The collapse of the Silicon Valley bank worries the founders of color

Hours after some of Silicon Valley Bank’s biggest clients began withdrawing their money, a group of immigrant startup founders of color on WhatsApp has grown to more than 1,000 members.

As the bank’s financial condition worsened, questions poured in. Some were desperate for advice: Can they open an account at a major bank without a social security number? Others questioned whether they needed to be physically present at the bank to open an account because they were visiting their parents abroad.

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

While Wall Street struggled to contain the banking crisis in the aftermath rapid death of SVB — the nation’s 16th largest bank and the largest bank to fail since the 2008 financial meltdown — industry experts predict it could become even more difficult for people of color to get funding or a financial home to support their startups.

SVB opened its doors to such entrepreneurs, offering the opportunity to build important relationships in the technology and financial communities that were not available at larger financial institutions. But smaller players have fewer resources to survive a bust, reflecting the perilous journey minority entrepreneurs face trying to navigate industries historically rife with racism.

“All these people who have very specific circumstances based on their identity, they can’t just change themselves, and that makes them unfit for the top four (big banks),” said Asya Bradley, a board member of numerous startups who has watched how a whatsapp group deals with the death of SVB.

Bradley said some investors have asked startups to move to larger financial institutions to prevent future financial risks, but 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, a senior fellow at the Brookings Institution’s economic research division, said SVB’s collapse could exacerbate racial disparities.

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

Tiffany Dufoux was frustrated when she was unable to access her SVB account and in turn was unable to pay her employees.

Dufoux raised $5 million as CEO of The Cru, a New York-based women’s platform and career coaching community. It was a rare feat for businesses founded by black women, who receive less than 1% of the billions of dollars in venture funding awarded to startups each year. She banked with SVB because it was known for its close ties to the tech community and investors.

“In order to raise this money, I’ve pitched about 200 investors over the last few years,” said Dufu, who has since regained access to her funds and moved to Bank of America. “It’s very difficult to put yourself out there and every now and then you get told it’s not a good fit. So the money in the bank account was very expensive.”

A Crunchbase’s February news analysis defined funding for black-founded startups slowed by more than 50% last year after receiving a record $5.1 billion in venture capital in 2021. Total venture funding fell from about $337 billion to about $214 billion, while black founders were disproportionately hit, falling to just $2.3 billion, or 1.1% of the total.

Entrepreneur Amy Hilliard, a professor at the University of Chicago’s Booth School of Business, knows how difficult it can be to find financing. It took three years to get a loan for her cake company and she had to sell her house to get started.

Banking is based on relationships, and when a bank like SVB goes down, “those relationships go down, too,” said Hilliard, who is African-American.

Some conservative critics argued the SVB’s commitment to diversity, equity and inclusion were to blame, but banking experts say these claims were false. The bank was insolvent because its larger customers were withdrawing 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.

“When we focus on the climate or communities of color or race, it has nothing to do with what happened with the Silicon Valley bank,” said Valerie Red-Horse Maul, co-founder of Known Holdings, an Asian-based black community. An American-based investment banking platform focused on the 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 big banks are run by white people and have mostly white boards of directors, and “even if they’re doing DEI programs, it’s not very deep in their kind of transfer of capital”.

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

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

But the effects of SVB’s 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 that represents more than 175 minority-owned banks.

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 secured loans and minimal risky investments, she said.

“You’re seeing an exodus of customers that we’ve served for a long time,” Elam said. “How many people might not come to us for a mortgage or a small business loan or a banking business because now they think they have to bank with a bank that’s too big to fail? This is the first consequence of undermining public trust.”

Black-owned banks have suffered the most as the industry consolidates. Most of them do not have much capital to withstand economic downturns. At their peak there were 134. Today there are only 21.

But changes are 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 discussion around racial justice, people are really seeing that minority banks are key to creating wealth and helping close the wealth gap,” Elam said.

Bradley is also an angel investor, providing seed capital to a number of entrepreneurs, and sees new opportunities when people join WhatsApp groups to help each other stay afloat and grow.

“I really hope so,” Bradley said. “Even after the fall of SVB, we managed to form an incredible community of people who try to help each other achieve success. They say, “SVB was here for us, now we’ll be here for each other.”

____ Stafford, who lives in Detroit, is the national race investigative writer for the AP race and ethnicity team. Follow her on Twitter: Savage reported from Chicago and is a member of the Associated Press/Reporting staff for the American Government News Initiative. Reporting for America is a nonprofit national outreach program that places journalists in local newsrooms to cover underreported issues.

Copyright 2023 Associated Press. All rights reserved. This material may not be published, broadcast, copied or distributed without permission.

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