Strategic Fintech Investing for Credit Unions

[00:00:00] Nick: so my, message to great unions is don’t wait. get the legal documents in hand, have the conversations you need to have with your board, strategically plan around what you need to do here.

[00:00:59] Vince: Welcome everyone to 22 minutes in lending. I’m your host, Vince Passione, and I’m excited to welcome today’s guest, Nick Evans. Nick is president and CEO of Circle Collective, which is a CUSO whose mission is to bring FinTech and credit unions together. Prior to leading Circle, Nick was the president of the Viridian Group, a wholly owned CUSO and the holding company of Viridian Credit Union, where he led their equity investments in strategic direction. FinTech investing for credit unions is a hot topic and Nick brings a very unique perspective, having done this successfully for Viridian and now for the broader credit union community. Nick, welcome to 22 minutes in lending. It’s great to see you. And thanks for coming on the podcast.

[00:01:11] Nick: Thanks for having me, Vince. It’s great to see you again.

[00:01:14] Vince: All right, Nick. So why don’t we kind of go start off with structure to start with? It is kind of unique. You’ve got these two CUSOs, you’ve got Circle Fund One, and then you’ve got the Circle Collective. and these two CUSOs come together so they can serve these three constituencies. You’ve got your investors, you’ve got the fintechs, and you’ve got the credit unions. So, can you talk a little bit about the structure? It is unique, and how it benefits your constituents.

[00:01:38] Nick: Yeah, but before I do that, Vince, I do have to say there is a third company. We just opened up Circle Fund 2. So there’s Circle Collective, Circle Fund 1, and Circle Fund 2. And that’s an important announcement for the industry. I would be remiss if I didn’t highlight that here before I answer your question. So, Circle Fund 2. is open. We believe it’ll be bigger than circle fund one.

[00:02:02] Nick: We believe we’ll have more investors. We left a lot of credit unions standing at the door when we closed circle fund one. So, Hey, to all you credit unions out there, we’re ready to talk to you about circle fund two, we believe we’ll be able to write bigger checks since it’s a bigger fund out of circle fund two. And we’ll talk more about that later, Vincent, and in another question that you have, but. I would be remiss if I said, Hey, we would, we are ready to talk to everybody about circle fine too.

[00:02:27] Vince: and size of the fund? You have a sense of how,

[00:02:29] Nick: we believe it’ll be anywhere from 300 to 500 million in size. Now it will close next August . So we have plenty of time, you know, there’s Liquidity headwinds in the market. We’re given CFOs and CEOs, plenty of time to forecast, to plan, to understand how we’re going to do cash calls and circle fund two differently than circle fund one. And so it’ll be capped at 500 million and the board is adamant we are not going over that.

[00:02:54] Nick: And August 2024, whichever comes first. So if we got to 500 million in commitments in May, we will close. So, so my message to great unions is don’t wait. get the legal documents in hand, have the conversations you need to have with your board, strategically plan around what you need to do here. And off we go now to answer your questions about structure. So, Cool. when we were developing the concept around circle, three and a half, four years ago, the fund was the center piece or the focal piece, right? Many of us have had an idea for many years that there needed to be an investment fund inside of credit unions, putting capital to work from credit unions and fintechs that needed them, in order to have a bigger say in those fintechs and the roadmap.

[00:03:39] Nick: As they grew and as they built their product on the backs of credit unions. And so, the investment fund was the initial concept. Well, what happened Vince was, as we were developing, all of the concepts around, Hey, let’s do an investment fund. We looked at it and we said, well, there’s really four pillars here that we need to focus on. And the first pillar was the, Credit union FinTech collaboration piece. And that’s the biggest part of this, the second pillar was ready money. I find the third was, the fact that we wanted to create strategic alliances across the entire industry. And the fourth was regulatory modernization.

[00:04:16] Nick: So what we said is, okay, we’re going to start a fund, but we really need a company. That sits over the top, more of a governance type that tracks these four pillars and really focuses on the mission. So the fund does one thing and that’s Circle Fund one, and that’s one company. And now we have Circle Fund two, that’s another company. And Circle Collective became the focal point around how do we keep it all together? So what we do at Circle Collective is it’s really simple. we have this mantra around the three legs of the stool. And so the Circle Collective’s role. Is like one is Fintech, like two is credit unions and like three the fund. So the fund of Fintechs and credit unions, three legs of the stool and where the three legs of the stool meet at the base of that stool. that’s where Circle Collective resides. We reside at the intersection of the three legs. And so our job is basically to Fintechs in front of credit unions and credit unions in front of Fintechs.

