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Investing in hummingbirds

martin@nextlevelvc.com (nextlevelvc.com) — Thu, 09 Mar 2023 07:39:44 +0000

In the context of social media marketing, the term “influencer” didn’t appear in English dictionaries until the year 2019. But the concept of influencer marketing has been around almost as long as, well, hummingbirds! Humans evolved to form words somewhere between 50,000 and 2 million years ago, and word-of-mouth marketing likely started a few seconds later.

Fast forward to the mid 20-teens, and influencer marketing rose to prominence with the explosion of social media. And being an influencer can be big business. Very big. As a subset of advertising, influencer marketing accounted for $15 billion in expenditures in 2021, and is expected to grow another 44% by 2030. According to Influencer Marketing Hub, Kylie Jenner earns nearly $1.8 million per sponsored social media post, only to be outdone by Cristiano Ronaldo, who earns over $2 million per sponsored post. Those high-profile influencers can be amazing promoters for the biggest brands, but, for the tens of millions of small businesses in the United States, they are far out of reach.

Meanwhile, hummingbirds founders Emily Steele and Charise Flynn were working hard to help businesses grow and succeed. In her 10+ years of SMB marketing, Emily saw the transition from traditional to digital marketing firsthand. She began using hyper-local influencers as an alternative marketing strategy to help her clients create brand awareness and grow revenue. In the process, Emily was personally sharing all of her favorite local brands on her personal social media accounts. She was amazed at the incredible word-of-mouth it was generating for local businesses. The value was clear, but the small business owners, responsible for every aspect of their business, rarely had the time or expertise to find the right influencers to help promote their products and services in their local market.

Enter hummingbirds.

Steele developed a platform and two-sided network, connecting small businesses with hyper-local influencers in their communities. “There’s no better way to build buzz than through real people amplifying your brand to their trusted network of peers,” said Steele. With options ranging from DIY to full-service managed campaign strategies, hummingbirds can match the expertise and needs of a wide variety of business owners. “There’s no other form of advertising that can create the type of loyalty and longevity that people-powered marketing can. When locals have an incredible experience with your brand, not only can they become lifelong customers, but they can also be your best referral, “adds Liz Keehner, Senior Associate with Next Level Ventures.

One of the things that distinguishes hummingbirds from its competitors is the authentic, hyper-local content that is created by their content creators called “hummingbirds”. “Hummingbirds aren’t national influencers seeking to be famous or earn a living from being an ‘influencer’. Instead, they are people like you and me who have local, trusted, networks of friends and followers and like to use their voice to create impact,” said Flynn.

The timing for hummingbirds to capitalize on the opportunity couldn’t be better. Next Level Ventures was thrilled to participate in hummingbirds’ recent funding round. “I believe Emily and Charise are the right team to execute on the vision,” says Keehner. With the prevalence of social media and the growing trend of shopping local, hummingbirds is poised to help small businesses connect with local customers like never before.

Investing in Tractor Zoom

ashley@iastrategies.com (nextlevelvc.com) — Thu, 15 Dec 2022 10:56:03 +0000

Even before today’s volatile markets, economic uncertainty, and supply chain issues, farmers and ag workers had trouble finding and valuing farm equipment like tractors, combines, and other machinery. With no credible, transparent valuation models for farm equipment, buyers were taking major risks in purchasing farm machinery. With machinery costing up to $500,000 a piece, even a valuation off by five or ten percent is a significant chunk of money.

Simultaneously, supply for new machinery simply couldn’t meet the demand. Today, manufacturers across a number of sectors cannot meet demand, and as a result, used machinery and equipment have become more ubiquitous.

After first-hand frustration in finding equipment, and attending roughly 1,000 auctions in just four years, Kyle McMahon met with other ag workers and industry leaders, discovering that problems finding, valuing, and purchasing machinery were present across the board for farmers and ag stakeholders.

Thus, Tractor Zoom was founded to solve this problem.

Tractor Zoom’s platform today advertises more than $10 billion worth of farm equipment, leveraging that data to help ag leaders and stakeholders better understand and determine value. Built around the philosophy of listening to the customer and solving their problems, the company has grown significantly since its founding in 2017. Having added nearly 1,500 equipment suppliers to the platform and grown its user base by 400 percent, Tractor Zoom now has data on more than $20 billion equipment sales and transactions -- a number that is 14 times higher than that of 2020.

