Unmet financing needs don't magically disappear the moment a borrower walks out the door. And leaders in the lending space don't call it a day when they've hit a wall with their direct lending capabilities. Instead, they find like-minded partners to help them power through obstacles.
Many hands make light work, which is exactly why one Iowa credit union has chosen to invest in capital funding networks that can help decrease the dollar amount at risk for lenders while also meeting the needs of deserving borrowers.
A Cooperative Foray Into Venture Capital
Veridian Credit Union ($2.5B, Waterloo, IA) is not opposed to forgoing traditional investment vehicles such as mutual funds or government securities in favor of options that benefit the local economy as much as they do the cooperative.
CU QUICK FACTS
Veridian Credit Union
HQ: Waterloo, IA
12-MO SHARE GROWTH: -0.16%
12-MO LOAN GROWTH: 16.94%
For example, the credit union already has a thriving MBL line as well as a CUSO — called The Veridian Group — that allows it to make direct investments in other credit union-owned companies.
Yet state regulations also allow Veridian to participate directly in three Iowa-focused venture capital firms, says Monte Berg, the credit union's senior vice president of finance.
Venture capital isn't for everyone, but for Veridian, success here hinges on four common sense rules:
Pursue industry diversity.
Maintain a strong credit union influence over investment decisions.
Pick partners who believe in all of the above.
"Many of the companies we fund through venture capital are at or below the break-even point regarding profitability, so they wouldn't qualify for a normal business loan," Berg says. "But the need for funding is still there, and if you can disperse that risk a bit, they can be a great investment."
Many of the companies we fund through venture capital are at or below the break-even point regarding profitability, so they wouldn't qualify for a normal business loan. But the need for funding is still there, and if you can disperse that risk a bit, they can be a great investment.
The newest of these three partnerships started in 2013 when the credit union joined forces with Des Moines-based Next Level Ventures, a fund that aligned closely with the credit union's own value and priorities.
"Because we are state-chartered, we can only invest in companies that are headquartered here and have half of their employees or assets here," Berg says. "Because Next Level Ventures shared that focus, we were comfortable that its team could evaluate and manage these investments."
Did You Know?
According to Iowa state code, credit unions that want to invest in venture capital or small businesses must meet the following criteria:
More than 50% of the investment must go to businesses that have their headquarters and at least half of their employees or assets in Iowa.
Investments in a specific company cannot exceed more that 20% of the company’s total capital.
Total investments cannot exceed 5% of a credit union’s total assets.
Expectations And Risk
Like most venture capital firms, Next Level Ventures is a 10-year fund. It will spend the first five years identifying and investing in opportunities and the next five years slowly divesting.
The firm made its first investment in a technology and HR company called Bird Dog, but its long-term goals include a portfolio of eight to 12 companies spread across a variety of industries, from technology and engineering to science and medicine. These investments would complement Veridian's early experiments with venture capital, which included support for animal vaccination companies, ceramics manufacturing, and even the production of structural monitoring systems.
The president of The Veridian Group, Nick Evens, is also on the investment committee of Next Level Ventures, which helps ensure the credit union has influence over what opportunities the group pursues.
Although the credit union does what it can to minimize risk, it is upfront about the realities of this activity with its key stakeholders.
"Even with the diversity of funds, we told our board of directors that the risk here is higher," Berg says. "We don't expect a return in the next three to four years, and while the return later could be higher, we could also experience a loss. The biggest reason to invest in something like this is to encourage economic development, innovation, and employment."
Veridian's total investments in these business lines has been limited to a max of 2% of total capital, but that does not rule out direct small business investments for these firms when the opportunity is right. So far, the credit union has pursued this option only once, with a local agriculture-oriented genetics company.
The oldest of Veridian's venture capital funds date back to 2011, and the four companies invested in at that time are still in business, Berg says, so there has not been an exit from any investment to date.