Former Comptroller of the Currency Gene Ludwig and Live Oak Bancshares CEO Chip Mahan are launching a $545 million venture capital fund for fintechs that work with banks.
The fund, announced Wednesday, is backed by 35 U.S. banks, the American Bankers Association, the Independent Community Bankers of America and several state banking associations. Ludwig and Mahan would not share the names of any of the banks that are participating.
It is the inaugural fund of a venture capital firm that Ludwig — who was also the founder of Promontory Financial Group — and Mahan quietly began last February called Canapi Ventures.
The two have known each other for a number of years. Mahan said he and his team started Live Oak in Wilmington, N.C., in April 2007 as a bank dedicated to Small Business Administration loans; they built their own technology for it, basing it on Salesforce’s Force.com. When the bank later spun out its software development unit as a separate company called nCino, Ludwig was one of its backers.
More recently, Ludwig visited Mahan with the idea for this new VC fund, according to Mahan. “Canapi was founded primarily on the back of Gene’s relationships with not only partners in the fund, but Gene knows every CEO on the planet, so it’s fun starting this thing with him,” Mahan said.
Ludwig praised Mahan for being "a real leader in actually making a reality out of modern banking in a community format,” and he said they both agreed that many community and regional banks often lack the time or ability to familiarize themselves with startups at the cutting edge of technology that are spread across the country.
"So we felt there was an opportunity here both to help younger companies get started, the ones we thought were real winners, and on the other hand, help community banks get a jump-start on the technology changes they need and want,” Ludwig said.
Ludwig and Mahan said they are devoting a substantial amount of time to Canapi while keeping their day jobs. Ludwig remains CEO of Promontory Financial, which IBM bought in 2016; Mahan is chairman and CEO of Live Oak and is a director of two tech-related ventures.
Small banks and regionals are thirsty for the kind of technologies being developed by startups, according to Ludwig and Mahan.
Banks of that size rely on the oligopoly of Fiserv, Jack Henry and FIS, Mahan said. “Most community banks are not particularly happy right now,” he said. “They’re not happy with the services being provided, they’re not happy with the contracts.”
The new fund will look for banks’ biggest challenges and the vendors trying to solve them, Mahan said.
“I think there will be next-generation core processors that are not 40 years old and not on [the business-oriented computer language] COBOL, that are built on next-gen platforms like Azure and [Amazon Web Services] and infinitely scalable,” he said. “We think ... there are a whole lot of folks that have ... the ability to write on those platforms at a fraction of the historic cost.”
Canapi’s investment committee has eight members, six of whom are fully dedicated to investor matters. The company has an analyst and will probably add a second analyst as well as a chief financial officer.
Canapi will put startups through a rigorous vetting process, especially for regulatory compliance, Ludwig said.
“We have a wonderful team of experienced veterans and bankers, and we want to vet ways to make sure they take their responsibilities for risk and compliance seriously, on an ongoing basis,” Ludwig said.
Some fintech startups may end up being incubated by Canapi, potentially at Live Oak's campus in Wilmington. Live Oak has experience with the process; it incubated Finxact, a young core banking software provider now based in Jacksonville, Fla., for a time.
Ludwig said both he and Mahan have invested their own money in the fund, though he declined to say how much. “Both of us have considerable skin in this game,” Ludwig said.
And, Ludwig said, the two of them plan to stick with the companies through good times and bad.
“Every day isn't a perfect day,” he said. “Not only will things go bump in the night, they may go bump in the night a lot with almost every one of these companies, because if you're developing something new, every day isn't a picnic. The secret is sticking with it, having a commitment both to the institution and to its customers.”
