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

In the hours after some of Silicon Valley’s biggest bank clients began withdrawing their money, the WhatsApp group of immigrant startup founders of color swelled to more than 1,000 members.

Questions poured in as the bank’s financial condition worsened. Some have asked for desperate advice: Can they open an account at a bigger bank without a social security number? Others wondered if they had to be physically present at a bank to open an account, since they were visiting parents abroad.

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

While Wall Street struggles to contain the banking crisis yet The demise of SVB – The 16th largest bank in the country and the largest bank to fail since the 2008 financial crash – Industry experts predict that it may become difficult for people of color to secure financing or a financial home to support their startups.

SVB has opened its doors to these entrepreneurs, offering opportunities to form important connections in the technology and financial communities that have been out of reach within larger financial institutions. But smaller players have fewer means of surviving a crash, reflecting the perilous journey minority entrepreneurs face as they try to navigate industries historically riddled with racism.

said Asia Bradley, a board member of several startups who has watched the WhatsApp group grapple with SVB’s demise.

Bradley said some investors have pleaded with startups to switch to larger financial institutions to thwart future financial risks, but this is 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 SVB collapse could exacerbate racial disparities.

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

Tiffany Duveaux was devastated when she couldn’t access her SVB account, and therefore couldn’t pay her employees.

Dufu has 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, which receive less than 1% of the billions of dollars in venture capital funding that are allocated annually to startups. I got involved with SVB because they were known for their close relationships with the tech community and investors.

“In order to raise that money, I’ve courted nearly 200 investors over the last few years,” said Dufo, who has since regained access to her money and moved to Bank of America. “It’s very difficult to put yourself out there over and over — you’re told it’s not appropriate. So, the money in the bank account was very valuable.”

a Crunchbase News analysis for the month of February is outlined Funding for startups founded by Black slowed by more than 50% last year after they received 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 took a hit. disproportionately, and they fell 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 can be to secure financing. It took her three years to get a loan for her cake manufacturing company, and she had to sell her home to start the business.

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

Some conservative critics have affirmed SVB’s commitment to Diversity, equality, and inclusion were to blameBut banking experts say these allegations are false. The bank slid into bankruptcy because its large customers withdrew deposits instead of borrowing at higher rates of interest and the bank’s balance sheets were overexposed, forcing it to sell bonds at a loss to cover the withdrawals.

said Valerie Red Horse Muhl, founding partner of Known Holdings, a Black, Indigenous, Asian investment banking platform founded in America focused on the sustainable growth of minority managed funds.

Most of the big banks are led by white men and majority white boards, and even when they do DEI programs, it’s not really a deep kind of capital transfer,” said Red-Horse Mohl — who has raised, structured and managed more than $3 billion in capital in tribal states. .

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

Historically, small and minority-owned banks have addressed funding gaps that large banks ignored or even created, with exclusionary laws and policies because they rejected clients because of the color of their skin.

But Nicole Elam, president and CEO of the National Bankers Association, a 96-year-old trade association representing more than 175 minority-owned banks, said the ripple effects from the collapse of SVB are also being felt among them.

Some have seen customers withdraw money and move to larger banks out of fear, she said, even though most minority-owned banks have a more traditional client base, with secured loans and lower-risk investments.

“You see a flight of customers that 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 think they need to deal with a too-big-to-fail bank? That is the first effect of undermining public confidence.”

Black-owned banks were hardest hit as the industry consolidated. Most of them do not have much capital to withstand an economic downturn. 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 equality, people are really seeing minority banks as key to creating wealth and key to helping close the wealth gap,” Elam said.

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

“I’m really hopeful,” Bradley said. “Even when SVB is down, I’ve been able to form this wonderful community of people trying to help each other succeed. They’re saying, ‘SVB was here for us, now we’ll be here for each other.’”

____ Stafford, based in Detroit, is a national survey writer on race for the AP’s Race and Ethnicity Team. Follow her on Twitter: https://twitter.com/kat__stafford. Savage reported from Chicago and is a staff member for the Associated Press/Reporting for America Statehouse News Initiative. Report for America is a nonprofit national service program that puts journalists in local newsrooms to report on undercover issues.