[00:05:14] Vince: So, Nick, structurally though, I want to step you back for a second. credit unions could not invest directly in fintechs. Is that a true statement? Cause I’ve already in, in the past in your prior life, you made some investments, but is it a CUSO can invest in a FinTech, but a credit union can’t. And that’s why the fund is actually a CUSO.

[00:05:35] Nick: So here’s a clarification. If a FinTech takes 1 from a credit union or a QSO. It is a QSO. It becomes a QSO. So the answer is credit unions can only invest in QSOs. QSOs can only invest in QSOs. So everything that we invest in today out of Circle Fund 1 has to be a QSO. So when you say they can’t, we can invest in the FinTech as long as it’s a QSO. And credit unions, when I was at Viridian, we did several, but those all had to become QSOs. Now there is a misconception out there. So when I was at Viridian, we invested in Alchemy. And an alchemy is now a publicly traded company.

[00:06:13] Nick: And so the perception is well, credit unions can’t own a parts publicly traded company while they can, as long as that publicly traded company remains acusive. And so there’s some nuances within all the rules, but it basically boils down to the fintechs have to be accused. They have to declare and, and be accused. So, that just means they have to 51 percent primarily serve credit unions or credit union. That’s the biggest stipulation. So, and we don’t have a problem with that conversation. When we’re investing, we’ve done 22 investments. Today in circle fund one and all 22 of those companies are CUSOS today. And so, and I would say 80 percent of them were not CUSOS when they started having conversations with us and thus had to become CUSOS.

[00:06:59] Vince: And the CUSO structure clearly didn’t interfere in the case of alchemy to become a public company.

[00:07:05] Nick: once a company is a CUSO, so they can still go public and they can still seek venture capital money, you know, we’re invested alongside many venture capital funds across the United States we’re in deals with Andreessen Morowitz and the likes of, you know, the most famous VCs on the planet. And so that doesn’t, you know, actually the VCs have a, bigger conversation with FinTechs and FinTech comes to them and says. I’m a QSO. The VCs have a bigger issue with what the heck is a QSO. So the education takes a little longer in that case. but that’s the governance structure.

[00:07:39] Nick: So, Circle Collective, if you think of it as the umbrella, that sits over, the rest of everything else that goes on underneath the umbrella. We like to say we’re the governance QSO, from that standpoint. So we hire, the fund manager. We seat the investment committee circle collectives governed by a board of our investors. And so basically we’ve set the whole structure up under circle collective.

[00:08:04] Vince: And technically, if I look at the fund, does Circle Collective show up as general partner?

[00:08:10] Nick: Lead general partner.

[00:08:11] Vince: So going back to my question, then Nick, if you think about how you serve those three legs of the stool, right, why does that structure, it’s an atypical structure, right? How does it benefit? All the three constituencies. I think I understand it, but it’d be good to explain to our listeners that structure is very unique in the industry and you pursued it for a very specific reason. Can you explain why?

[00:08:32] Nick: sure. So take leg one, which is credit unions. And so we’re serving credit unions every single day by bringing transformative technology to them. that’s how we’re serving credit. unions We’re serving fintechs by bringing 68. very astutemostly large credit unions to the table We’re a strategic investor. We do not use the word venture capital . We are strategic. Our funnel right now, Vince runneth over because of the fact that we can bring 68 potential customers to the table. we serve the fund in the capacity that we help educate the fund on how credit unions. Work and how credit unions engage and interact with these fintechs or how they should the fund manager is next level ventures from Des Moines, Iowa.

[00:09:19] Nick: They don’t necessarily know how credit unions work every single day, how they operate, how they have to deal with certain regulatory and compliance issues. And so what we do is we help bring that education piece to the fund manager so that when they’re looking at a FinTech to possibly invest in it and they’re doing their due diligence, we’re making sure they’re asking the right questions.So that’s how we work with those three different legs in the stool.

[00:09:42] Vince: All right, Nick. So I cheated a little bit and you know, my relationship with Jeff Klein at members development company. I talked to Jeff and he talks about his business, it really is an R& D arm. It’s a CUSO. It’s an R& D arm. He talks about the 70 members. He’s the largest credit unions in the country that come together with members development company to talk about the issues facing credit unions and what the needs are. How does Curql Collectiveve work with Mdc?

[00:10:11] Nick: Yeah, great question. And we make no bones about it. We were born out of MDC. Circle, and the whole concept. Was born at MDC as part of a project. And so they’re an R and D Q. So, 80 credit unions and this was a project. So is there a need is the time, right? you know, what kind of things do we need to pull off in order to create an investment fund inside the credit union district, when I was at Verdean credit union and we joined MDC and Jeff knew of my experience around investing, and so he nabbed me right away.