At Next Level we believe in backing strong founders and teams,” said Liz Keehner, Senior Associate at Next Level Ventures. “Tractor Zoom’s Founder and CEO, Kyle McMahon, and the team he has built are a great representation of this. Kyle’s vision of bringing transparent data to the ag equipment market makes him the right leader to solve a huge problem and he has put together a highly talented team to execute on that vision.”

While Tractor Zoom may not be the first company ever to value farm machinery, the transparency and data tracking the platform features actual comparable sales versus algorithms that can’t keep up with changing markets. This provides a valuable differentiator. Additionally, today, less than one percent of ag equipment is financed online, providing Tractor Zoom a massive opportunity to leverage their platform’s $11 billion of equipment listings.

And the market opportunity is far-reaching. With agriculture equipment transactions totaling in excess of $30 billion annually, farm machinery is often one of the largest assets on a farmer’s balance sheet. Reliable valuations equal real money, especially in volatile markets, and without a reliable way to value the equipment, an incorrect valuation can be a massive hit.

“Competitively, no one is leveraging this ag equipment data in the way that Tractor Zoom is,” added Keehner. “While other companies compile data on the listing price of companies, Tractor Zoom can capture data on the final sales price which gives them a significant competitive advantage in the marketplace.”

Democratizing this data creates a disruption in the marketplace which gives Tractor Zoom the ability to go out and capture the large market opportunity – all three of these components work in harmony, making Tractor Zoom an exciting investment for Next Levels Ventures.

Investing In Distynct

ashley@iastrategies.com (nextlevelvc.com) — Tue, 04 Oct 2022 14:20:22 +0000

This is part of a series where we explore the innovation behind our portfolio companies and the defining reasons we offered investments.

There are more than 60,000 pork farms across the country. Yet almost every swine facility lacks reliable network connectivity. This makes it almost impossible to monitor and manage a farm’s two most important assets: the people and the pigs.

A common complaint among the industry is that there is no ability to proactively manage the facility, and a lack of visibility on even the most basic facility conditions, from temperature and feed ability to manure pit levels and even worker presence. Thus, farmers managing swine facilities are forced to reactively respond to situations, rather than offer proactive, protective, management.

Increased technology in the agricultural sector is helping farmers make better, more sustainable decisions to maximize their yields – and Distynct’s solution can do the same for producers.

Distynct establishes a secure, reliable connection to rural swine facilities, providing a way for farmers to proactively manage their assets in real time. Online and mobile dashboards are user friendly and easily accessible, allowing farmers to collect data and turn it into actionable solutions.

Next Level Ventures has recently offered a second investment to Distynct.

“What made Distynct stand out to us was the founder and team,” said Liz Keehner at Next Level Ventures. “Distynct’s founder, BJ Brugman, has a background that lends itself well to the industry and he’s encountered the problems that producers were facing throughout his career.”

Data is basically another form of currency in many industries today, and that’s no different in the ag sector. Distynct revolutionizes the way we can collect data on farms. Today, everything logged in a hog barn is most likely on paper or in an Excel spreadsheet. Distynct’s sensor technology can inform producer decisions in real-time by pulling information from everything happening inside the barn. This data is critical to ensuring properly cared for, making sure barns are operating efficiently and helping producers manage risks.

Distynct users today can connect the technology to existing devices and sensors already in the site, and their new smart alarm feature elevates the customer’s ability to monitor and manage their facilities. The ag startup is continuing to expand its services, testing new data, and refining the product to offer the highest quality solution to consumers.

The success and potential growth of the company is also highlighted by recent recognitions. Distynct was recently announced as a finalist in the Technology Association of Iowa’s Prometheus Awards in the AgTech Company of the Year and 2022 Startup Tech Company of the Year categories.

"What Distynct is doing is exciting because it bridges the gap between technology and traditional ag,” added Keehner. “Swine production is behind the curve when you compare it to the rate of technology adoption in crop production, and Distynct offers a much-needed solution.”

Investing in Mazen Animal Health

duane@nextlevelvc.com (nextlevelvc.com) — Wed, 24 Aug 2022 10:52:29 +0000

This is part of a series where we explore the innovation behind our portfolio companies and the defining reasons we offered investments.

