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

Hours after some of Silicon Valley Bank’s largest customers began withdrawing their money, a group of WhatsApp startup founders who are immigrants of color swelled to over 1,000 members.

Questions poured in as the bank’s financial position deteriorated. Some desperately sought advice: Can they open a larger bank account without a Social Security number? Others wondered if they needed to be physically at the bank to open an account because they were visiting their parents abroad.

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

As Wall Street struggles to contain the banking crisis following the quick demise of SVB — the nation’s 16th-largest bank and the biggest bankruptcy since the 2008 financial crash — industry experts predict it could be even harder for people of color to get funding. or financial position. home, supporting their startups.

The Santa Clara-headquartered Silicon Valley Bank was shut down on March 10, 2023 by California regulators and placed under the control of the US Federal Deposit Insurance Corporation. | Justin Sullivan/Getty Images

SVB has opened its doors to such entrepreneurs, offering opportunities for important relationships in the technology and financial communities that were not available at larger financial institutions. But smaller players have less chance of surviving a crash, reflecting the perilous path that minority entrepreneurs face when trying to navigate industries historically rife with racism.

“All these people who have special circumstances related to their identity can’t just change themselves, and that makes them unsuitable for the top four (big banks),” said Asya Bradley, board member of numerous startups who have watched a whatsapp group is fighting the demise of SVB.

Bradley said some investors have begged startups to switch to larger financial institutions to head off future financial risks, but it’s not an easy transition.

“The reason we go to regional and local banks is because these (large) banks don’t need our business,” Bradley said.

Worsening racial inequality

Banking expert Aaron Klein, senior fellow in economic research at the Brookings Institution, said the collapse of the SVB could exacerbate racial disparity.

“It will be more of a challenge for people who don’t fit into traditional credit boxes, including minorities,” Klein said. “A financial system that favors existing wealth holders will perpetuate the legacy of past discrimination.”

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

Dufu raised $5 million as the CEO of The Cru, a New York-based career coaching platform and community for women. It was a rare feat for businesses founded by black women, which receive less than 1% of the billions of dollars of venture capital funding given to startups each year. She worked at SVB because she was known for her close ties to the technology community and investors.

“To raise this money, I have raised about 200 investors over the past few years,” said Dufu, who has since regained access to her funds and moved to Bank of America. “It’s very hard to show off and you’ve been told over and over that it’s not right. So the money in the bank account was very valuable.”

A February analysis by Crunchbase News found that funding for black-founded startups slowed more than 50% last year after raising a record $5.1 billion in venture capital in 2021. hit disproportionately hard, falling to just $2.3 billion, or 1.1% of the total.

Entrepreneur Amy Hilliard, a professor at the Booth School of Business at the University of Chicago, knows how difficult it is to get funding. 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 fails, “that relationship disappears too,” said Hilliard, an African-American.

What led to the collapse of SVB

Some conservative critics have argued that SVB’s commitment to diversity, fairness and inclusiveness is to blame, but banking experts say those claims were false. The bank became insolvent because its larger customers were pulling deposits rather than borrowing at higher interest rates, and the bank’s balance sheets were excessively exposed to risk, forcing it to sell bonds at a loss to cover withdrawals.

“If we’re focused on climate, communities of color, or racial equality, it has nothing to do with what happened to the Silicon Valley bank,” said Valerie Red Horse Mole, co-founder of Known Holdings, a black, indigenous, Asian-based US-based investment – banking platform focused on sustainable growth of funds managed by minority shareholders.

Red Horse Mole, which has raised, structured and managed more than $3 billion worth of capital for tribal nations, said most of the big banks are led by white people and have a white majority board and “even when they run DEI programs, it’s not very deep”. a sort of transfer of capital.

A man stands outside the closed headquarters of Silicon Valley Bank in Santa Clara on March 10, 2023. | Dan Fenstermacher for The Standard

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

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

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

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

“You’re seeing a flight of customers we’ve been serving for a long time,” Elam said. “How many people might not apply to us for a mortgage or a small business loan or go into their banking business because they now think they need to work at a bank that is too big to fail? This is the first impact of undermining public trust.”

Impact on black-owned banks

As the industry consolidated, black-owned banks were the hardest hit. Most do not have much capital to withstand economic downturns. At their peak, there were 134. Today, only 21 remain.

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

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

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

“I’m really, really hopeful,” Bradley said. “Even during the collapse, SVB has 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’ll be here for each other.”

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