The collapse of the Silicon Valley Bank worries the founding fathers of color

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

Questions poured in as the bank’s financial status deteriorated. Some desperately sought advice: Could they open an account with a larger bank without a social security number? Others questioned whether they needed 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 following the rapid demise of SVB — the country’s 16th-largest bank and the largest to fail since the 2008 financial crisis — industry experts predict things could be even harder for people of color. to get funding or a financial home to support their startups.

SVB had opened its doors to such entrepreneurs, providing opportunities to form vital relationships in the technology and finance communities that were out of reach within larger financial institutions. But smaller players have fewer resources to survive a collapse, reflecting the perilous journey minority entrepreneurs must endure as they try to navigate industries traditionally rife with racism.

“All these people who have very special circumstances based on their identity, it’s not something that they can just change about themselves and that makes them unbankable by the top four[big banks],” said Asya Bradley, a board member of numerous startups he has seen the WhatsApp group struggle with the demise of the SVB.

Bradley said some investors have been begging startups to move to larger financial institutions to mitigate future financial risk, but that’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 the collapse of the SVB could exacerbate racial disparities.

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

Tiffany Dufu was disappointed 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 given to startups each year. She banked with SVB as it was known for its close ties to the tech community and investors.

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

An analysis by Crunchbase News in February found that funding for Black-founded startups slowed more than 50% last year after they received a record $5.1 billion in venture funding in 2021. disproportionately hard 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 get financing. It took her three years to get a loan for her pie-making business and she had to sell her house to get it up and running.

Banking is based on relationships, and if a bank goes bankrupt like the SVB, “those relationships disappear too,” says Hilliard, who is African-American.

Some conservative critics claimed the SVB’s commitment to diversity, equality and inclusion was to blame, but banking experts say those claims were false. The bank slipped into insolvency as its larger clients drew 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 the withdrawals.

“If we focus on climate or communities of color or racial equality, it 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-founded investment banking platform focused on the sustainable growth of minority-managed funds.

Red-Horse Mohl — which has raised more than $3 billion in capital, structured and managed for tribal nations — said most of the larger banks are run by white men and majority-white boards, and “even if they do DEI programs, isn’t it really a deep kind of capital shift.”

However, smaller financial institutions have been working to build relationships with people of color. “We cannot lose our regional and community banks,” she said. “It would be a mockery.”

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

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

Some have seen customers withdraw money and move to larger banks out of fear, even though most minority banks have a more traditional customer base, with secured loans and minimal risky investments, she said.

“You see a customer flight of people we’ve been serving for a long time,” Elam said. “How many people might not come to us for a mortgage or a small business loan or to do their banking because they now have it in their heads that they have to bank with a bank that is too big to fail? That is the first impact of eroding public confidence.”

Black-owned banks have been hit the hardest as the industry consolidates. Most do not have as much capital to withstand economic downturns. At its peak there were 134. Today there are only 21.

But change is coming. Over the past three years, the federal government, the private sector and the philanthropic community have invested heavily in minority-owned depository institutions.

“In response to this national conversation about racial equality, people are really seeing that minority banks are key to creating wealth and key to closing the wealth gap,” said Elam.

Bradley is also an angel investor, providing seed money 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’m really so hopeful,” Bradley said. “Even in the downfall of SVB, we managed to form this incredible 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 investigative reporter for AP’s race and ethnicity team. Follow her on Twitter: Savage reported from Chicago and serves on the Corps for the Associated Press/Report for America Statehouse News Initiative. Report for America is a non-profit national service program that places journalists in local newsrooms to report on undercover issues.

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