What happens when a sixth generation community banker and a small business entrepreneur meet in business school? They create a crowdfunding portal, naturally. But one that is laser focused on small but growing local businesses. That’s the backstory of Honeycomb Credit, the latest Regulation Crowdfunding portal to launch. We talked with Honeycomb cofounder & CFO Ken Martin about the Pittsburgh-based portal’s ambitions to help Main Street businesses prosper and grow.
Locavesting: What led you to start Honeycomb?
Honeycomb is George Cook’s idea, it’s something he was noodling on for several years. The genesis to launch was George and I coming together at business school at Dartmouth. I was an investment banker at Barclays and tapped into tech trends, but I realized my real passion was small business. I launched a chain of coffee shops in Washington DC and a juice company, so I’m familiar with being a small business owner in America, versus a high flying venture-backed company that will IPO, and how hard it is to raise capital, even for someone like me with a financial background.
George comes from six generations of small community bankers. The bank was founded right after the civil war and they have owned and operated it ever since. We really have the lineage to talk about the issues that have happened in community banking. We lose one community bank every day in the US! George was watching the effect that was having on small business lending. Why is technology making consumer lending better, but small businesses still struggle?
Out of that came Honeycomb.
LV: You are the 26th or so Reg CF portal approved… any qualms about entering a crowded and challenging field?
The number of registered funding portals is something we looked at. We recognize that there are several players out there doing great stuff—we don’t want to replicate what’s already been done. However, no one is taking this type of angle on attacking the market. We’re very laser focused on sub-$100,000 expansion loans for existing small businesses—they are absolutely underserved by the market. Traditional banks can’t profitably make a (small) loan. And online lenders like Kabbage and OnDeck charge far in excess of what would make sense for that kind of project.
LV: So in a sense you’re filling a gap left by the decline of community banks?
Yes. We’re bringing that relationship banking back in a scalable way.
LV: What type of business is your target borrower?
The type of businesses most successful for a Honeycomb loan is an established storefront or a product or brand that people in the community know and love.
We have a campaign on our platform now for Pittsburgh Juice Company–she’s had success with a storefront and is ready to expand. She’s struck a bunch of cool deals to distribute her juice all over Pittsburgh, but needs a $30,000 refrigerated truck to do that. It’s a smart, value expansion project that’s a little small for a traditional bank loan.
So microbreweries, yoga studios, cross fit gyms… these are the kind of loans we like.
LV: You are rooted in Pittsburgh. Will you remain focused on that city?
Pittsburgh used to fly under the radar. We were thrilled to get accepted into the AlphaLab program, an accelerator that grew out of (Benjamin Franklin Technology Partner‘s) InnovationWorks, a public-private partnership to promote startups in Pittsburgh. It taps into the world class engineering talent at Carnegie Mellon University and the innovation happening in Pittsburgh. Not only is it nationally ranked, but very aligned with our mission—we don’t want to be a Silicon Valley solution for Main Street America. George and I are building a product for Main Street America.
We are firmly planted in Pittsburgh and our core focus is building market share in the western Pennsylvania market. But we do have an expansion plan that includes expanding to areas with similar demographics to Pittsburgh. We’re thinking carefully about growth strategy with our advisors.
LV: There seems to be a lot of entrepreneurial activity and excitement these days in Pittsburgh and Pennsylvania in general…
Pittsburgh was very successful in the old economy and, like many places in the rust belt, really struggled for some time. But our [civic leaders] have been very smart about how they promote local investment and human capital development through great educational institutions.
Several policy makers had the foresight to say, we should be committed to economic development in our state. Benjamin Franklin Technology Partners Fund is one of those efforts. It is the owner of AlphaLabs, one of our original funding sources. They had foresight and were smart about allocating capital to places that can have an impact on economic development.
LV: Will Honeycomb focus on loans only?
Yes. There’s a lot of funding portals out there and several others have a focus on equity crowdfunding, which is a perfectly fine model but just not the right one for our market. Take the local hardware store. What’s the exit opportunity? That’s not a fit for Main Street America.
LV: What about revenue share?
We didn’t hear a lot of interest from small business owners in revenue share—they’re more familiar with a five-year amortizing loan. But we would be receptive to it.
LV: What do you charge issuers?
We charged 8% of the loan volume at closing. For the moment, there are no fees unless they successfully close.
LV: How does that compare to a bank loan?
Rates vary, but the guidelines are 6% to 8% for an SBA loan. Non-SBA bank loans are in the 8% to 11% range. The next source is often a credit card, which could carry a 20% to 25% APR. Can we be dramatically cheaper than a credit card but also massively more user-friendly than SBA loan process?
LV: Any fees for investors?
Investors pay a small fee of 2.8% to put funds onto the platform to invest, mainly to cover the ACH transactions.
LV: Are the costs of transferring money going down?
We’ve already seen, since 2015, a pretty dramatic decrease in the cost of running a portal—the cost of escrow, transferring money around. As we see more demand, more people are entering the market, and that will help bring down costs short term.
Longer term, I’m talking ten years or so, something like blockchain has potential to dramatically lower the costs of these loans to small businesses. That’s something we talk a lot about with our advisors
LV: Are investors prepped for crowdfunding? Or are you finding that you and/or your issuers have to do a lot of educating?
On the investor side of the market, we’ve benefited from a lot of the pioneers of the fintech industry. We did hundreds of customer interviews and what we found was striking: everyone’s heard of Kickstarter and Indiegogo. Most have heard of Lending Club or at least the concept of peer-to-peer lending. Same with Kiva. So the groundwork has been laid. We haven’t had as much headwinds as we expected.
LV: You’ve got two live campaigns, and one is already met its goal. What’s the demand like?
We’re being very deliberate about campaigns that we launch. We want to learn what customers and the market are telling us. We have two live campaigns that have only just launched, but we’ve been overwhelmed by two things: the average size of investment has been larger than we expected. We had thought it would be in the $100-$150 range.
The second thing is, we’ve been really surprised about how large the reach and unique visitors has been. We don’t do much advertising. But we’ve been overwhelmed by how much people really care about investing in their communities.
People like buying local. They like the choice, they like supporting indie local companies. On the other side, fintech is firmly established and lots of companies doing cool stuff. Those two forces are what Honeycomb sits in the middle of.
There’s a lot of room in this space. When you see how much interest is in ‘buy local,’ there’s a ton of room for ‘invest local.’ We are physically and philosophically rooted in Main Street America.
Photo of downtown Pittsburgh by Jiuguang Wang, via Wikimedia Commons