A financial system that favors the existing holders of wealth will perpetuate the legacy of past discrimination.”
Tiffany Dufu was gutted when she couldn’t access her SVB account and, in turn, couldn’t pay her employees.
Dufu raised $5 million as CEO of The Cru, a New York-based career coaching platform and community for women. It was a rare feat for businesses founded by black women, who receive less than 1% of the billions of dollars in venture capital funding doled out annually to startups. She banked with SVB because it was known for its close ties to the technology community and investors.
“To raise this money, I’ve pitched to almost 200 investors over the past few years,” said Dufu, who has since accessed his money and moved to Bank of America. “It’s very difficult to put yourself out there and time and time again – you’re told this is not a good fit. So the money in the bank account was very precious.”
A Crunchbase News analysis in February found that funding for Black-founded startups fell by more than 50% last year after receiving a record $5.1 billion in venture capital in 2021. Total venture funding fell from about $337 billion to about 214 billion, while Black entrepreneurs were disproportionately hit, falling to just $2.3 billion, or 1.1% of the total.
Entrepreneur Amy Hilliard, a professor at the University of Chicago Booth School of Business, knows how difficult it is to secure funding. It took three years to secure a loan for her cake maker and she had to sell her home to get started.
Banking is based on relationships, and when a bank like SVB goes under, “those relationships disappear, too,” said Hilliard, who is African-American.
Some conservative critics claimed SVB’s commitment to diversity, equity and inclusion was to blame, but banking experts say those claims were false. The bank went into insolvency because its larger customers withdrew deposits instead of borrowing at higher interest rates, and the bank’s balance sheet became overexposed, forcing it to sell bonds at a loss to cover the withdrawals.
“If we’re focused on climate or communities of color or racial equality, that has nothing to do with what happened to Silicon Valley Bank,” said Valerie Red-Horse Mohl, co-founder of Known Holdings, a black, indigenous, Asian American foundation investment banking platform focused on sustainable growth of minority-managed funds.
Red-Horse Mohl — who has raised, structured and managed over $3 billion in capital for tribal nations — said most major banks are led by white men and majority-white boards, and “even when they do DEI programs, it’s not a really deep sort of capital movement.”
However, smaller financial institutions have worked to build relationships with people of color. “We cannot lose our regional and community banks,” she said. “That would be a travesty.”
Historically, smaller and minority-owned banks have addressed funding gaps that larger banks ignored or even created, following exclusionary laws and policies when they turned away customers based on the color of their skin.
But the ripple effects of SVB’s collapse are also being felt among those banks, said Nicole Elam, president and CEO of the National Bankers Association, a 96-year-old trade association that represents more than 175 minority-owned banks.
Some have seen customers withdraw funds and move to larger banks out of fear, even though most minority-owned banks have a more traditional customer base, with secured loans and minimal risky investments, she said.
“You’re seeing customer exodus of people that we’ve served for a long time,” Elam said. “How many people might not come to us for a mortgage or small business loan or to do banking because they now have in their mind that they need to bank with a bank that’s too big to fail? That’s the first impact of eroding public trust.”
Black-owned banks have been hit hardest as the industry consolidates. Most people do not have enough capital to withstand economic downturns. At its peak there were 134. Today there are only 21.
But change is on the way. Over the past three years, the federal government, the private sector, and the philanthropic community have invested heavily in minority-run depository institutions.
“In response to this national conversation around racial equity, people are really seeing that minority banks are key to value creation and key to helping close the wealth gap,” Elam said.
Bradley is also an angel investor, providing seed money to a number of entrepreneurs, and sees new opportunities when people network in the WhatsApp group to help each other stay afloat and grow.
“I’m really so hopeful,” Bradley said. “Even in SVB’s downfall, it’s managed to form this incredible community of people trying to help each other succeed. They’re saying, ‘SVB was here for us, now we’re going to be here for each other.’
____ Stafford, based in Detroit, is a national investigative race writer for the AP’s race and ethnicity team. Follow her on Twitter: https://twitter.com/kat__stafford. Savage reported from Chicago and is a staff member for the Associated Press/Report for America Statehouse News Initiative. Report for America is a nonprofit national service program that places journalists in local newsrooms to report on hidden issues.