[00:10:43] Nick: And said, Hey, we want you to be on this project team. And so, it was Martin Walker from sound credit and Ben Maxson from Michigan state and Jeff, and I’m missing some people, but there were some other really astute people on this project team and it just kept rolling it. And I always liken it to the snowball rolling downhill. And finally, Jeff went to his board and said, Hey, we have something here. this is something that we can launch. Out into the industry and kudos to NBC and to the board and to their members. They said, yes, this is a go let’s go for it. And so, then that project, he basically became the board of circle and wasn’t even called circle then we created a company and we created a board and we said, okay, what do we do here?

[00:11:27] Nick: So, that’s how the seeds were planted. We did an RFP for a fund manager in the summer of 20,hired the fund manager in August of 20. and we started raising money. The rest is history. So did our first investment in April of 21, but you know, that was also the time when once we launched the fund. Vince, we said, Hey, there’s a need for a bigger part here in an ecosystem, just the fun. And that’s when we went back to our four pillars. And that’s when the project team said, Hey, I think we’re going to need to create this governance company over the top of everything we’re doing here. And that’s when Circle Collective came about. And I was hired in June of 21 to lead Circle Collective.

[00:12:07] Vince: So Nick, let’s step back to the pillars again. ’cause you raised them and we had, board member Hood on, in one of our prior episodes. And, you know, , he’s also very atypical, not what you expect. As someone who’s a Prudential regulator. He’s very forward-thinking. He’s very predisposed to FinTech and why FinTech needs to be part of credit unions and credit unions to be part of FinTech. But you talk about regulatory modernization, what does a fund or a fund manager have to do? And how do you influence regulatory modernization?I would think that the Prudential regulator would be pushing you away. You represent risk.

[00:12:41] Nick: You’re an investor. Well, you know, on the surface, it might look that way. you mentioned, board memberhood, board memberhood has been a huge friend to what we’re doing only because he was leading the charge initially. He was the one out there out front. Saying credit unions, you have to find a way to collaborate with FinTech and FinTech. You have to find a way to collaborate with credit unions. Otherwise we’re going to be left in the dust. We’re not going to keep up with , the big FinTechs that are disintermediating us, we’re not going to keep up with the big banks.

[00:13:12] Nick: So kudos to board member Wood. He has always been banging this drum from the get go and we’ve kind of run with it . And so, you know, we say we’re de risking, we’re not adding risks to the system. In fact, the NCOA is on record as saying, you do not pose any risk to the NCOA fund. We’re de risking. I say out loud to credit unions, you should not be investing one on one, one offs, one on one. You should be using us to be your eyes and ears and letting us do the due diligence and letting us ask all the questions and do the tough negotiating. What’s gotten really, interesting Vince, over the last couple of years is people like you, you are a very sophisticated entrepreneur, a very sophisticated CEO.

[00:13:53] Nick: You’ve been there, done this, right? We have fintechs entering the space where the CEO has, exited three, four, five companies, all venture backed . They know how to talk this game. They know how to. raise money. They know how to talk about their valuation and make it sound logical. and to their credit, they’re very smart people. And so our credit unions today, aren’t that sophisticated when it comes to talking to people that have been there, done that. And so what we’re saying is we’re hiring professionals to manage our money. They know how to negotiate. They know how to talk about valuation. They know how to place a valuation , you know, determine the valuation if the entrepreneur is. A little elevated in their thinking, we’re not afraid to tell him. So, and so we’re saying that we’re de risking that part of the conversation for the credit unions that are in our fund because they just don’t have the bandwidth nor the money to hire somebody with this kind of expertise. So we say, let us do it for you.

[00:15:21] Vince: No, look, it makes sense, right? I mean, this is a profession. Venture investing is a profession. It’s not a hobby. And, you talk about risk and I’m gonna use a pun, but how do you circle the square right on risk? Cause you, you touched on it and it’s not for the faint of heart, right? I’m an angel investor and. You know, I probably made over a dozen investments that I sort of imagine my portfolio and some of them are great and they pay for the ones that aren’t so great. How do you deal with that risk when you deal with a credit and says, I want to put money into the fund and now you’re spreading it out over, you know, 20, 30 companies and I understand you’re multistage, so it’s seed, it’s series a, you’re going to stay alongside these companies.

[00:16:01] Vince:  And there’s some risk associated with that early stage part. Of the investing cycle. So how do you circle the square on risk and how do these credit unions look at their members and say,this is a good use of our capital and you should feel comfortable with me, CEO of this credit union taking this risk.