Record high prices at the grocery stores and supply chain disruptions have made it more important than ever to protect the food supply. Along with population growth and rising demand for protein, sustainable and humane animal production is a critical component of our food supply. Particularly in the Midwest, livestock production is a massive industry – in Next Level Venture’s home state of Iowa, hog and cattle production amounted to $10.2 billion in 2020.

Vaccination of livestock is critical in preventing disease and decreasing animal loss. Standard vaccination procedures, particularly injectable vaccines, are costly and difficult to administer. With growing labor shortages, and shifting biosecurity risks, injectable vaccines are also becoming more hazardous for workers to dispense.

Mazen Animal Health has created transformative vaccine technology with an oral vaccine. Administered through feed, animals aren’t even aware of the vaccination process, unlike the sometimes traumatizing and hazardous method of giving animal vaccination shots.

By administering a vaccine with feed, not only are labor challenges eliminated, the animal’s lives are not disrupted. Distributing the oral vaccine through corn is beneficial for many reasons –corn is already a common part of livestock diet, the dosing corresponds with current feed mill and producer systems, and the animal is treated more humanely.

“Mazen has revolutionized the animal vaccine industry – creating safe and effective oral vaccines not just for livestock but for pets as well,” said Duane Harris, Partner at Next Level Ventures. “As we navigate new technology advancements in agriculture and in vaccines, one thing is certain – the safety and quality of life for the people and animals in the industry is vital, and Mazen has provided a cost-effective way to ensure it.”

Mazen’s oral vaccine technology leverages years of research and development led by John Howard, Mazen Co-Founder and world-leading expert in recombinant protein (commonly used in pharmaceuticals) production in plants. Mazen, which is produced by recombinant protein in corn, is substantially more cost-effective and convenient than traditional vaccine methods.

As vaccine technology continues to advance, Mazen Animal Health works to disrupt the status quo and address complex challenges in animal health and protein production. This first disruptive solution of oral vaccination methods is just a first step in reinventing disease prevention and animal health.

Investing in Dryland Genetics

duane@nextlevelvc.com (nextlevelvc.com) — Wed, 06 Jul 2022 09:59:47 +0000

Today’s supply chain obstacles have put pressure on nearly every industry in every corner of the world, and with changing climate and weather patterns, it’s essential for our food system to depend on sustainable and resilient food supplies.

Some crops have been adapted to grow on marginalized lands, but there are many that have not and may depend on irrigation water and more for healthy yields. Drought areas with lack of rainfall result in yield shortfalls, and in areas where wheat dries up year after year, our food supply dwindles.

Researchers across the world are looking for new varieties of wheat and grains to bolster supplies in the long term. Here, in the Midwest, one company has focused on a specific grain that can impact the future of crop supply globally.

Father and son team Pat and James Schnable are both university professors who want to change the future of crops. They founded Dryland Genetics to research and commercialize proso millet, a grain that can endure scorching summer heat and drought. This ancient grain can produce twice as much grain per gallon of water as dryland corn, and many farmers who plant proso millet after years of mostly corn and wheat are finding growing markets in which to sell the unique grain.

In the past, proso millet has often been dismissed as “birdseed” – being overlooked by seed producers for investments in research. But with Dryland Genetics’ yield increases of 10-40 percent over standard varieties, and with the ability to plant and harvest proso millet with the same equipment used for wheat, proso millet can be a game changer for farmers.

Dryland Genetics varieties of proso millet may not replace corn (especially in high-yielding states like Iowa), but it can compete closely with dryland corn, particularly in areas where rainfall is limited and less irrigation water is available. As one of the most water-efficient crops in the world, high-yielding proso millet varieties can be used for cattle feed, pig feed, and can continue to grow even after irrigation water is gone.

"In the heartland of America, we see all sorts of agricultural startups focused on improving food supply or quality of harvest. It's companies like Dryland Genetics that look for unique ways to revolutionize our ag sector by promoting more sustainable production processes," said Duane Harris, Partner at Next Level Ventures. "If we don't look for ways to conserve water, both rural and urban communities will dry up."

Dryland Genetics research started as an accident, when James left some proso millet in a greenhouse, forgetting to throw it away. Later, even after no one had cared for or watered the crop, it still completed its entire lifecycle, which spurred a lifetime of research and discovery.

