Tune in to the latest episode of The Angel Next Door podcast as host Marcia Dawood sits down with George Cook, co-founder of Honeycomb Credit. George shares how the platform is revolutionizing crowdfunding for small businesses, addressing the challenges faced in accessing capital from traditional lenders. This insightful episode offers a compelling look at the impact of investment crowdfunding with microloans on Main Street entrepreneurs and its potential to shape the future of business financing. If you're interested in learning about the evolving landscape of small business funding and the role of crowdfunding in supporting local economies, this episode is a must-listen.
Tune in to the latest episode of The Angel Next Door podcast as host Marcia Dawood sits down with George Cook, co-founder of Honeycomb Credit. George shares how the platform is revolutionizing crowdfunding for small businesses, addressing the challenges faced in accessing capital from traditional lenders. This insightful episode offers a compelling look at the impact of investment crowdfunding with microloans on Main Street entrepreneurs and its potential to shape the future of business financing. If you're interested in learning about the evolving landscape of small business funding and the role of crowdfunding in supporting local economies, this episode is a must-listen.
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Marcia Dawood
Well, hi, George. Welcome to the show.
George Cook
Thanks, Marcia. Glad to be here.
Marcia Dawood
Well, I am super excited to talk to you today about everything honeycomb credit, because, you know, I am a huge fan of not only Pittsburgh, where you're based, since I lived there for 25 years, but also about crowdfunding and how we can get more people to learn about it. So why don't we get started? Tell me a little bit about your background, how you learned about investing in entrepreneurs and small businesses, and a little bit about how you came to Honeycomb.
George Cook
Certainly. Yeah. So I actually come from a community banking background. My family has been running a small community bank in rural Pennsylvania for 130 years. Wow. Yeah. So I grew up in the family business and really fell in love with relationship lending and working out of branches and working with the entrepreneurs right in the communities where I was working out of. And that taught me a lot about the importance of getting a holistic picture of small businesses and of main street entrepreneurs to obviously dig in and understand the financials, but also understand a business owner's reputation in the community and how they serve their customers.
George Cook
And in Pennsylvania, do they shovel their sidewalk when it snows outside? Right. Little things that demonstrate that a business is a good fit for their local community and really making sure that consciously or subconsciously, that those qualitative data points are working their way into funding for Main street businesses. I spent most of my career at Transunion. I was doing big data credit analytics. I worked at a startup called Zest AI, and I saw that the industry was consolidating really quickly. We lose almost one community bank every other day in the United States right now. That's crazy. It's wild.
George Cook
When in the 80s there were about 30,000 community banks, today there's about 4000. And that change means that the way banks operate and just their whole operating principle has really shifted pretty dramatically. And a lot of that qualitative data has fallen by the wayside. And the amount of loans flowing from traditional banks to small businesses has really dropped significantly, down by almost about 70% from the peak in 2007. If you look at SBA loans, I kind of saw that while I was at TransUnion and zest, and I realized that the community banking model that I grew up loving and really appreciating was not as robust as it had. So kind of came to this problem thinking about less about high tech, high growth startups that I know you talk a lot about on the show in terms of angel investing. That's obviously great. And it's so important for local economies.
George Cook
But I was really thinking about it from the perspective of mainstream entrepreneurs and the 90 whatever percent of small businesses that might not have a liquidity event on the horizon. They might not be selling to Google or Facebook, but that are stable, cash flowing businesses, that are truly investable businesses, but decreasingly had opportunities from traditional lenders to get the capital they needed to grow and thrive.
Marcia Dawood
That's amazing. So then how did honeycomb come about?
George Cook
Yeah, so I was thinking about all of those problems. I was in grad school, and I was really lucky to meet my then classmate, now co founder. Ken was, was a former investment banker, really sharp guy, and he, while in grad school with me, was running a chain of coffee shops. And he applied for an SBA loan for a couple different banks and he got turned down. And I kind of looked at Ken and I said, ivy league MBA, former investment banker. If you can't get an SBA loan, how is the average small business owner navigating?
Marcia Dawood
This is why he didn't get the loan.
George Cook
It was years of operation because they acquired the business and just a lot of hoops to jump through. And what we found is a lot of banks have these very rigid checkboxes, and if you miss just one by a slight margin, you're going to be turned down. And it was very frustrating for a lot of entrepreneurs, especially very credit worthy entrepreneurs. And all of this was happening right at the same time that the rules around the Jobs act and regulation crowdfunding were being finalized. And Ken and I kind of put our heads together and said, how do we bring that relationship lending model back in a tech enabled, scalable way? And we saw some of the early success at some of the equity crowdfunding sites, the wefunders and republics, and start engines of the world. And we said, can we apply the same regulatory framework, the same regulation crowdfunding model, but bring that over to Main street entrepreneurs, where debt is more frequently the right financial instrument, but use that same regulatory framework and process to get funds flowing to those types of businesses. And that's where the idea for honeycomb came from.
Marcia Dawood
That is so cool. We did have somebody on the program from Wefunder who was actually doing the revenue based financing side and helping the main street kind of small businesses that you're talking about. So tell me, walk us through exactly how it works. So there's a company that needs funding and how does that all play out?
George Cook
Yeah. So, with Honeycomb, when a business comes to us, they go through an online application system. We are looking at two years of financial history. We're looking at credit history on the business owners. We're running background checks on the owners and the business itself. We're doing quite a bit of vetting to validate that the business has a path to repay their loan and that they've got a good business plan in place. If they meet all of our criteria, they're then invited to the Honeycomb platform. As we've talked about, most of our offerings are loans.
