Silicon Valley Bank collapse worries founders of color

Within hours of some of Silicon Valley Bank’s biggest customers starting withdrawing their money, a WhatsApp group of immigrant startup founders of color grew to more than 1,000 members.

Questions poured in as the bank’s financial situation deteriorated. Some were desperate for advice: Could they open an account at a major bank without a social security number? Others wondered if they had to be physically at a bank to open an account, as they were visiting relatives abroad.

A clear theme emerged: deep concern about the broader impact on startups led by people of color.

As Wall Street struggles to contain the banking crisis after the rapid demise of SVB – the nation’s 16th-largest bank and the largest to fail since the 2008 financial crisis – industry experts predict it could become even more hard for people of color to get funding or funding. at home supporting their startups.

SVB had opened its doors to these entrepreneurs, providing opportunities to build crucial relationships in the technology and financial communities that were beyond the reach of large financial institutions. But smaller players have fewer ways to survive a meltdown, reflecting the perilous journey minority entrepreneurs face while trying to navigate industries historically plagued by racism.

“All these people who have very special circumstances because of who they are, it’s not something they can just change on their own that makes them unbankable by the top four (big banks),” said Asya Bradley, a board member of many startups who saw the WhatsApp group struggle with the demise of SVB.

Bradley said some investors have implored startups to move to bigger financial institutions to thwart future financial risks, but it’s not an easy transition.

“The reason we go to regional and community banks is that these (big) banks don’t want our business,” Bradley said.

Banking expert Aaron Klein, senior fellow in economic studies at the Brookings Institution, said the collapse of SVB could exacerbate racial disparities.

“It’s going to be harder for people who don’t fit the traditional credit box, including minorities,” Klein said. “A financial system that prefers the current holders of wealth will perpetuate the legacy of past discrimination.”

Tiffany Dufu was upset 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 companies founded by black women, who receive less than 1% of the billions of dollars in venture capital funding distributed to startups each year. She did business with SVB because she was known for her close ties to the tech community and investors.

“In order to raise that money, I introduced nearly 200 investors over the past few years,” said Dufu, who has since regained access to his funds and moved to Bank of America. “It’s very difficult to put yourself forward and over and over again – you’re told it’s not a good choice. So the money in the bank account was very valuable.

A Crunchbase News analysis in February determined that funding for black-founded startups slowed by more than 50% last year after receiving a record $5.1 billion in venture capital in 2021. overall venture capital fell from about $337 billion to about $214 billion, while black founders were disproportionately affected, 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 get financing. It took three years to get a loan for her cake-making business, and she had to sell her house to get started.

Banking is relationship-based and when a bank like SVB fails, “those relationships also go away,” said Hilliard, who is African-American.

Some conservative critics have claimed that SVB’s commitment to diversity, equity and inclusion is to blame, but banking experts say those claims were false. The bank descended into insolvency because its biggest customers withdrew deposits rather than borrow at higher interest rates and the bank’s balance sheets were overexposed, forcing it to sell bonds at a loss to cover withdrawals.

“If we focus on climate or communities of color or racial equity, it has nothing to do with what happened with Silicon Valley Bank,” said Valerie Red-Horse Mohl, co-founder of Known Holdings, a black, indigenous, Asian company. US-founded investment banking platform focused on sustainable growth of minority-managed funds.

Red-Horse Mohl – which has raised, structured and managed more than $3 billion in capital for tribal nations – said most major banks are run by white men and majority white boards, and “ even when they do DEI programs, it’s not really deep a kind of capital transfer.

Smaller financial institutions, however, have worked to build relationships with people of color. “We cannot lose our regional and community banks,” she said. “It would be a parody.”

Historically, small minority-owned banks have filled funding gaps that big banks ignored or even created, by following exclusionary laws and policies when they turned away customers because of their skin color.

But the ripple effects of SVB’s collapse are also being felt among those banks, said Nicole Elam, president and chief executive of the National Bankers Association, a 96-year-old trade association representing more than 175 state-owned banks. minorities.

Some have seen customers withdraw funds and move to bigger banks out of fear, even though most minority-owned banks have a more traditional clientele, with guaranteed loans and minimal risk investments, she said. declared.

“You see customers running away from people we’ve been serving for a long time,” Elam said. “How many people don’t come to us for a mortgage or a small business loan or to do their banking because they now have in mind that they have to do business with a bank that is too big to do Bankruptcy is the first impact of the erosion of public trust.

Black-owned banks have been hardest hit as the sector consolidates. Most don’t have as much capital to weather 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 about racial equity, people really see that minority banks are critical to wealth creation and critical to helping close the wealth gap,” Elam said.

Bradley is also an angel investor, providing seed funding to a number of entrepreneurs, and sees new opportunities as people network in the WhatsApp group to help each other stay afloat and grow.

“I really have so much hope,” Bradley said. “Even in the downfall of SVB, he managed to form this amazing community of people trying to help each other succeed. They say, ‘SVB was there for us, now we’re going to be there for each other. ‘”

____ Stafford, based in Detroit, is a national racing investigative writer for the AP’s Race and Ethnicity team. Follow her on Twitter: Savage reported from Chicago and is a member of the Associated Press/Report for America Statehouse News Initiative body. Report for America is a nonprofit national service program that places reporters in local newsrooms to report on underreported issues.

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