While the research may have been a result of an accident, continued research is intentional, and just getting started. Proso millet is also gluten-free, and as gluten-free diets grow in popularity, there is an opportunity to increase market share in human consumption as well. If the market continues to expand, Dryland Genetics’ founders predict the growth rate could be comparable to crops like canola, which have seen increases in market share thanks to increased research.

Today, people are willing to pay more for food that is resilient and sustainable. Dryland Genetics is at the forefront of this game, and opportunities for continued growth and findings are still forthcoming.

Lessons Learned: Coda #3

duane@nextlevelvc.com (nextlevelvc.com) — Mon, 27 Jun 2022 10:19:23 +0000

In over 30 years in the private equity and venture capital industries, I have collected notions that seem to be borne out by everyday experience. Following are several of my conclusions that are offered without proof:

Lesson 1: Entrepreneurs are born not raised.

In working with entrepreneurs through the years, I can offer a list of their characteristics such as smart, creative, dogged, resilient, resourceful, naïve, bull-headed, bold, and many more. Note that all those characteristics are inherent, not learned. Since I left academia many years ago, I have been amused at the proliferation of entrepreneurial programs in universities across the country, as if being an entrepreneur can be taught. I’ve often wondered how you can teach someone to wake up at 4:00 in the morning in a cold sweat to worry about making payroll.

Lesson 2: Small businesses don’t have access to big capital.

Access to financial capital by small businesses has become more difficult during the past 30 years. Small banks have been absorbed by regional banks that have been swallowed by mega banks. Small funds are officially avoided and neglected by large institutional investors. High-net-worth family offices now invest in funds of funds, not in individual businesses. And pension funds, whose investment programs are managed by gatekeepers, typically invest only in big funds.

Friends and family and angel investors are more important than ever in supporting the establishment and growth of small businesses. Next Level is bringing “small capital” to small business to try to help fill that void, and all of you are playing a critical role in helping us do so. We thank you!

Lesson 3: Timing is everything—but persistence widens the window of opportunity.

A familiar phrase is “an idea whose time has come.” But that implies, if you wait long enough, something will happen. Successful entrepreneurs do not wait. Remember that the world will resist your new ideas. The status quo does not like disruption. Or put another way, old mousetraps do not like better mousetraps. Determination is critical, but also it can be very expensive. You may need help with the capital to fund operations while you are pursuing the right moment. Don’t be afraid of dilution. A small share of a big pie may be more than all of a small pie or all of no pie at all.

Lesson 4: Motion is often confused with progress.

Years ago, I had a partner who we called “Chicken Little” because the sky was always falling. His anxiety led to group hand wringing, frequent calls, and innumerable meetings, all of which he viewed as action and progress. His favorite saying was, “Are you going to take care of that, or am I?” He never intended to do anything himself, of course. Rather, he intended to create urgency and guilt someone else into doing the work. That way he could register motion and take credit for “progress.”

Lesson 5: The urgent crowds out the important.

In the 1980s business literature, the warning was “Don’t let the urgent crowd out the important.” Unfortunately, it already has. The biggest culprit is the smartphone. It produces little noises that interrupt everything in life. The smartphone makers call their noises “alerts” to give them the semblance of importance. I would argue that the smartphone and its social media offspring represent the greatest drag on productivity in history. Turn the phone off and take an urgency break.

Advice: Give yourself credit.

Keep track of your own common-sense conclusions. They may come from trusted outside sources or from your own experience. Your collected thoughts of today can become the wisdom of tomorrow.

DGH

Investing in HLT

ashley@iastrategies.com (nextlevelvc.com) — Thu, 16 Jun 2022 11:37:01 +0000

Over the last few decades, technology has revolutionized the way we live our daily lives. Advanced technology has put resources constantly at our fingertips, from faster, smaller mobile phones to smart devices like watches. As we continue to turn to technology solutions for just about everything, innovative startups leverage technology to build educational tools that can help better our quality of life.

Much like technology, education has become a cornerstone of the average American’s life. Whether it be four-year or community colleges, trade schools, or other professional certificates and licenses, continuing education is crucial to nearly every profession. Traditionally, students have relied on massive binders or notecards for on-the-go studying, but with our constant access to smartphones, we can empower students to study anywhere at any time.

