It’s well known that the shutdown of Silicon Valley Bank was the largest US bank failure since the 2008 financial crisis. What is less talked about is the disproportional impact this has on women founders and founders of color, who have historically been underbanked. Even with the FDIC ensuring that depositors have access to their capital, the aftermath of this will have an inequitable impact.
A study from Gusto found that in 2021, 49% of new business owners were women (up 75% from 2019), 10% were Hispanic (up 25% from 2019) and 9% were Black (up 300% from 2019). Despite that significant diversification in founder identities, the study showed that while 70% of white business owners were approved for the small business loans they applied for, only 30% of Hispanic owners and 55% of Black owners were approved. Many studies have shown similar trends around women-owned companies being underbanked. A Zippia report revealed that women founded companies received 2.5 times less money in small business loans than their male counterparts.
Silicon Valley Bank (SVB) was recognized for their commitment to Diversity, Equity and Inclusion (DEI). In a press release from January 2023, celebrating the 5th year in a row that SVB was named to the Bloomberg gender equality index, bank president and CEO, Greg Becker, said: “We have a responsibility and a unique opportunity to ensure women and people of underrepresented groups can access, contribute to and benefit from the enormous potential of the innovation economy.”
While the data around the demographics of SVB’s depositors is not readily available, anecdotal information reveals that SVB was often the only banks that would provide credit and loans to historically underbanked founders. This is not to say that they offered the best terms – several founders of color that I spoke with mentioned receiving terms that felt exploitive – but they were often the only terms available. For example, they required that founders with debt vehicles through SVB had to exclusively bank with them. That means that there was no way for these founders to diversify their banking, even though the FDIC only insures up to $250k held within a given bank.
Liz Giorgi, the CEO and co-founder of soona, shared that she had applied for lines of credit at 27 banks before finally being approved by SVB, despite having run a profitable, multimillion dollar business for seven years prior. She noted that all of the women-founded companies that she was in entrepreneur cohorts with at Tory Burch Foundation and Techstars were similarly impacted by the SVB collapse.
“Female founders have been historically underbanked, and therefore have been unable to access even a simple business credit card at a traditional bank,” Giorgi explained. “SVB filled a need for female founders, and they were able to demand very stringent terms because of it, including clauses that prevented those women-owned companies from having secondary accounts elsewhere.”
While the short-term needs of those that banked with SVB are being addressed by the FDIC, the weeks and months ahead will be telling. The actions of the government, the venture capital ecosystem and other private banks will have huge ramifications on the 50% of US venture-backed startups that SVB banked, and disproportionately on the women founders and founders of color that they had served.
James Oliver Jr, CEO and cofounder of Kabila, had moved his company’s funds to SVB from a local bank because of their network. “My primary concern is around the containment of the problem,” he shared. “If it is not contained, then I think it might be untenable for me to continue building Kabila. If it is contained, great, but it means we go back to a place where Black founders only get 1% of VC dollars, which isn’t awesome.”
With Signature Bank being shut down after SVB, many founders are left wondering what financial institutions they can count on for reliable banking.
“At this moment, It’s hard not to think about all the bias in banking which women and underrepresented founders continue to face,” Lizelle van Vuuren, as serial startup founder, shared. “I’ve seen a great deal of jokes around SVB’s DEI focus, and most people don’t have a clue what it eventually takes for women to successfully raise capital, and then to safely bank, rolling capital. We shall see which banks help underrepresented founders in this crisis live to see another day.”
Giorgi echoed this sentiment. “While many banks are reaching out to female founders now, the true test will be if they are able to competitively fund these women to survive this crisis.”