6 venture funds connecting banks and credit unions with fintechs

October 26, 2021 5:16 PM

A wave of venture capital funds with financial institutions as limited partners has emerged, and return on investment isn't their only motive.

The funds — run by outfits such as Canapi, Curql Collective and JAM Fintop — are trying to suss out promising technologies and potential fintech partners for regional and community banks as well as credit unions that lack the resources to find and vet such partners on their own. Fund managers also will consult with their bank investors about how useful a product would be before committing to it.

“Particularly in the last 12 months, [financial institutions] have used fintechs as more of a partner than competitor,” said Vincent Hui, managing director at Cornerstone Advisors. “But the challenge is who is the best partner, how do I manage that partnership, how do we get visibility on potential partners?”

Most small institutions don’t have a dedicated staff for managing fintech partnerships, so participating in these kinds of funds is one way to learn about fintechs without wasting time with the wrong partner, said Hui.

“If they get a return, that’s icing on the cake,” he said.

This is an active time for fintech investing. The third-quarter "State of Fintech" report from CB Insights found that global fintech funding stood at $94.7 billion at Sept. 30 — nearly double the year-end total of $48.4 billion in 2020.

Here is a look inside six funds that have debuted in recent years. Some of them are still fundraising or filling out their ranks of limited partners; others have launched new funds focusing on niches such as minority-owned startups or blockchain.

Curql Collective

The “curql” in Curql Collective is pronounced “circle” and is a nod to how the investment fund of the same name, the fintechs it invests in and the credit unions that benefit are all connected in one ecosystem. The curious spelling is meant to grab the attention of the next generation of fintech entrepreneurs.

Curql Collective, the general partner, and the Curql Fund, managed by Next Level Ventures, are freestanding Credit Union Service Organizations. The 70 credit unions, CUSOs and one state trade association that are owners of Curql Collective are also limited partners of the Curql Fund.

“Our mission is to bring transformative technology to the credit union industry in order to stay competitive and relevant,” said Nick Evens, above, president and CEO of the Curql Collective.

Curql launched in April 2020 and has invested a little over $40 million across nine companies, including Illuma Labs, MotoRefi,

Payrailz

and Zest AI. The fund is closing at the end of October, after having raised $250 million, so the managers can focus on investing.

Evens said there is no short supply of fintechs approaching them, and he speaks with several each week.

Chris Otey, chairman of South Bay Credit Union in Redondo Beach, California, said in an interview this summer that any fintech involvement is good for the credit union movement.

“Understanding which fintech solutions are out there to eat your lunch, sell you lunch or eat lunch with you is a tall task,” he said.

Canapi

Since Canapi

announced its launch

in 2020, its assets under management have risen from $545 million to $654 million.

The investors, known as the Canapi Alliance, have multiplied in number as well. The alliance includes more than 40 banks, the American Bankers Association, the Independent Community Bankers of America and a number of state banking associations. Nonbank institutional investors such as insurance companies, large asset managers, registered investment advisors, family offices and high-net-worth individuals, including current and former financial services executives, are also investors.

Canapi was founded to help small and regional banks get access to technology. “We felt there was an opportunity here both to help younger companies get started … and on the other hand, help community banks get a jump-start on the technology changes they need and want,” Gene Ludwig (at left in the photo above), a co-founder and managing partner along with Chip Mahan, said in a January 2020 story. Banks with less than $10 billion in total assets make up about a quarter of the Canapi Alliance's members, but 15 of the top 50 U.S. banks are in the group, too.

Two funds, Canapi Ventures SBIC Fund, with capital commitments of $534 million, and Canapi Ventures Fund, with capital commitments of $120 million, invest in early- to growth-stage private financial technology companies. These investments have ranged from less than $1 million for seed rounds to more than $40 million for raises for larger and more mature companies. The companies in Canapi’s portfolio include

and

.

Ludwig and Mahan (at right in photo) have deep experience in the banking industry. Ludwig is a former U.S. comptroller of the currency, founder and chairman of Promontory Financial Group and one of the founders of Promontory Interfinancial Network (now

IntraFi Network

). Mahan is the CEO and chairman of Live Oak Bancshares in Wilmington, North Carolina.

JAM Fintop

JAM Fintop coalesced when a community bank investor approached a fintech venture capital firm with a common problem it was hearing from its financial institutions: They needed help screening next-generation technologies.

JAM Special Opportunity Ventures — whose affiliate Jacobs Asset Management in New York invests in community banks — and Fintop Capital, a Nashville, Tennessee, firm that invests in fintechs that serve financial institutions, created JAM Fintop in April. The joint venture, as well as its Banktech fund, have 66 community and midsize bank partners ranging in size from about $500 million to $80 billion of assets. It raised $150 million in April and has subsequently closed the fund. A separate blockchain fund was announced in

August

.

“We as a fund are very pro-bank, very cognizant of the challenges and the opportunities set forth within banking,” said Joe Maxwell (above), managing partner at Fintop Capital, about his firm. “We are focused on equipping banks for the future.”