HLT has created digital tools that allow students to study for the most important courses and exams of their lives, all from the phones in their pockets. HLT’s bite-sized, interactive content is perfect for busy learners.

Where HLT stands out from competitors is the access provided for specific courses and classes – with tailored products – from nursing classes, clinicals, or boards and guides for MCAT, PCAT, or dental admission tests, to courses for military recruits looking to land choice placements and professional certifications for CPAs, real estate, and more.

“At Next Level Ventures, we are looking for companies that understand adapting needs of consumers today, and HLT has exemplified that with their early prediction of technology’s role in education – beyond traditional college courses to professional certifications and other continuing education needs,” said Craig Ibsen, Managing Partner at Next Level Ventures. “We are seeing technology overlap in just about every industry, and it’s crucial to be ahead of the curve in finding opportunities to utilize technology to improve quality of life.”

Today, HLT has been downloaded more than 10 million times, and has nearly 500 thousand monthly active users.

The Importance of Mentors in your Startup

ashley@iastrategies.com (nextlevelvc.com) — Fri, 13 May 2022 10:32:53 +0000

The recipe for a successful startup may vary from industry to industry. It may depend on market opportunities and timing. One thing it almost always includes: a good team.

A good team is more than a startup’s paid staff. A good team usually includes a mentor.

A good business mentor offers advice and guidance, can be a sounding board, and can help connect you with even more smart, qualified individuals.

Every startup needs a mentor.

What is a mentor?

Generally, a mentor is a trusted confidante, with experience and wisdom, willing to give you their time and brain power. Many people have trusted mentors and don’t even realize it until they reflect and put a name to it. Mentors can be parents, friends, previous coworkers or bosses, teachers, coaches, and so much more. These are the people who have had a profound impact on your life and/or career thus far.

In the startup space, the best mentor is someone with a track record of starting, scaling, and building businesses. They know how to take ideas and turn them into results. A good mentor is willing to dedicate their time and experience to helping a founder build a business and support their growth. Ultimately – a good mentor will see your potential and help you reach it. Through introductions, resources, and brainstorming, a great mentor will be able to give you guidance without always giving direct advice.

Some of the most successful entrepreneurs have this in common. Warren Buffet, Steve Jobs, Bill Gates, Larry Page, and Jeff Bezos are all well-known and extremely successful in their own right. Even these folks – often considered the brightest and the best – have received help and advice from trusted mentors.

Every founder needs a mentor.

Here are just 5 ways you and your startup might benefit from leveraging a mentor.

1. You don’t know what you don’t know.

New founders won’t know everything right away. Sometimes it takes mistakes to learn good lessons. Mentors have already made their mistakes, and are ready to impart that wisdom so you don’t have to. As an entrepreneur, it’s crucial to know your strengths and weaknesses, and where your gaps lie. Finding a mentor who can help you bridge those gaps can be invaluable in your overall business development. While there are millions upon millions of resources out there for new entrepreneurs – from social media sites and podcasts to magazines and books – a mentor is there to help you narrow it down. There is endless content out there to tell you the X, Y, and Z’s of growing a business. But a mentor is a two-way street – able to offer you tailored advice, answer direct questions, and challenge YOU to think outside the box.

2. You CAN handle the truth.

Your friends and family will, nine times out of ten, support just about anything you do. While everyone needs a “hype team” we also need someone who will give you tough love. A new startup needs someone willing to ask the tough questions, to challenge you to think about what could (and probably will) go wrong. It’s hard to find someone who is willing to be critical of someone they support. A good mentor will understand that constructive criticism is one of the most important facets to building a long-term, successful venture.

3. Take it from innovative idea to profitable success.

If you’re thinking about starting a business, you’re probably filled to the brim with fresh ideas. When it’s time to turn that idea into results, a mentor will be there to offer you guidance on the actual tactics you’ll need to achieve, because a mentor has probably already been there, done that. Sometimes you need an outside perspective to cross your t’s and dot your I’s. When it’s time to leverage your ideas into a tangible, profitable, and scalable venture, a mentor with proven experience can help you understand the steps you need to take to transform an idea into a successful business.

