Conexus CU Invests in High-Tech Startups

Focused on Credit Unions

Regnier said she didn’t start out planning to serve credit unions and probably would have failed if she had, because at that time, credit unions weren’t focused on such digital services. Initially, the company offered its scheduling product to a wide range of customers, but in 2018 her marketing department urged a more targeted approach, and they did some research and concluded that credit unions were a natural market.

Regnier says being the CEO of a tech start-up requires two different skill sets. One involves fundraising and pitching the company’s promise to investors, the other involves the skills needed to manage and grow the company. Being part of Cultivator and a similar group in Saskatoon, Co.Labs, has helped her with both sides of her job.

“It’s come full circle because now we have some of the largest credit unions as our customers like Desjardins and Navy Federal Credit Union, one of the largest ones in the U.S.,” Regnier says.

“Getting investment from Conexus has been great credibility. When we're talking to some prospective customers, for them to know that a credit union has invested in us says they're behind this. I think we have a lot of similar values as credit unions.”

Regnier says her fundraising was going well in 2019 and she didn’t desperately need the Conexus investment, but she wanted them as a partner because she shared their belief in supporting tech companies on the Prairies.

Coconut Software now has about 120 staff, spread across Canada, with about 50 in Saskatchewan. Several members of the executive team are based in Toronto.

COVID-19 and the dramatic shift to digital banking that it spurred helped grow Coconut’s customer base. It now does about 80% of its business in the U.S., primarily with credit unions.

Coconut raised $28 million in 2021 and is currently cash-flow neutral, so it’s not looking for more investment money now, but expects it will be in the future, she says.

“Conexus has played an instrumental part in funding a lot of start-ups in Saskatchewan,” Regnier says. “I think it's a very early tech scene here and we're very lucky. In the first five to eight years, someone like myself, I had to go to Toronto, I had to go to San Francisco, I had to go to Vancouver.”

Build Local Teams

Now, founders can stay in Saskatchewan when they are looking for investors or advice. “There is such a difference in the community.  I can hire people locally and actually help build an economy around tech in Saskatchewan because of Conexus,” Regnier says.

Not long after starting its first fund, Conexus CU realized that there was a need to focus on Saskatchewan’s most important industry—agriculture.  So, in August 2021 it launched a second venture capital fund, Emmertech, focused on Canadian ag-tech and agribusiness innovation.

Investors included farmers, agribusiness owners, The Co-operators Group Limited, and several credit unions—Connect First Credit Union, Gulf and Fraser Fishermen’s Credit Union, Innovation Credit Union, UNI Financial Cooperation, Interior Savings Credit Union, and Libro Credit Union. The fund also included $15 million from Innovation Saskatchewan and $5 million from Conexus CU.  At the end of 2021, it closed the fund at $60 million.

Emmertech focuses on two investment themes: technologies that increase agricultural yield and productivity and those that reduce the cost of agricultural production.

One of its first investments was in Lucent Biosciences Inc., based in Vancouver. President/CEO Michael Riedijk says that in mid-September 2021 he was seeking a round of funding for his company, which was developing new types of fertilizers that are climate positive, nonpolluting and sustainable. “I specifically targeted VCs that were focused on agriculture, and there were not that many at that time.”

He connected with Emmertech and they liked what Lucent was doing, even though its research and development was being done in BC, in part because the company planned to set up manufacturing in Saskatchewan.

The funding round closed in April 2022 and the relationship has blossomed since then, with the manufacturing plant coming online last October.

Lucent has three product lines. The first upcycles low-value by-products from the food-processing industry, such as rice hulls and wheat chaff, turning them into fertilizers. A second is a sustainable product that coats seeds, replacing coatings that typically contain microplastics or petrochemicals. The third is a slow-release coating for urea nitrogen or phosphorus fertilizers that reduces the amount of fertilizer needed and the amount leached off by rain.

Helping Entrepreneurs

In 2021, Cultivator, Economic Development Regina and Emmertech partnered to launch Agtech Accelerator. Companies selected to participate receive fundraising guidance and potential investment from Emmertech.

The 12-week program built with founders and farmers as the foundation helps tech entrepreneurs find their way.

In mid-February it announced the 15 companies chosen to be part of its third cohort this spring. From March to June each year, the selected companies go through intensive programming, connect with expert mentors, investors, industry leaders and producers, and at the end of three months, founders pitch their company at Demo Day on the Launch Pad Stage at Canada’s Farm Show in Regina.