Unlike other firms on this list, all 66 bank partners are public and include Busey Bank,

New York Community Bancorp

and

Sterling Bancorp

.

“It’s like having a phenomenal research team at your disposal to help educate you on emerging trends,” Farhan Yasin, chief technology officer of the $11 billion-asset Busey in Champaign, Illinois, said in an October

interview

.

A survey by JAM Fintop of its partner banks in the spring found that faster payments, digital end-to-end lending solutions, business intelligence, banking as a service and embedded banking were among the top areas of concern. It recently announced its first investment:

Monit

, a small-business predictive intelligence company. Four more companies have joined the portfolio since, including the social media marketing company Denim Social and IRS account-monitoring service Tax Status.

BankTech Ventures

Five diverse entities, including two community banks, came together to form BankTech Ventures.

Carey Ransom (above), managing director, said this is one feature that sets BankTech Ventures apart from similar funds. The Independent Community Bankers of America, the Venture Center, Hovde Group, Coastal Community Bank in Everett, Washington, and Sunwest Bank in Irvine, California, are the five general partners. This means, for one thing, that portfolio companies can go through the ICBA’s accelerator, and that Coastal and Sunwest can pilot products and collaborate with management teams.

“I don’t think any other [venture capital funds] have two actively operating bank CEOs as partners in the fund, or an association as general partner or an accelerator explicitly focused on bank technologies,” he said. “It’s a unique combination that will help us both in vetting and determining which companies to invest in and our ability to help those companies be successful.”

Ransom expects the fund to make its first close shortly, once it raises $50 million. Eventually, he plans for the fund to reach $200 million in total. At least 50 community banks should be committed to the fund by the first close, and as many as 150 to 200 by the final close. The largest one so far holds about $20 billion of assets. Encore Bank, a $1 billion-asset institution in Little Rock, Arkansas, is one limited partner.

BankTech Ventures will look for products that help the banks save money and become more efficient, in areas such as lending, regulatory compliance and data and analytics, or make money by extending financial technologies to their customers.

“None of these banks on their own could look at more than 1,000 technology companies a year,” said Ransom. “They look at us as being an extension of their R&D innovation, digital transformation team.”

Mendon Venture Partners

Mendon Venture Partners is intentionally keeping its investor base small.

The new firm is founded by Anton Schutz, Andrew Marquardt, Dan Goldfarb and John Clausen; Schutz and Marquardt are the managing partners. Schutz is also owner of Mendon Capital Advisors, a registered investment advisor and separate legal entity. He and Goldfarb will continue to invest in financial services stocks full-time through Mendon Capital Advisors, while Marquardt and Clausen will oversee the new firm’s fund full time.

“Our goal is to stay as close to the financial institutions as possible and understand what is going on within the banking space,” Schutz said

The founders plan to initially raise $100 million. The minimum investment they are asking for per investor is $2.5 million and maximum is $5 million, meaning they plan to end up with 20 to 40 investors.

“This allows us to be very bespoke to those banks,” Schutz said.

The firm is also positioning itself as a trusted partner that will keep its bank partner names confidential. So far, the banks involved range in size from fewer than a billion dollars of assets to around $100 billion of assets.

The bank technology companies they are eyeing for investment are in the early to middle stages of growth. “They are companies with real products, revenue streams, clients and management teams,” Marquardt said. “We can add a lot of value but also realize a lot of value at that stage.” These companies will typically serve regional and community banks with the “foundational” aspects of banking, such as data analytics, automation, core banking and processing, payments and risk and compliance.

CMFG Ventures

CMFG Ventures is the venture capital arm of CUNA Mutual Group, which provides insurance to credit unions.

Even though credit unions are not direct investors in the fund, CMFG Ventures, which launched in 2016 and has doled out more than $200 million to date, works with credit unions to develop fintech strategies, pilot fintech solutions, launch partnerships and more, said Brian Kaas, president and managing director of CMFG Ventures.

CUNA Mutual Group works with the vast majority of U.S. credit unions, “uniquely positioning CMFG Ventures to drive solutions that solve the pain points across the entire credit union ecosystem,” Kaas said.

The CMFG Ventures fund makes initial investments of $1 million to $5 million, typically in the Series A or B rounds of companies that concentrate on financial and insurance technology, financial education and protection, data analytics or digital channels.

In 2021, CMFG introduced the Discovery Fund, which will invest in pre-seed and seed-stage fintechs with founding teams made up of women, people of color and LGBTQ individuals. It launched with an initial commitment of investing $15 million over three years and will write checks of up to $500,000.

There are 22 companies in the CMFG Ventures Portfolio, including the buy-now-pay-later lender Affirm, socially conscious challenger bank Good Money and lending platform Splash Financial. Another six startups fill out the Discovery Fund Portfolio, including the mortgage advisor Home Lending Pal and marketing communications platform Pulsate.