4. Sometimes it’s not what you know, but who you know.

A new startup needs people. From a quality and experienced team, to new customers and clients, to investors, a successful startup goes beyond the product into the personal. Your mentor likely already has a track record of building successful businesses – and through those experiences, they have a strong network. Your startup can benefit from a mentor in your industry that can connect you to key players, journalists, potential investors, and stakeholders that may become part of your team or client base. A mentor from an outside industry can help you bring new faces and perspectives to your venture. All this is to say: a good mentor can introduce you to the right people, tell you where to network, and how to make a good impression, but it’s up to you to do the work and build the relationship from there.

5. Learn how to actually grow, build, and scale.

We’ve already established that even the most successful entrepreneurs depend on mentors to take it to the next level. No matter what stage of business you’re in, a mentor can help you. If you’re a brand new startup, you probably need guidance on how to build a team, develop a business plan, legally establish your business, and so on. A year or so later, you may need help developing a pitch deck or connecting with investors. And as your startup grows and scales, you’ll need help on expanding and growing intentionally. Sometimes the same mentor will help you reach each milestone – and sometimes you may find yourself seeking assistance from a new mentor. Again, your mentor has likely “been there, done that” and has (hopefully) asked you the tough questions. Now they are there to help you actually build the thing.

Every startup needs a mentor. It’s up to you to find one.

Our team at Next Level Ventures has decades of experience in a wide range of industries. From working for large, well-known corporations to brand new startups, our team of experts has seen just about everything. As we invest in companies we believe in, we also believe in helping take each startup to the Next Level.

We’d love to help your startup reach the Next Level too! Reach out to any of our team members to get started.

CODA: Hard Writing Makes Easy Reading

ashley@iastrategies.com (nextlevelvc.com) — Mon, 25 Apr 2022 12:18:07 +0000

“Hard writing makes easy reading.” Wallace Stegner

I write this first message in memory of Dudley G. Luckett--mentor, colleague, and friend. Dr. Luckett was my major professor for my master’s degree at Iowa State University. Later he was my colleague in the economics department at Iowa State. He was a well read “renaissance man” with wide-ranging interests--the consummate gentleman scholar who impacted scores of students and colleagues. He passed away in January 2020 at the age of 91 after a distinguished 37-year career at Iowa State. To me he was always Dr. Luckett. He insisted that I call him Dudley after I joined him as a colleague, even though that didn’t seem quite right.

So now to the point. Wallace Earle Stegner (1909–1993) was an American novelist, short story writer, environmentalist, and historian, often called "The Dean of Western Writers". He won the Pulitzer Prize in 1972 and the U.S. National Book Award in 1977. Among others, he is credited with the quote, “Hard writing makes easy reading.” I was introduced to the quote by Dr. Luckett as we processed my master’s thesis.

I spent months writing my thesis and my wife Linda carefully typed it on an IBM Selectric to be letter perfect without correction tape. She produced three carbon copies, and I proudly presented it to Professor Luckett for his review and approval. I anxiously awaited my conversation with him and was crestfallen to see my masterpiece covered with markups. It was blood red.

Dr. Luckett sensed my disappointment and proceeded patiently to go through all of his edits and comments. At the end, he gently said, “Duane, just remember that ‘hard writing makes easy reading’.” I returned to my desk and proceeded to revise the thesis several times from the perspective of the reader, not the writer. As the reader, I kept returning to the page to force myself to new levels of brevity and clarity. That painful thesis lesson stayed with me for a lifetime. Over the years, I have often struggled to write and re-write a paragraph to make it read well.

As with most of us, I have had little formal education in grammar and composition beyond the standard classes in high school and college. I have forgotten split infinitives, dangling participles, and unclear antecedents. Over the years, however, I have come to be able to identify just what sounds right. Read your work aloud. Set it aside to come back to later. Work on it until it sounds right.

In today’s world of casual speech and writing, we have developed many bad communication habits. Email messages of misspelled words and phrases, no capital letters, and missing punctuation marks reinforce the perception of lack of attention to detail and convey an acceptance of carelessness. PowerPoint presentations hide the background thought and documentation behind simple and abbreviated statements. My go-to source is still The Chicago Manual of Style. Look it up and get it right!

