CMFG Ventures has been engaged in portfolio investing a bit longer, with a slightly different spin on the model. Over its five years of existence, the investment arm of CUNA Mutual Group has invested $243 million into roughly 30 early stage companies.
Structured as a corporate venture fund, CUNA Mutual contributes 100% of CMFG’s capital.
“We’re able to flex with opportunities in the marketplace and react quickly to market trends,” says CMFG Ventures Associate Laura Sievert about the advantages of this approach. “A lot of funds require setting aside capital for follow-on investments and reserves, limiting the amount available to invest in new companies. We don’t have that constraint.”
That allows CMFG Ventures to quickly seize on opportunities by leveraging CUNA Mutual’s ample balance sheet resources rather than returning to the equity markets for funding. They’re also less bound by the expected return timeline of a broad investor base.
Credit unions’ reputation for collaboration extends to investment activities as well. Rather than approaching their hunt for prime fintech candidates as a winner-take-all battle, CMFG and Curql maintain a collegial relationship.
They even hold parallel investments in four startups, including cross-channel digital messaging firm Eltropy and conversational AI provider Posh Technologies.
Sievert and Evens also point to ongoing engagement with brand-name equity firms like Adreessen Horowitz, which are backing some of the same startups.
CMFG’s portfolio registered two high-profile successes in 2021 with the initial public offering of digital lender Affirm and the sale of InsureTech provider Gabi to Experian.
“We’re starting to see the payoff and generous returns, which gets our organization that much more committed,” says Sievert, who continues to scout new opportunities.
Sievert sees this as part of a virtuous cycle maintaining a thriving credit union community. She points to the no-fee strategy support CMFG has provided to hundreds of credit unions lacking the resources or appetite to invest.
“Seventy-five percent of financial institution IT budgets are dedicated to keeping the lights on, while fintech startups don’t face such constraints,” Sievert says. “We can match credit unions with appropriate fintechs. We’ll eventually earn our return through the portfolio.
“The biggest struggle with credit unions is they think about fintech as a concept,” she continues. “We work with them to demystify fintech to find out what it means for them. Managing fintech isn’t easy but it will pay off in the long term.”
MSUFCU began crafting its fintech investment strategy in 2019. It pushed out its execution a year as it channeled resources to address COVID’s demands, setting the stage for an active 2021.
“It’s been busy, but we had the strategy brewing,” says Sara Dolan, MSUFCU’s chief financial officer, a title she also holds for the Reseda Group, which houses the credit union’s CUSO investments.
“It keeps the investment static on the credit union’s balance sheet at the amount of capital approved by the board,” she says. “Gains and losses grow within the holding company, which we can reinvest without going back to the board for additional approval. It separates some of the operations, creating a dividing line.”
Reseda’s original objective was to take minority stakes in firms complementing MSUFCU’s services to members and improving its efficiency, while enhancing the landscape for credit unions overall. As is the case with VyStar and Curql, MSUFCU uses or plans to use the products of its portfolio companies.
In three cases, however, Reseda is the sole or majority investor. One of these is Foresight Group, a printing vendor MSUFCU has worked with for more than 30 years.
“Their CEO was looking to retire and they approached us,” Dolan says. “We saw an opportunity to bring their services to more credit unions.”
On the other end of the spectrum is Spave, a startup savings app in which MSUFCU invested even before going live.
“We loved their idea and their product,” she says. “We started by looking into a partnership and it evolved into an investment discussion.”
Rounding out this trio is Evergreen 3C, which encompasses products MSUFCU developed internally, commercializing them as offerings for other credit unions.
Including six additional minority investments, 70% of the $58 million in capital MSUFCU earmarked for Reseda has already been invested, all during 2021. Reseda also participates in the Curql fund.
Dolan and her leadership team has made a concerted effort to set expectations with both entities’ boards on the timing of returns. “We see a two- to four-year horizon before the portfolio is profitable,” a quicker payback than our other examples owing to its mix of mature and growth stage companies.
Reseda’s board chair also serves on the MSUFCU board, providing additional connectivity.
The days of supposed hand-to-hand combat between credit unions and fintech startups are mostly in the rearview mirror.
Or as longtime CUSO legal expert and NACUSO Board Member Guy Messick, puts it, “The dichotomy between risk-averse credit unions and risk-taking CUSOs can be a powerful combination despite some inherent tension.”
As credit union leaders increasingly recognize the need to modernize their member experience, particularly in the digital space, they’re fortunate to have a variety of avenues to success at their disposal—as well as a wealth of industry leaders who stand ready to share their learnings.
GLEN SARVADY is managing partner for 154 Advisors.