Hours after some of Silicon Valley Bank’s biggest clients started cashing out, a group of WhatsApp startup founders who are immigrants of color has grown to more than 1,000 members.
The questions came as the bank’s financial situation worsened. Some desperately asked for advice: Could they open an account at a major bank without a Social Security Number? Others questioned whether they had to physically be in a bank to open an account because they were visiting parents abroad.
One clear theme emerged: a deep concern about the broader impact on startups led by people of color.
As Wall Street struggles to contain the banking crisis following the rapid collapse of SVB — the country’s 16th-largest bank and the largest to fail since the 2008 financial meltdown — industry experts predict it could get even tougher for people of color to secure funding or a financial house that supports their start-ups.
SVB had opened its doors to such entrepreneurs, offering opportunities to build critical relationships in the technology and finance communities that were inaccessible to 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 particular circumstances based on their identity, it’s not something they can just change themselves and that makes them unable to capitalize on the top four (big banks),” said Asya Bradley, board member of several startups who watched the WhatsApp group struggle with the death of SVB.
Bradley said some investors have asked startups to turn to larger financial institutions to hedge against 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 in Economics at the Brookings Institution, said SVB’s collapse could exacerbate racial disparities.
“This will be more difficult for people who don’t fit the traditional credit framework, including minorities,” Klein said. “A financial system that favors existing wealth holders will perpetuate the legacy of past discrimination.”
Tiffany Dufou 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 career coaching platform and community for women. It was a rare achievement for businesses founded by black women, who receive less than 1% of the billions of dollars in venture capital funding awarded annually to startups. It partnered with SVB because it was known for its close ties to the tech community and investors.
“To raise this money, I attracted almost 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 put yourself out there and every time – you’re told this doesn’t fit. So the money in the bank account was very valuable.”
A February Crunchbase News analysis found that funding for black-owned 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 dollars to about $214 billion, while Black founders were hit disproportionately hard, 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 secure funding. It took her three years to secure a loan for her cake-making company, and she had to sell her house to get started.
Banking is based on relationships, and when a bank like SVB goes under, “and those relationships disappear,” said Hilliard, who is African-American.
Some conservative critics argued that SVB’s commitment to diversity, equality and inclusion was to blame, but banking experts say those claims were false. The bank went bankrupt because its biggest 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 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, Asian. The US investment banking platform focused on the sustainable development 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 biggest banks are run by white men and majority white boards and “even when they do DEI programs, it’s not a very deep kind of capital shift.”
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 and minority-owned banks have faced funding gaps that larger banks ignored or even created by following exclusionary laws and policies as they turned away customers based on the color of their skin.
But ripples from SVB’s collapse are being felt at those banks, too, 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 bigger banks out of fear, even though most minority-owned banks have a more traditional customer base, with secured loans and minimal risky investments, he 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 small business loan or to do their banking because they now have in their mind that they have to bank with a bank that’s too big to fail? This is the first impact of the erosion of public trust.”
Black-owned banks have been hit hardest as the industry consolidates. Most do not have enough capital to weather the economic downturn. In his prime he was 134. Today he is only 21.
But change is on the way. Within the past three years, the federal government, the private sector, and the philanthropic community have invested heavily in minority-owned depository institutions.
“In response to this national conversation around racial equity, people are really seeing that minority banks are key to wealth creation and key to helping close the wealth gap,” Elam said.
Bradley is also an angel investor, providing money to many entrepreneurs and seeing new opportunities as people network in the WhatsApp group to help each other survive and grow.
“I’m really so optimistic,” Bradley said. “Even in the downfall of SVB, he managed to form this incredible community of people trying to help each other succeed. They say, “SVB was here for us, now we’ll be here for each other.”
____ Stafford, based in Detroit, is a national race investigative writer for the AP’s Race and Ethnicity team. Follow her on Twitter: https://twitter.com/kat__stafford. Savage reported from Chicago and is a member of the Associated Press/Report for America Statehouse News Initiative corps. Report for America is a nonprofit national service program that places reporters in local newsrooms to report on undercover issues.