Entrepreneurs will tell you the hardest part of starting a new business usually is securing the first batch of investment capital necessary to get their idea off the ground.
Add the fact that a disproportionately low share of venture capital dollars goes to Black- and female-led startups (both in the low single-digit percentages), and it’s easy to understand the challenges faced by founders from minority populations.
CMFG Ventures, the venture capital arm of CUNA Mutual Group, has set out to alter that equation. In July 2021 it announced plans to invest $15 million over the next three years in early-stage fintech companies led by founders from underrepresented groups through its newly created Discovery Fund.
One year into the process those investments are on track, according to Elizabeth McCluskey, director of the Discovery Fund. To date, it has committed $5.75 million to 15 startups.
“We’re not looking to be the lead investor, but we’re often the first round of institutional capital” for these companies, explains McCluskey, who joined CMFG from Impact Engine, a woman-owned and led private equity firm. With checks of up to $500,000, “we’re looking to catalyze additional institutional dollars.”
“Our overall investment theme is financial inclusion: creating more affordability and access to financial services,” she continues. Toward that end, the Discovery Fund focuses on companies pursuing better approaches to credit access, wealth building, financial literacy, asset protection, and liquidity management.
Like CMFG Ventures, the Discovery Fund intends to profit from its investments. Return on equity isn’t McCluskey’s sole measure of success, however.
In addition to financial metrics—which include the growing value of CMFG’s stake in these companies—she points to strategic factors such as positioning CUNA Mutual as a thought leader able to help credit unions address their core needs.
There’s also the mission of reducing the funding gap for underrepresented founders, “playing our small part in creating those success stories,” McCluskey says.
One of the Discovery Fund’s first portfolio companies was Home Lending Pal, a 5-year-old Orlando, Fla.-based firm. Home Lending Pal uses artificial intelligence to assist prospective homebuyers in determining which mortgages they can afford and their likelihood of approval by different lenders, “taking the guesswork out of qualifying for a mortgage,” as the website puts it.
Using blockchain technology, consumer data remains anonymized until a borrower selects a lender. The service is free to borrowers; lenders pay for referrals but receive no information until an applicant chooses to share it.
CEO and co-founder Bryan Young, a veteran of four prior startups as well as card technology innovator Marqueta, credits the Discovery Fund with “bringing Home Lending Pal to the forefront with C-level credit union decision makers.”
In the year since Discovery’s investment it has acquired two startups pursuing a similar space, in part to accelerate the development of Home Lending Pal’s mobile app.
It’s also deepened a technology relationship with IBM’s Hyperledger unit, and surpassed the 100 million mark of mortgages analyzed to inform its recommendation engine.
Home Lending Pal’s traction places it among the most advanced of the Discovery Fund’s portfolio companies. The general approach is to target earlier-stage opportunities than the larger CMFG Ventures fund.
“In some cases we’re catching these companies even before they’re credit union ready,” McCluskey says, “introducing them to and helping them navigate the credit union ecosystem,” as well as “potentially cultivating these companies to graduate to CMFG” for a second, larger check.
GLEN SARVADY is managing principal at 154 Advisors.