‘Trust is a hard thing to earn’: SVB’s closure could disproportionately affect Black founders

The social impact of Silicon Valley Bank was ‘unparalleled’

Dakotah Rice, the founder of investing platform Poolit, was sitting on his couch Thursday watching CNBC as he does every morning. Then, his phone started ringing — and didn’t stop.

“I started getting texts and calls from my investors saying, ‘Look, you should move your money out of Silicon Valley Bank, something’s going on there,’” Rice told TechCrunch+. “My first instinct was just to act quickly, I didn’t ask a lot of questions.”

He moved most of his money from SVB to another bank, leaving just some cash in case of a false alarm. But hundreds of people were doing the same thing, which led to what has become one of the worst bank failures in U.S. history. A cloud of uncertainty hangs over Black founders: How devastating will the ripple effects of the collapse be?

The bank emerged as somewhat of a leader in helping Black founders within the tech ecosystem. It connected them with other founders and investors and provided banking services to help scale their businesses, granting opportunities where other banks shied away. The Black community has a fraught, harrowed history with banking institutions, and SVB emerged as a bank they could trust.

In fact, Rice said he worried that some founders would feel the effects of losing SVB for a while, especially as there’s no institution within tech seemingly as committed to helping Black founders, he said. Although the bank resumed operations, it’s unclear what its role will be moving forward as a critical social player.

“As a Black founder, you’re going out to the market, and you’re trying to raise capital, and you’re finding out that capital allocators’ money was also potentially lost in this.” Harold Hughes, founder, Bandwagon

Brian Brackeen, the co-founder of Lightship Capital, found out about the bank collapse while sitting in a hotel room during SXSW, when his investor group chat started blowing up.

Like many companies within his portfolio, his firm and its nonprofit arm banked with SVB. He rushed to help them move their money from the bank, but like Rice, didn’t pull out every last penny. “Because mathematically, if we all go to zero, it’s going to cause the run of the bank, and it’s going to cause problems,” he said.

He was successful in helping his founders move the money. He was already two weeks into moving his funds from SVB into JPMorgan Chase, which is starting to replace SVB as a favorite in the startup community.

Although some of the bank’s policies had a disproportionate impact on Black founders — for example, according to a term sheet reviewed by TechCrunch+, only founders who raised at least a $7 million equity round could get a line of credit — the social impact of SVB was unparalleled, Brakeen said. “Silicon Valley Bank was certainly willing to push the envelope and see what they could do, including investing in Black funds,” he said. “We don’t see that commitment from other banks. Some made promises they didn’t keep; others didn’t even bother to promise.”

SVB gave loans and lines of credit to businesses that other banks would not serve, said RareBreed Ventures founder McKeever Conwell.

His firm didn’t bank with SVB, but many companies within his portfolio did. He used SVB when he was a founder, however, and said that SVB was the only bank willing to give him a business account.

“There are similar stories for a lot of founders out there, and so ultimately, the people who are probably going to be impacted the most are those who are underbanked,” he told TechCrunch+. The FDIC’s most recent survey on unbanked and underbanked households showed that for all income levels, Black households were significantly more underbanked than white households.

“I also loved connecting with people of color who were Black women. I don’t think I will find that in another bank.” Ciara May, founder, Rebundle

SVB was also a top venture debt provider, and without an entity to replace it, startups could find it costly to fund growth. “Venture debt and lines of credit for these companies is the real boom for the industry, and without Silicon Valley bank around, I fear how that impacts a company’s ability to get additional financing to continue to keep pace,” Conwell said. “And again, founders of color will always be more disproportionately hurt by these kinds of things.”

Fundraising might also become more of a challenge, and the collapse could lead to more banking and venture capital regulations, stipulations and guardrails, he said. “Founders from diverse backgrounds are already considered to be a bigger risk for whatever stupid reason somebody wants to come up with,” he said. “Now take a bigger risk on top of, ‘Oh, I got higher bars, reporting or regulations that I need to hit. I definitely don’t want to take that extra risk with them.’”

Ciara May, the founder of the hair care company Rebundle, had just landed in Atlanta when she found out the bank was collapsing. SVB is her only business bank account, and only received access to the more than $250,000 her company had in the bank Tuesday morning. She’s worried what the financial impact that not having access to her money will have on her business. “Will I be able to make payroll? What projects do I now have to deprioritize? Because all of the capital I had access to I no longer have access to, and what does that mean for my runway?” she said.

Despite the fallout, May said the bank had suitable startup products and good customer service. “I also loved connecting with people of color who were Black women,” she continued. “I don’t think I will find that in another bank.”

SVB’s collapse revealed the inequities beneath the surface of the tech ecosystem, Rice said. There is a possibility that limited partners and general partners will become more risk-averse to venture, meaning less capital to funds, which could disproportionately affect how much money goes to Black fund managers and Black founders.

“There are similar stories for a lot of founders out there, and so ultimately, the people who are probably going to be impacted the most are those who are underbanked.” McKeever Conwell, investor, RareBreed Ventures.

“I wouldn’t be surprised if a lot of investors just became more conservative over the coming months and also [started] doing much deeper due diligence, not just on financials but also on banking strategies,” Conwell said. “If that becomes the case, well, it will not be lost on me if founders of color take an even bigger hit in their ability to raise funds over the next few months.”

Some funds could also lose money in this if they are not able to access the funds.

Harold Hughes, who founded data company Bandwagon, said he was double exposed to the bank’s failure: He had an account there and used Rippling, the payroll service that had funds tied up in the institution. He was able to move all of his company’s money quickly to Brex. When he went to tell his investors about the financial situation, he noted that his company’s funds were technically their money, too, as they provided the capital for the business to operate. “As a Black founder, you’re going out to the market, and you’re trying to raise capital, and you’re finding out that capital allocators’ money was also potentially lost in this; the biggest challenge I saw was that we may need to figure out how our funding strategies were impacted,” he told TechCrunch+.

Many Black founders are now having a larger conversation about where to store funds, such as with a Black bank. The trust has been shattered, and that’s important when looking at the distressed history of the Black community and banks, Hughes said.

“We all know the issues that exist in the banking system for Black people,” Hughes said. “Trust is a hard thing to earn.”

For now, Black founders and investors are taking this as a lesson. May said she is open to staying at the bank if its current issues are resolved. Brackeen also said he would be willing to return to the bank one day, but with reservations. “As far as my banking or keeping millions in an account, my new position in life is to keep millions of dollars in an account with a bank that has trillions of dollars,” he said.

Hughes is also open to returning but said it wouldn’t be his primary bank. As the dust has yet to settle, he and others are simply focused on getting back on their feet. “I’m doing what I can do so that we can be back to a normal position,” Hughes said. “Which is definitely at a disadvantage, but a normal disadvantage.”

Read more about SVB's 2023 collapse on TechCrunch