As an entrepreneur, you need to be able to write well to both raise capital and to communicate with your investors. Do your readers a favor and spend plenty of time in conveying your ideas and thoughts to the written page. It will make you more persuasive and more successful. Be driven for accuracy in spelling and punctuation. Mistakes in the little things will cause your readers to question your attention to detail in the big things. Take pride in your written words.

Until next time, happy and effective writing.

DGH

The Case for Credit Unions and Cryptocurrencies

martin@nextlevelvc.com (nextlevelvc.com) — Thu, 21 Apr 2022 11:07:00 +0000

By Martin Walker, Vice President, Next Level Ventures

It’s 2022, and cryptocurrency is the hot, sexy space. As of the end of January 2022, there were over 81 million Blockchain.com wallet users [1]. Coinbase ended 2021 with 11.4 million monthly transacting users and over 89 million total verified users [2]. Trading volume on Coinbase hit $547 billion in the fourth quarter of 2021, up 67% from the prior quarter [2].

Why is cryptocurrency so hot? Different people have different reasons, but the overall appeal is undeniable. Some are drawn by the possibility of insanely high returns, which can come with equally high risk. For others, cryptocurrency represents the democratization of the exchange of value on a global scale. After all, cryptocurrencies are built on blockchain technology, where every transaction is immutable and visible for all to see and validate.

If I were to describe an organization that was created, funded and self-governed by its community of users, you might think, “that sounds a lot like a cryptocurrency built on the blockchain.” Or, you might also think, “that sounds a lot like a credit union,” and, of course, that is an oversimplification of the origins of the modern-day credit union.

Unlike cryptocurrency, credit unions may not be thought of as very sexy. They do, however, occupy a hot space – a space that many would like to access. As of about a year ago, there were over 5,000 federally insured credit unions with over 125 million members [3]. Many of those credit union members already participate in the cryptocurrency ecosystem; however, many more are sitting on the sidelines. Some would argue that those people are risk averse and will never be active cryptocurrency asset holders or investors. However, a 2021 NYDIG survey found that 51% of non-bitcoin holders were interested in accessing it through their financial institution, and that 81% of bitcoin holders would store it with their financial institution if offered [4].

At their core, credit unions do three things, and they do them very well: store money, move money, lend money. In this context, the term money refers to assets held in U.S. dollars. Cryptocurrencies, being digital assets, can enable credit unions to offer more value to their members in all three of those areas.

Store Money

While it may seem to be a reach for U.S. credit unions to move beyond storing U.S. dollar assets to include digital cryptocurrencies, they have been storing our U.S. dollars digitally for a long time. The current balance of each of our checking and savings accounts is simply a digital record of those assets, only partially backed by U.S. currency on hand. For those who prefer to store their cryptocurrency with a financial institution rather than a fintech platform or decentralized organization, credit unions are perfectly positioned to provide this service.

Move Money

While the movement of U.S. dollars is largely facilitated through digital means, and the movement of cryptocurrencies is entirely digital, the big difference is the method in which those balances change. With U.S. dollars, balances are most often changes via settlement, although new real-time options are quickly changing that landscape. In cryptocurrency, the change takes place on a blockchain. In both cases, an audit trail exists to validate the transaction that resulted in the change. There are a number of use cases that lend themselves well to cryptocurrencies. Foreign exchange transactions could be executed much faster and cheaper by using cryptocurrencies as an intermediary vehicle rather than institutions. Taking it a step further, if two parties are both comfortable exchanging value in the form of cryptocurrency, foreign exchange can be taken completely out of the equation. Another use case is real-time movement of large sums of money between organizations. New use cases are being explored continuously, and credit unions can enhance their ability to remain relevant in this new landscape by facilitating these types of transactions.

Lend Money

In the lending space, cryptocurrency can perform in multiple roles. A cryptocurrency can be the currency that is being loaned to an individual, instead of U.S. dollars or other fiat currency. In some cases, it may be preferred, as cryptocurrency may be a more efficient way to acquire the goods and services tied to the loan’s purpose. Another role is that of collateral. Several solutions are being developed that allow cryptocurrency holders to use a portion of that collateral to secure loans, which may be executed in cryptocurrencies or fiat currencies. By participating in these types of lending activities, credit unions may be able to leverage their efficient lending operations to provide these services in a better way than other competitors.