[00:16:19] Nick: Yeah. Let me answer that two ways then. So first, I liken it to a mutual fund. we’re in 22 fintechs right now, 22, which is more risky being in 22 fintechs and only 1%. No, it’s. That big, broad spectrum or owning two fintechs and owning 10 percent in one and 15 percent in another . That’s a lot of risk right there. So we’re spreading that risk. We’re diversifying risk. We’re a mutual thing. The other thing, and you touched on it very nicely. When we first started raising money for CircleFund One, we said, we’re going to be an early stage investor. We’re going to focus on late seed early rounds. Well, what we’ve done is just. Almost by accident, we’re stage agnostic. At this point, we did some analysis on the 22 companies and we’ve done a convertible node. So you’re through an effort and what I’m saying is that, by being open minded and really looking for the best technology, it’s actually forced us out of that early stage investing mentality.

[00:17:24] Nick: And now we’re saying, well, since we’re stage agnostic, we wouldn’t even be in some of the companies if we didn’t. Invest in an effort. We wouldn’t be in zest AI if we didn’t do an effort. We wouldn’t be in X, Y, Z fintech if we didn’t consider their convertible note. And also what that does, though, that diversifies within our portfolio. So not just 22, but diversity of maturity inside the portfolio. So. We have some young entrepreneurs, some first timers, but we have some two and three and four times successful entrepreneurs on the other end of the spectrum, so we’re seeing diversity in two ways from that perspective. And to me, that’s helps again, when we talk about de risking this.

[00:18:05] Nick:  That’s actually helped this entire conversation. So we don’t eliminate a conversation just because they say, well, we’re in a C route and we say we’re only doing the other thing is we thought we would write 5 million checks. We’ve written some smaller checks. we just did our largest investment, our largest one check investment last Friday. and that was only seven and a half million. So you can see in between we’ve put 118 million to work already. And, you know, those are pretty small checks for that much money. We still think we’re only going to have about FinTech in the portfolio. When we’re done with Circle Fund one, we think Circle Fund two is going to be a little bigger events, money wise and number of companies. So we’re looking at how we manage that as well. you can’t be on 70 boards, right? Just a handful of people can’t be on 70 boards. So we’re looking for ways. And that’s another thing we do. We make sure that we try to grab board seats when we can. Again, that gives our credit union say, where the product is headed on the tech roadmap and things like that. So we’re doing a lot of things inside of the investment piece that are de risking.

[00:19:05] Vince: So you touched on it. I just want to stay there for a minute. So board governance. It’s interesting, right, as a strategic investor, if you’re sitting alongside of other investors and your interest is that credit unions get some structure or credit unions get some feature or function, right, so that they have a say. But what happens when the other investors who potentially aren’t strategic investors, they’re just money managers. How do you solve that problem? And do you find yourself, it might be too early having to recuse yourself from certain conversations because of that strategic bent that your potential interests might not be aligned with the other board members or do I, have that totally wrong?

[00:19:46] Nick: Well, I contend we have a stronger voice in the boardroom. Because we are strategic. And so a lot of times if we’re sitting alongside of two or three BCs, a BC invests for one thing, then it’s right. They want to return  they  say, here’s our money. Call us in three years when you’re ready to exit and tell us how much we’re getting back. And so when they sit in the boardroom, they’re very helpful. Don’t get me wrong. But when the CEO is sitting there saying, Hey guys, this is their voice has 68 people behind them, 68 potential customers, all large behind them. when they talk, we’re going to listen. So the strategic factor, I think, weighs out in the boardroom more than just a traditional person that’s just waiting for a check. And so I think that the CEO in this case carries the water in those conversations by taming down that conversation with the others and saying, Hey, we have to be in credit unions because we agreed to be accused.

[00:20:40] Nick: So, therefore, we’re going to listen to this strategic investor who has 68 credit unions with them.

[00:20:46] Vince: Makes sense. Good answer, Nick. I appreciate that. And Nick, let’s go back to the actual investments. So you said it’s over 20 investments, over a hundred million dollars invested, and you’ve spoken about these swim lanes, I’ve heard in some of the interviews while I was kind of doing some research for this podcast. Can you talk a little about the swim lanes and sort of the focus you’ve got?

[00:21:04] Nick: So we’ve identified about 15 to 20. He. What do I say? Categories is not the right word, but key areas that we want to own a piece of. And so, it’s no secret that early on, when we started circle lending was a key swim, right? So we invested in three lending platforms because lending was so hot at the time, you know, that’s changed in the last three years, it’s changed drastically the things that we identified lending, so auto lending, mortgage lending, refi lending, all kinds of things, home improvement lending, HELOCs, those are the kinds of things we’ve identified within lending.

