The collapse of Silicon Valley Bank worries black founders

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 grew to more than 1,000 members.

The questions flowed 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 wondered if they had to physically be at a bank to open an account, because they are visiting parents abroad.

A clear theme has 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 16th largest bank in the nation and the largest to fail since the 2008 financial meltdown – industry insiders predict it could become even more difficult for people to color get funding or a home loan by supporting their startups.

SVB had opened its doors to such entrepreneurs, providing opportunities to form crucial relationships in the technology and finance communities that had been out of reach within larger financial institutions. But smaller players have fewer means to survive a collapse, reflecting the perilous journey minority entrepreneurs face as they attempt to navigate industries historically rife with racism.

“All these people who have very special circumstances based on their identity, it’s not something they can just change about themselves that makes them unbankable by the top four (big banks),” said Asya Bradley, a board member of several startup that saw the WhatsApp group struggling with the disappearance of SVB.

Bradley said some investors have begged startups to move to larger financial institutions to stymie future financial risk, 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, an economics researcher at the Brookings Institution, said the collapse of the SVB could exacerbate racial disparities.

“It will be more difficult for people who don’t fit the traditional credit box, including minorities,” Klein said. “A financial system that prefers current 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 community and professional coaching platform for women. It was a rare feat for companies founded by women of color, which receive less than 1 percent of the billions of dollars in venture capital funding handed out to startups each year. She banked with SVB because she was known for her close ties to the tech community and investors.

“To raise that money, I’ve pitched nearly 200 investors over the past few years,” said Dufu, who has since regained access to her funds and moved to Bank of America. “It is very difficult to put yourself out there and time and time again you are told that it is not a good idea. So, the money in the bank account was very valuable.”

A February Crunchbase News analysis found that funding for Black-founded startups slowed more than 50% last year after receiving a record $5.1 billion in venture capital in 2021. The funding Overall risk fell from about $337 billion to about $214 billion, while Black founders were disproportionately affected, falling to just $2.3 billion, or 1.1 percent 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 her three years to get a loan for her pie business and she had to sell her house to get it started.

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

Some conservative critics said the SVB’s commitment to diversity, equity and inclusion was to blame, but banking experts say those claims were false. The bank slipped into insolvency because its larger customers withdrew deposits rather than borrowing at higher interest rates and the bank’s balance sheets were overextended, forcing it to sell loss-making bonds to cover drawdowns.

“Whether we focus 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, Indigenous, Asian company American-founded investment banking platform focused on sustainable growth of minority-managed funds.

Red-Horse Mohl – who has raised, structured and managed more than $3 billion in capital for tribal nations – said most of the biggest banks are run by white men and majority white boards of directors, and “even when they do DEI programs, it’s not a very deep thing some kind of capital shift.

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 farce.”

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

But the knock-on effects of SVB’s collapse are also being felt among these banks, said Nicole Elam, president and CEO of the National Bankers Association, a trade association that has represented more than 175 minority-owned banks for 96 years.

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 guaranteed loans and minimal risky investments, he said.

“You’re seeing a flight of customers from people we’ve been serving for a long time,” Elam said. “How many people may not come to us for a mortgage or small business loan or to do their banking business because they now have a mindset that they have 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 by industry consolidation. 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 are really seeing that minority banks are critical to wealth creation and helping close the wealth gap,” Elam said.

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

“I’m just so confident,” Bradley said. “Even during the downfall of SVB, she managed to form this amazing community of people who are trying to help each other succeed. They are saying: ‘SVB was here for us, now we will be 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 corps member for the Associated Press/Report for America Statehouse News Initiative. Report for America is a non-profit national service program that places reporters on local newsrooms to report on hidden issues.

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