Collapse of Silicon Valley Bank worries Color founders

Collapse of Silicon Valley Bank worries Color founders

In the hours after some of Silicon Valley Bank’s biggest clients began withdrawing their funds, a WhatsApp group of startup founders who are immigrants of color grew to more than 1,000 members.

As the bank’s financial condition deteriorated, questions arose. Some desperately sought advice: could they open an account at a major bank without a social security number? Others asked if they had to be physically at a bank to open an account because they were visiting parents abroad.

One 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 after the rapid demise of SVB — the country’s 16th-biggest bank and the biggest bankruptcy since the 2008 financial crisis — industry experts predict it could become even harder for people of color to secure financing or finance to secure a financial center home to support their startups.

SVB had opened its doors to such entrepreneurs and offered opportunities to build important relationships in the technology and finance worlds that were unattainable within larger financial institutions. But smaller players have fewer opportunities to survive a meltdown, reflecting the perilous journey minority entrepreneurs face while trying to navigate industries historically steeped in racism.

“All these people who have very special circumstances because of their identities, they can’t just change them on themselves and that makes them unbankable for the top 4[big banks],” said Asya Bradley, board member of numerous startups who has watched herself the WhatsApp group dealt with the demise of the SVB.

Bradley said some investors have been begging startups to switch to larger financial institutions to avoid future financial risks, but that it’s not an easy transition.

“The reason we go to regional and community banks is because those (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 the SVB could exacerbate racial disparities.

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“That will be more of a challenge for people who don’t fit into the traditional credit box, including minorities,” Klein said. “A financial system that favors existing wealth owners will perpetuate the legacy of past discrimination.”

Tiffany Dufu was devastated when she couldn’t access her SVB account in return for being unable to pay her employees.

Dufu raised $5 million as CEO of The Cru, a New York-based women’s career coaching platform and community. It was a rare feat for companies founded by black women, which receive less than 1% of the billions of dollars in venture capital funding given to startups annually. She staked at SVB Bank because she was known for her close ties to the tech community and investors.

“To raise this money, I’ve reached out to almost 200 investors over the last few years,” said Dufu, who has since regained access to her funds and has moved to Bank of America. “It’s very difficult to show yourself out there and you keep being told it’s not a good fit. So the money in the bank account was very precious.”

A February analysis by Crunchbase News found that funding for black-founded startups slowed more than 50% in the past year after they received a record $5.1 billion in venture capital in 2021, which was disproportionately hit and fell 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 can be to secure funding. It took three years to get a loan for her pie factory and she had to sell her house to get it started.

Banking is built on relationships, and when a bank like SVB goes under, “those relationships go, too,” Hilliard said.

Some conservative critics have claimed SVB’s commitment to diversity, equity and inclusion is to blame, but banking experts say these claims are false. The bank slipped into bankruptcy because its larger customers were withdrawing deposits instead of borrowing 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 the climate, communities of color, or racial justice, 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 the 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 of the larger banks are run by white people and white-majority boards, and “even if they run DEI programs, it is not really deep a kind of capital shift.”

However, smaller financial institutions have worked to build relationships with people of color. “We must not lose our regional and local banks,” she said. “That would be a farce.”

Historically, smaller and minority-owned banks have filled funding gaps that larger banks have ignored or even created by following exclusionary laws and policies when refusing customers based on the color of their skin.

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

Some have seen customers withdraw money and switch to bigger banks out of fear, although most minority-owned banks have a more traditional customer base with secured loans and minimal risky investments, she said.

“You’re seeing a run of customers from people we’ve been serving for a long time,” Elam said. “How many people might not come to us for a mortgage or small business loan or to do their banking because now they think they have to work with a bank that’s too big to fail? This is the first effect of eroding public trust.”

Black-owned banks were hit hardest as the industry consolidated. Most don’t have the capital to weather economic downturns. At peak times 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 custodians.

“In response to this national discussion on racial justice, people are really seeing that minority banks are the key to wealth creation and the key to closing the wealth gap,” Elam said.

Bradley is also an angel investor, providing seed capital to a number of entrepreneurs, and sees new opportunities as people connect on the WhatsApp group to help each other stay afloat and thrive.

“I’m really so hopeful,” Bradley said. “Even in SVB’s decline, it has managed to create this incredible community of people trying to help each other succeed. They say: ‘The SVB was there for us, now we will be there for each other.’”

____ Stafford, based in Detroit, is a national investigative race writer for AP’s Race and Ethnicity team. Follow her on Twitter: Savage reported from Chicago and is a corps member of the Associated Press/Report for America Statehouse News Initiative. Report for America is a nonprofit national service program that brings journalists into local newsrooms to cover undercover topics.