[00:21:42] Nick: But the other things like cybersecurity, fraud, marketing, you get the idea. We want to be in all of those segments or all those sections of. what’s important to credit unions. And so we have a, swimlane map, so to speak. And so we’re mapping, you know, if we were to invest in you tomorrow, we would put you in our swimlane map where we thought you’d fit. And we don’t like to duplicate, at least right now, we don’t like to duplicate, and invest in like companies. So, we had this conversation really early on. one of our early FinTechs raised a stake. When we invested in another FinTech , they thought it was a competitor . And we said,wait a second. We’ve done the analysis. Now we agree. We will not invest in a company in a FinTech that does 100 percent of exactly what you do. But in this case, we believe they only do 10%.

[00:22:32] Nick: So you’re going to have to get over it. Because there’s still a 90 percent there of the market that we are trusting They’re going to hit this under a company. So those are the kind of conversations we have around our swim lane. So we still have some gaps in our swim lane map for Circle Fund 1 as companies exit. Like payrails did last September to Jack Henry, you know, then we can back to, we can look for a new payments company. And we did that. We invested in neural payments after payrails was sold. So those are the kinds of moving parts that we see inside of our swimlane document. but that’s what we call swimlanes. Those are segments within tech stack of a credit card.

[00:23:09] Vince: So you raised payrails. So let’s go there very interesting. I took note of that because it was probably. A record investment, both in time and an outcome. So a little over 5 million, right? I know canopy ventures involved my friendship may hand. He was also on, on a previous episode. He did it back in, 2021. And then pretty much about 12 months later, you sold it to Jack Henry for a nice multiple, right? And. I guess in my thought, when I look at the way you’re investing, I’m sort of thinking you want control, right? You said you want to be in the boardroom. You want to be able to represent your credit unions and make certain that their money, you know, has bearing on the strategic direction of these companies How do you, once again, using a bad term, how do you circle the square? on that company IPO ing, which was great from an investing perspective, but now suddenly it’s now owned by a core processor. And look, I think the world of Jack Henry, but they’re a big company and some of my clients don’t feel like Jack Henry sometimes is responsive as they want. So did you just lose control there?

[00:24:13] Nick: Absolutely not. so first of all, the conversation on why they wanted to buy payrails was first and foremost , that was key. Why do you want to buy this company? The answer was this. We think they have a better payment solution than what we’re currently offering our clients. And we’re going to supplant our current system with this new technology after we acquire it. So that was a key part of the conversation, right? so if they would have said, well, we’re going to totally dismantle the company and the technology, we’re just buying it to get it out of the way. We wouldn’t have gone for that ever a million years. You know, ultimately at the end of the day, it was , the primary owners of pay rails, which it was still held by, you know, Fran and a few other people, it’s ultimately their decision, but , we’re going to have impact in that conversation. and they’re going to listen to us around. You know, we aren’t going to sell to somebody that’s going to dismantle it just to get it out of the way. So we have fear of that with some of the bigger players in our industry, and we know who they are and they’re notorious buyers, but we’re going to pay attention to that. The other thing is Vince, they left. Two or three credit union people in place on an advisory board to help with, you know, be a sounding board for Jack Henry in the credit union space. Jack Henry is a big player in the credit union space. No bones about it. And I know some of the people. They’re great people. They’re nice people. They have a presence in Cedar Falls, Iowa, where I live.

[00:25:42] Nick: I know some of the folks, so that was a little less, of a worry, so to speak, especially when they left some of the people on the advisory board, of which a couple of them are on the Circle Collective Board of Directors, so that also helped. So, you get the idea. We were paying attention to what they were going to do with the company, what they said they were going to do with the company, and the fact that they still wanted to hear from credit unions regarding them. Direction of the payment solution. Once it was inside of Jack Henry made a lot of impact with me.

[00:26:10] Vince: No, that makes sense. And I’m glad you explained that to me because it does make sense from an impact investing perspective in that. Now you’ve got this new contender, that’s absorbed by a company that can take it to the next level. It makes sense.

[00:26:26] Nick: There’s no question. If somebody said we’re going to buy it, we’re going to abandon credit unions altogether. We won’t go for that. we will fight tooth and nail, whether we can impact that or not, we just, we’d have to see how much of the company we own we will stand up to as many people as we need to try to prevent it.

[00:26:40] Vince: Nick, I’m going to leave it there with it. Thanks so much for sharing the insights and thanks to all our listeners it’s been a great 22 minutes, Nick. so I want to thank everybody for tuning in. Don’t forget to subscribe so you can enjoy future episodes and I’ll meet you back here in our next 22 minutes in London. Thanks again, Nick. Thank you. Take care.