Banks that have venture capital arms say they are continuing to fund startups, even as the macroeconomic environment is stifling these startups' fundraising efforts and in some cases, calling into question their very survival. Monetary returns aren't the primary objective for the notoriously risk-averse industry, anyway, these financial firm VCs say. They're looking for industry knowledge.
Banks' venture capital support of fintechs has grown over the last five to seven years as banks and credit unions seek deeper intelligence about new technology. Getting a front seat to financial services innovation is worth the costs, even in a risky industry, bank leaders and industry experts said.
"Venture investments allow for a more measured approach to put some capital at play, garner additional information as a limited partner, or in some cases, enough of the stake to potentially have some board exposure and to really start to understand and learn the landscape," said Dan Goerlich, U.S. banking and capital markets leader at PricewaterhouseCoopers, in a January interview. "[Banks can] also see what works and what doesn't. Also have some opportunities to be on the ground floor as those technologies grow, either to form those partnerships, potentially do an acquisition, or just understand the market a little bit more."
Rising interest rates and economic pressure have stymied tech fundraising, but financial institution leaders said having a presence in fintech is important to their strategy. Goerlich said that the current economic environment has made people more cautious about deploying capital, which could tighten banks' venture strategies.
CMFG Ventures, the venture capital arm of CUNA Mutual Group, has several portfolio companies that were unable to access deposits and other funds from SVB last weekend.
But the failure of the three banks won't change CMFG Ventures' investment strategy, according to Brian Kaas, president and managing director of the investment group.
"At the end of the day, [the spate of bank failures] was a situation attributable to the impact of long-term monetary policies and other macroeconomic drivers," Kaas said in an email. "This was not a problem with the tech companies that worked with these banks. We continue to believe in the growing importance of fintech partnerships in enabling community banks and credit unions to remain relevant and competitive in the long run."
Prior to the government's Sunday evening announcement that SVB's depositors would be made whole, Kaas said CMFG Ventures was preparing to provide emergency funding to ensure portfolio companies could make payroll and cover other bills.
Kaas said in a February interview that he wants to use venture investments to connect fintechs with credit union clients of Madison, Wisconsin-based CUNA Mutual Group, which provides insurance and investment products to credit unions.
Citi Ventures, Citigroup's venture capital arm, has also been coordinating with its portfolio companies to ensure they have the support they need, said a person familiar with the matter.
While venture capital deployment slowed in the last year from the previous two years, banks are still seeing opportunities to invest. This week, Capital One Ventures and Citi Ventures announced they invested in cloud security fintech Securiti. BankTech Ventures closed its inaugural fund of $115 million in committed capital from more than 100 limited partners, primarily made up of community banks, in August. In September, Royal Bank of Canada linked its tech banking and innovation arm and investment group to create RBCx to invest in Canadian fintechs. Truist Ventures invested in fintechs throughout last year, including leading an $11 million funding round for emergency savings fintech SecureSave.
Citi Ventures, which has an active portfolio of more than 100 companies, gathers knowledge and shares it across Citi to inform business and operations strategy, said Arvind Purushotham, head of Citi Ventures, in an interview earlier this month. Citi Ventures coordinates with internal leaders at New York City-based Citigroup to outline investment priorities, like fraud mitigation. He added that monetary return, while not the primary focus, can be tied to information collection.
"We exist for strategic purposes," Purushotham said. "We want to deliver those learnings to our business leaders so that they get the benefit of a group like ours. The flip side of it is, startups are risky ventures. You start these companies, and they have to build a product and get out there, raise multiple rounds of financing, build a business and so on. If they don't go through that whole cycle, then they're actually not going to be very strategic to anybody."
Citi Ventures was one of the top corporate venture capital investors in fintech in 2022 by company count, along with Nasdaq Ventures and Coinbase Ventures, per data analytics company CB Insights.
First Internet Bank President and COO Nicole Lorch said in a January interview that she thinks the current economic environment will churn out higher-quality fintech partners as funds and firms apply more scrutiny to investments. The Fishers, Indiana community bank is too small to innovate internally, she said, but investing helps it see which technologies could be useful and which startups could be strong partners.
"We see [venture capital] as a path to learning about new opportunities, getting looks at fintechs that we might otherwise not know about," Lorch said. "They can bring new products and services to First Internet Bank customers."
Kaas said he thinks the environment has provided opportunities to deploy investments at more reasonable valuations.
"The strategic needs of traditional financial institutions have not diminished," Kaas said. "The strategic purpose of why we invest remains stronger than ever…our plan is to continue to make investments in new companies as some of the other VCs are taking time out to wait for market conditions to improve."
Kaas added that the past week's bank failures will create business opportunities for other financial institutions as tech companies look to diversify their banking relationships.
CMFG Ventures has a dual mandate for investing: generating a financial return similar to if it invested in a traditional venture capital fund, and helping its financial institution clients achieve strategic objectives, like lending. Kaas said the investments' financial success resemble a bell curve: two or three companies with 10-20 times return, two companies that have failed, a few that exited at small losses, but most sit at four to five times return on capital.
Financial institutions use a variety of methods to deploy capital. Goerlich said the investment structures aren't as important as why they're investing, and what they're investing in.
First Internet Bank invests as a limited partner in BankTech Ventures and Jam Fintop, a fund mainly made up of community bank investors to deploy capital in fintechs, Lorch said.
Citi Ventures invests on its balance sheet, instead of using a separate fund. Its initial check sizes are between $2 million and $20 million, but it may participate in follow-on investments totaling up to two or three times original investment. (Citigroup also has other investment strategies, like the Citi Impact Fund and a venture vehicle within its institutional clients group.)
"We try to identify companies that are working in areas of interest, invest in those companies, and then try to drive a partnership between these companies and the appropriate group in Citi," Purushotham said. "We develop relationships around the organization so that we are in sync and aligned with the strategic priorities of the various business units and various functions, so that we are able to bring those two things together and identify companies, identify trends that are important to us."
Citi Ventures typically invests in rounds led by other institutions in companies that are post-product, instead of early-stage startups. Purushotham said Citi Ventures will sometimes bring its fintech investments on as vendors or partners, and will also use its network to connect founders with other bank clients.
CMFG Ventures also connects its portfolio companies to CUNA Mutual Group's credit union clients, Kaas said CMFG Ventures has raised two funds that it uses to invest in companies from pre-revenue to pre-initial public offering. The group's first fund invests in Series A or beyond, with checks starting at $1 million. CMFG Venture's second fund, called the Discover Fund, typically invests $250,000 to $500,000 in pre-seed and seed stage companies led by founders from underrepresented groups, like women and people of color.
