Silicon Valley bank collapse worries black founders

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 has grown to more than 1,000 members.

Questions flowed in as the bank’s financial situation worsened. Some desperately sought advice: Could they open an account at a larger bank without a social security number? Others questioned whether they would have to physically be at a bank to open an account because they are visiting parents abroad.

A clear theme emerged: a deep concern for 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 biggest to fail since the 2008 financial meltdown – industry experts predict it could become even more difficult for people of color to secure funding or home funding supporting your startups.

SVB opened its doors to these entrepreneurs, offering opportunities to form crucial relationships in the technology and finance communities that were beyond the reach of larger financial institutions. But smaller players have less means of surviving a meltdown, reflecting the perilous journey minority entrepreneurs face as they try to navigate industries historically rife with racism.

“All these people who have very special circumstances based on their identities, it’s not something that they can just change about themselves that makes them unbankable by the big four (big banks),” said Asya Bradley, board member from various startups who watched the WhatsApp group deal with the demise of SVB.

Bradley said that some investors have implored startups to move to larger financial institutions to head off future financial risks, but this is not an easy transition.

“The reason we’re going 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 the SVB collapse could exacerbate racial disparities.

“This will be more challenging for people who don’t fit into the traditional credit box, including minorities,” Klein said. “A financial system that prefers wealth holders will perpetuate the legacy of past discrimination.”

Tiffany Dufu was destroyed 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 annually to startups. She banked with SVB because it was known for its close ties to the technology and investor community.

“To raise this money, I introduced nearly 200 investors over the last few years,” said Dufu, who has since regained access to his funds and moved to Bank of America. “It’s really hard to put yourself out there and over and over again – you hear that that’s not a good fit. So the money in the bank account was very precious.”

A Crunchbase News analysis from February determined that funding for black-founded startups declined by more than 50% in the past year after they received a record $5.1 billion in venture capital in 2021. Overall venture funding dropped from about $337 billion to approximately $214 billion, while black founders were hit disproportionately, 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 funding. It took three years to get a loan for her cake-making business, and she had to sell her house to get it started.

Banking is about relationships, and when a bank like SVB fails, “those relationships disappear too,” said Hilliard, who is African American.

Some conservative critics claimed that the SVB’s commitment to diversity, equity and inclusion was to blame, but banking experts say these claims were false. The bank fell into insolvency as its larger clients drew deposits rather than borrowing at higher interest rates, and the bank’s balance sheets were overexposed, forcing it to sell bonds at a loss to cover withdrawals.

“Whether we’re focused on climate or communities of color or racial equity, that has nothing to do with what happened with Silicon Valley Bank,” said Valerie Red-Horse Mohl, co-founder of Known Holdings, a black organization, Indigenous and Asian Investment banking platform founded in the United States focused on the sustainable growth of funds managed by minorities.

Red-Horse Mohl – who has raised, structured and managed more than $3 billion in capital for tribal nations – said that most big banks are led by white men and mostly white boards, and “even when they do DEI programs, it’s not a profound kind of capital transfer”.

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

Historically, smaller and minority-owned banks have addressed funding gaps that larger banks have ignored or even created by following exclusionary laws and policies by turning away customers because of the color of their skin.

But the effects of the SVB 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 representing more than 175 minority-owned banks.

Some have seen customers withdraw funds and move to larger 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 customers drain from people 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 their banking business because they now have the mindset that they need to bank with a bank that is too big to fail? This is the first impact of the erosion of public trust.”

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

Bradley is also an angel investor, providing seed capital to numerous entrepreneurs, and is seeing new opportunities as people connect in the WhatsApp group to help each other stay afloat and grow.

“I’m very hopeful,” Bradley said. “Even in the downfall of SVB, he managed to form this amazing community of people who are trying to help each other succeed. They’re saying, ‘SVB was here for us, now we’re here for each other.’”

____ Stafford, based in Detroit, is a national investigative writer on race 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 journalists in local newsrooms to report on undercover issues.

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