Silicon Valley Bank collapse worries founders of color

Photo of author

By admin

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 skyrocketed to more than 1,000 members.

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 questioned whether they had to be physically in a bank to open an account, because they are visiting their parents abroad.

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

As Wall Street struggles to contain the banking crisis after the rapid demise of SVB, the country’s 16th-largest bank and the largest to fail since the 2008 financial crash, industry insiders predict it could become even more difficult for people of color obtain financing or a financial position. home supporting their startups.

SVB had opened its doors to such entrepreneurs, offering opportunities to form crucial relationships in the technology and financial communities that had been out of reach for the largest financial institutions. But smaller players have less means of surviving a collapse, reflecting the perilous journey minority entrepreneurs face trying 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 change about themselves that makes them unfundable for the top four (big banks),” said Asya Bradley, a board member at numerous startups that has seen the WhatsApp group deal with the demise of SVB.

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

“The reason we go to the 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’s going to be more challenging for people who don’t fit into the traditional credit box, including minorities,” Klein said. “A financial system that gives preference to existing wealth holders will perpetuate the legacy of past discrimination.”

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

Dufu raised $5 million as CEO of The Cru, a New York-based community and career guidance platform for women. It was a rare feat for companies founded by black women, which get less than 1% of the billions of dollars in venture capital funding that is doled out annually to startups. She did banking with SVB because it was known for its close ties to the tech community and investors.

“In order to raise that money, I’ve introduced 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 is very difficult to expose yourself over and over again; they tell you this doesn’t fit well. 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. Disproportionately hit strong, 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 business and she had to sell her house to get started.

Banking is based on relationships, and when a bank like SVB fails, “those relationships also disappear,” 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 because its largest clients withdrew deposits rather than borrow at higher interest rates and the bank’s balance sheets were overexposed, forcing it to sell loss-making bonds to cover the withdrawals.

“If 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 entity. and asian. US-founded investment banking platform focused on the sustainable growth of minority-managed funds.

Red-Horse Mohl, which has raised, structured and managed more than $3 billion in capital for tribal nations, said most of the largest banks are run by white men and majority white boards, and “even when they do DEI programs, It’s not a really deep commitment.” kind of displacement 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. “It would be a farce.”

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

But the ripple effect of the SVB collapse is also being felt among these 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 clients withdraw funds and move to larger banks out of fear, even though most minority-owned banks have a more traditional client base, with guaranteed loans and minimal risk investments, he said.

“You’re looking at a flight of customers that we’ve been serving for a long time,” Elam said. “How many people can’t come to us for a mortgage or a business loan or to do their banking business because now it’s on their mind that they need to do business with a bank that’s too big to fail? That 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 as much 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 banks are key to creating wealth and helping to close the wealth gap,” Elam said.

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

“I’m very hopeful,” Bradley said. “Even in the fall of SVB, he managed to form this amazing community of people trying to help each other to succeed. They’re saying, ‘SVB was here for us, now we’re going to 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 staff member of the Associated Press/Report for America Statehouse News Initiative. Report for America is a nonprofit national service program that places journalists in local newsrooms to report on covert issues.

Leave a Comment