The collapse of Silicon Valley Bank worries founders of color

In the hours after some of Silicon Valley Bank’s biggest clients started withdrawing their money, a WhatsApp group of immigrant business founders 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 asked if they had to be physically in 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 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 it could still be more difficult for people of color to get funding or financial funding. home supporting their startups.

SVB had opened its doors to these entrepreneurs, providing opportunities to form crucial relationships in the technology and financial communities that had been beyond the reach of larger financial institutions. But smaller players have fewer means to survive a collapse, 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 identity, it’s not something they can just change themselves and that makes them incomprehensible to the big four (big banks),” said Asya Bradley, a member of the board of numerous startups that has seen the WhatsApp group struggle with the demise of SVB.

Bradley said some investors have asked startups to switch to larger financial institutions to curb future financial risks, but that’s not an easy transition.

“The reason we’re going to regional and community banks is because those (big) banks don’t want our business,” Bradley said.

Banking expert Aaron Klein, a senior fellow for economic studies at the Brookings Institution, said the collapse of SVB could exacerbate racial disparities.

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

Tiffany Dufu was devastated 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 professional training platform and community for women. It was a rare feat for companies founded by black women, who receive less than 1 percent of the billions of dollars in venture capital funding doled out annually to startups. He banked with SVB because it was known for its close ties to the tech community and investors.

“In order to have raised this money, I pitched to nearly 200 investors over the past few years,” said Dufu, who has since regained access to his funds and moved to Bank of America. “It’s very difficult to put yourself out and time after time – they tell you that this is not a good fit. So the money in the bank account was very valuable.”

A February Crunchbase News analysis found that funding for black-founded startups slowed by more than 50% last year after they received a record $5.1 billion in venture capital in 2021. Global corporate funding fell from about $337 billion to roughly $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 financing. It took her three years to get a loan for her cake-making company, and she had to sell her house to get it started.

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

Some conservative critics claimed that SVB’s commitment to diversity, equity and inclusion was to blame, but banking experts say those claims were false. The bank fell into insolvency as its biggest customers withdrew deposits rather than borrow 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 the 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 and Asian. US-founded 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 biggest banks are led by white men and majority-white boards, and “even everything when they do DEI programs, it’s not really deep. kind of capital change.”

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

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

But the ripple 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, although most minority-owned banks have a more traditional customer base, with guaranteed loans and minimal risk 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 a small business loan or to do their banking business because they now have in their mind that they have to bank with a too-big-to-fail bank? This is the first impact of the erosion of public trust.”

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

But change is on the way. In 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 minority banks as key to wealth creation and key to helping close the wealth gap,” Elam said.

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

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

____ Stafford, based in Detroit, is a national investigative race writer 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 corps. Report for America is a national nonprofit service program that places reporters in local newsrooms to report on undercover issues.

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