Since its launch, Agtech Accelerator has seen 32 companies collectively raise $108 million in private capital, generate $47 million in revenue and receive $33 million in public funding. This success underscores the quality of cohort companies and the demand for their innovative technologies.

Lucent Biosciences was one of the first companies involved. Riedijk says his chief operating officer was heavily involved in the accelerator program. “We've done six or seven of those accelerator programs and this was by far the best. It was a lot of coaching on technology, scaling markets with local growers and networking.

“It had an interesting network effect, though we don't necessarily work or partner with them on a technology level it is more like an experience exchange,” he adds.

Riedijk says he often gets asked about his experience with Emmertech by other companies. “I answer that the Emmertech team is very knowledgeable. They're also great people to work with. I think the biggest value that they bring is this network and know-how in Ag-Tech specifically. They know everybody and that's what you need.”

Philpot says the venture capital approach has been “very grassroots, very cooperative, and a very credit union way to say, ‘We think there's a need.’

“Traditionally that's what our credit union has always prided ourselves in is where is there a need in the market that's not being satisfied appropriately, how could we make a difference locally to our members,” she notes.

She’s quick to point out that the investors are not average Conexus CU members. Most of the capital comes from credit unions, other institutional investors or sophisticated high-net-worth investors.

Launching Another Fund

Conexus Venture Capital is launching a second fund with up to $15 million from the credit union and is seeking up to another $15 million from other institutional investors, Philpot says.

The only other Canadian credit union that has a venture capital arm is Desjardins Capital, which focuses on several areas of the Quebec economy.

“Venture capital provides start-ups with the funds needed to support accelerated growth,” it says on its website. “This is an excellent lever to take off and grow quickly.

“In addition, the risk capital offered by Desjardins Capital is called ‘patient,’ because our main objective is not short-term return. The horizon of our financing solutions extends over the medium or long term, which allows you to realize your immediate potential and allows us to support you over a long period.”

Desjardins has invested in 500 companies across the province and offers investments from $100,000 to $80 million. It has several funds, including ones focused on fintech, technology innovation, and helping companies expand into North American and European markets.

“I think one of the struggles for local credit unions is that an investment profile like tech is risky,” Regnier says. “I think it puts a lot of folks out of their comfort zone. Venture capitalists are used to one out of 10 hitting a home run. So, it's a different game.”

Philpot agrees that “it is a very unique environment. So, there has been tons of learning for us as a credit union. It's not part of a regular credit union offering, as is evident across Canada.”

There are opportunities for other credit unions across the country to get involved in helping their communities through venture capital, but it is a lot of work and requires skills not usually found in credit unions, she says.

The leaders at Conexus Venture Capital have a close relationship with the founders they have backed. When the founders run into new issues, they often call their Conexus CU contacts first, she says.

Needed: Different Skills

“We want to help these folks be successful. So, I think some of that key learning was the amount of support required beyond initial seed money,” Philpot says. “The richness of relationships is a credit union core competency; however, experience running a startup is not. We went to the market and looked for expertise in venture capital and startup support to assist our founders.”

As venture capital is constantly evolving, so too is Conexus CU. Jordan McFarlen is now a director with Conexus Venture Capital which manages the CVC series of funds. As the Emmertech fund continued to evolve to a national and even international scope, Conexus transitioned Emmertech to a new entity owned and operated in part by the Emmertech team previously in place at Conexus. Conexus CU continues to serve as the General Partner for Emmertech Fund 1; however, fund management services have transitioned to this team allowing Emmertech to continue to meet the needs of the Canadian ag-tech sector. This transition allows the credit union to focus where its strengths lie, which is building the tech ecosystem in Saskatchewan fully leveraging the Cultivator programs and creating opportunities for scale for Saskatchewan founders.

One obvious question is: What do regulators think about credit unions moving into the venture capital world?

Philpot says the regulators “are looking to have a very strong line of sight and there's a lot of reporting and compliance requirements that are put upon us as we run these programs. So, I'd say there is a high level of rigor and oversight, and we expect that as a credit union.

“We spent a lot of time building out the governance to support the venture capital program,” she says.

What about when a founder’s dream fails, and the investment doesn’t pan out?

“Success is never guaranteed, but we prefer to focus on the learnings rather than using the term failure,” Philpot says. “So, through a failure, there's some key learning. Each opportunity provides some valuable insights, and we recognize that continuous learning is an inherent and beneficial aspect of the VC landscape. We know there’s a probability of failure, so we work with our founders to address issues as quickly as possible.” cues icon

Art Chamberlain is a writer who focuses on issues in the Canadian credit union system.