Following the withdrawal of funds by some of Silicon Valley Bank’s major clients, a WhatsApp group consisting of immigrant founders of color from startup companies grew to over 1,000 members in just a few hours.
As the bank’s financial situation deteriorated, numerous inquiries were made by members. Some were in urgent need of guidance, wondering if they could establish an account at a larger bank without a Social Security Number. Others were unsure if they had to be physically present at a bank to open an account, as they were currently visiting family members overseas.
As Wall Street grapples with the banking crisis that has become the world news that has ensued since the sudden collapse of SVB, the country’s 16th largest bank and the biggest to fail since the 2008 financial crisis, experts in the industry are predicting that people of color may find it even more challenging to secure funding or financial support for their startups.
SVB had provided a platform for these entrepreneurs, granting them access to establish crucial connections in the technology and finance communities that were previously out of their reach within larger financial institutions. However, smaller players have limited resources to weather a collapse, highlighting the challenging journey that minority entrepreneurs must undertake while trying to navigate industries that have historically been plagued by racism.
Experts comment on the changes:
Asya Bradley, a board member of several startups who has observed the WhatsApp group’s response to SVB’s collapse, stated, “Individuals with unique circumstances based on their identity cannot merely alter these traits, rendering them unbankable by the four largest banks.”
According to Bradley, some investors have advised startups to shift to larger financial institutions to avoid potential financial risks in the future. Aaron Klein, an expert in banking and a senior fellow in economic studies at the Brookings Institution, believes that SVB’s collapse may worsen existing racial disparities.
When Tiffany Dufu was unable to access her SVB account, she was devastated as it prevented her from paying her employees.
As the CEO of The Cru, a career coaching platform and community for women based in New York, Dufu managed to raise $5 million—a noteworthy achievement for businesses established by black women, who typically receive less than 1% of the total venture capital funding awarded annually to startups. Dufu chose to bank with SVB due to its strong connections to the tech community and investors.
In February, an analysis by Crunchbase News revealed that funding for black-founded startups decreased by over 50% last year, following a record high of $5.1 billion in venture capital funding in 2021. While overall venture funding declined from around $337 billion to approximately $214 billion, black founders were disproportionately impacted, receiving only $2.3 billion, or 1.1% of the total amount.
Amy Hilliard, an entrepreneur, and professor at the University of Chicago Booth School of Business understand firsthand the challenges of securing financing. It took her three years to obtain a loan for her cake manufacturing company, and she even had to sell her home to get it off the ground. According to Amy Hilliard, banking is built on relationships, and when a bank like SVB goes bankrupt, those relationships dissolve as well.
While some conservative critics blamed SVB’s diversity, equity, and inclusion initiatives for the bank’s collapse, banking experts have refuted these claims. They stated that the bank became insolvent because its major customers withdrew deposits instead of borrowing at higher interest rates, causing the bank’s balance sheets to become overexposed. As a result, the bank had to sell bonds at a loss to cover the withdrawals.
Red-Horse Mohl, who has helped tribal nations raise, structure, and manage over $3 billion in the capital, pointed out that the leadership of most larger banks is comprised of white men and majority-white boards. She further explained that even when these banks implement diversity, equity, and inclusion (DEI) programs, it often does not lead to a significant shift in capital.
In contrast, smaller financial institutions have actively sought to establish relationships with people of color. Mohl stressed the importance of regional and community banks, stating that it would be a tragedy to lose them.
Throughout history, smaller and minority-owned banks have attempted to address funding gaps that larger banks have either ignored or created as they turned away customers based on their skin color, following exclusionary laws and policies.
The impact of SVB’s collapse is also being felt among these banks, according to Nicole Elam, president ,and CEO of the National Bankers Association shared on the world news. The trade association, which has been in existence for 96 years and represents more than 175 minority-owned banks, is witnessing the ripple effects of SVB’s collapse.