But cryptocurrency is scary. It’s volatile. While the blockchain may be immutable, there are stories of cryptocurrency being stolen. As of March 2022, there are over 18,000 different cryptocurrencies in existence [5]. Rug pulls have taken place, where developers promote new projects to investors and then disappear. In 2021, rug pulls accounted for 37% of all cryptocurrency scam revenue [6]. How does a cryptocurrency novice know which cryptocurrencies are real and which ones are scams? In addition to those concerns, the market itself can be highly volatile. Investors can gain, or lose, millions overnight.

While many proponents of DeFi, or decentralized finance, cringe at the idea of government involvement, some are suggesting that cryptocurrency needs oversight and regulation. In March 2022, The White House issued the Executive Order on Ensuring Responsible Development of Digital Assets. Among the goals of the order are to protect consumers, investors, and businesses and to protect United States and global financial stability and mitigate systemic risk [7]. As the government works toward a regulatory framework for the cryptocurrency industry in the United States, many cryptocurrency insiders are supportive of the efforts to legitimize the industry and elevate its reputation.

The NCUA is on board as well. At CUNA GAC, the NCUA board’s vice chairman Kyle Hauptman said, “I don’t want to see credit unions go the way of Blockbuster Video because their regulator did not evolve and give them clarity around (cryptocurrency). We know we have to provide credit unions clarity here so they can compete.” [8] The agency took a step toward helping credit unions compete in December, when Chairman Todd Harper penned a letter that clarified federally insured credit unions’ ability to establish relationships with third-party providers to offer digital asset services to their members [9].

Speaking of which, credit unions’ number one asset is their reputations. They cannot jeopardize that to offer cryptocurrency or any other products or services. Working closely with the White House, regulators and policy makers, and cryptocurrency industry leaders to create a healthy and safe ecosystem is in the best interest of credit unions and all involved parties.

Some would say it’s already over. Credit Unions already missed out on the crypto movement. It’s too late. And that may be true for the early adopters, the supporters of DeFi, those who rail against the institutions and the “establishment” it represents. But a large segment of the population is just dabbling in crypto, not really taking it seriously. And an even larger segment of the population is interested in crypto, but sees it as being too risky to dive in. They are looking for a place they can trust to test out the waters. And that trusted place can, and should be, credit unions.

There are many disruptors out there, individuals who embrace DeFi, DAOs (decentralized autonomous organizations), and a completely decentralized ecosystem where institutions such as credit unions no longer have a part to play. But weren’t credit unions the first DAOs? They were formed by people with a common bond, who wanted to make decisions to help the members of their group without relying on banks or other for-profit institutions. Member-owned credit unions are the perfect partners for blockchain-based technology, including cryptocurrencies. They are member-owned, but also regulated to ensure the membership isn’t damaged.

Several companies have set out to enable credit unions to serve their members with cryptocurrency products and solutions. These partnership opportunities exist today. But, to remain relevant and take advantage of their unique position, credit unions must do something that they don’t typically do. They must act fast. This opportunity is here today, and it will be seized. No one is going to give credit unions a head start – they can, and must, act now.

Sources
[1] https://www.statista.com/statistics/647374/worldwide-blockchain-wallet-users/
[2] https://blockworks.co/coinbase-reports-sharp-revenue-user-growth-in-q4/#:~:text=Coinbase%20ended%20the%20year%20with,users%20grew%20to%2089%20million.
[3] https://www.ncua.gov/files/publications/analysis/quarterly-data-summary-2021-Q1.pdf
[4] https://www.cutimes.com/2022/02/22/credit-unions-dip-toes-in-rtps-crypto/
[5] https://www.investopedia.com/tech/most-important-cryptocurrencies-other-than-bitcoin/#:~:text=One%20reason%20for%20this%20is,communities%20of%20backers%20and%20investors.
[6] https://fortune.com/2022/03/02/crypto-scam-rug-pull-what-is-it/
[7] https://www.whitehouse.gov/briefing-room/presidential-actions/2022/03/09/executive-order-on-ensuring-responsible-development-of-digital-assets/
[8] https://www.cutoday.info/Fresh-Today/GAC-Coverage-NCUA-Vice-Chair-Talks-CUs-Future-of-Crypto
[9] https://www.ncua.gov/regulation-supervision/letters-credit-unions-other-guidance/relationships-third-parties-provide-services-related-digital-assets