George Cook
So typically they're debt three to five year, fully amortizing loans. We do some revenue share. We do some equity deals. It's about 95% debt based. And each loan will then have a set interest rate for the term of that loan, anywhere from prime to prime, plus six. So in today's environment, eight to 14, 15% is kind of our range. Businesses will accept those terms. We'll work with them to build out an offering page.
George Cook
They'll have a video to tell their story. They have all sorts of details, talking through the history of the business and the goals with this crowdfunding, with the funds they're going to raise and this offering, and, of course, the investment perspectives, the form C that gets uploaded to Edgar. Then they go out and they share that with their customers, fans, and friendly strangers on the Internet. Right. People that know their business or people that are just looking to play the shark from the shark tank. Right. And look for fun businesses that they can put 100 or $1,000 into and earn a return. We then have all of these individuals make investments.
George Cook
We hold that in an escrow account, and once they hit their funding goal, we disperse the funds to the business. They go out, they open their new location, they buy their new espresso machine, whatever it might be. They make monthly payments, and then Honeycomb handles the distribution of those repayments back out to all of the investors.
Marcia Dawood
Interesting. So then play out that scenario from the investor side.
George Cook
Yeah. So most of our investors are learning about honeycomb from businesses that they love, right? So let's say my neighborhood coffee shop is running an offering. They're opening a second location, and they need $100,000 to do it. That might be a little too small for a bank or for whatever reason, they decide to work with Honeycomb. They go through our application process. They're live on the offering. Our offering is live on the honeycomb site. And then they post on social media.
George Cook
They send out an email blast. So I, the customer, see, hey, look, my favorite coffee shop is opening a new location. I see it on Instagram. I click the link, and it takes me to their honeycomb offering page. I watch the video, maybe I download the investment perspectives and get into the financials, understand the business a little bit better. And if I like it, and it seems to be aligned with my investment goals, I can go through the honeycomb process in 60, 90 seconds, invest as little as $100, as much as $10,000 or more, and my money goes into the pool. The business loan tips. And they then send me repayments on a quarterly basis right back into my honeycomb wallet that I can then reinvest, or I can take back and buy more coffee.
Marcia Dawood
Interesting. So I have so many questions. What's the average size of the checks that people are investing?
George Cook
Yeah. So the average is about $1,000, but it ranges widely, right. We have a lot of $100 investments, $250 investments. A lot of people tell us it's the first investment they've ever made. Right. They might be intimidated by investing in bonds or stocks, but investing in my favorite, taqueria, that feels approachable. Right. I know the business, I know the owner.
George Cook
I see the line out the door. So it's an opportunity to get more people to become investors and identify themselves as investors. But then, on the other end of the spectrum, we have serious investors who are putting hundreds of thousands of dollars to work on the honeycomb platform. They're building diverse portfolios, investing in dozens or even hundreds of different businesses, and through that process, are kind of building up that portfolio and generating significant cash flow from those investments.
Marcia Dawood
And what is the average that a company is coming to raise on honeycomb?
George Cook
Yeah, the average right now is about $60,000. It ranges anywhere from 25,000 to about 250,000 is our sweet spot. Sometimes we'll go a little bit larger than that as well.
Marcia Dawood
So then it's a debt instrument. So this isn't for any equity. They don't get any ownership into the company, is that right?
George Cook
That's right. Most of the time, we do have some equity offerings. We're working with a brewery right now that's doing a large national expansion. It's a franchise brewery, and they're doing it as an equity raise. So, still kind of a flavor of more of a main street business, but because they're more of a high growth model, they're raising in the form of equity.
Marcia Dawood
That's interesting. So then, as the company pays back, I guess they're paying back as a monthly payment to honeycomb. Are you holding that and distributing it, like quarterly, or are you doing it monthly, or how's that all work?
George Cook
Yeah. So businesses make monthly payments. It goes into a holding account, and then we distribute that on a quarterly basis.
Marcia Dawood
Okay. Yeah, that makes sense. Interesting. So what type of business are you seeing the most? Come on here. Is it like the mom and pop coffee shop type thing that you've been using as an example, or are there other things that are hot right now?
George Cook
Yeah, it tends to be direct to consumer or business to consumer businesses. So it tends to be a business that has some touch point with their end customer. So that frequently is main street entrepreneurs, main street businesses, coffee shops, breweries, bookshops, pharmacies, and some ecommerce companies as well, and some service businesses, too. So it really does run the gamut. But if you walk down your favorite main street community, you would see dozens of the types of businesses that tend to raise money on the honeycomb platform.
Marcia Dawood
Interesting. So then the dollar amount that people are paying or that the companies are paying back every month, is there then a certain time period like, okay, this is going to be a five year loan or a 60 month loan or however you guys talk about it.
George Cook
Yeah, exactly. So almost all of our loans are between 36 months and 60 months. So kind of medium term loans that work really well for equipment purchases or for moving into new spaces or maybe we hear this story all the time. An entrepreneur was really scrappy. They put everything on credit cards or merchant cash advances, and they scrape together to get the doors open, and then they need to refinance that into a proper loan instrument. So honeycomb does a lot of that as well.
Marcia Dawood
Oh, that's interesting. So this is a little bit different than revenue based finance, where you would, in revenue based finance, be paying back. As your revenues went up, you would pay back more. Right. But this is kind of like a traditional loan where you've got an interest rate, you're going to make a monthly payment. The monthly payment is going to stay the same through the life of the loan. Am I right there?
George Cook
That's right. Yeah. It's more consistent and repeatable. Right. A business owner knows exactly what their payment is going to be for the next 36 months. There's a lot of upside with revenue based finance, and we do some of that as well. The biggest challenge with revenue based finance is we're talking about relatively young, small businesses. And for revenue based finance to be really effective, you have to have very good financial forecasts for years into the future.
George Cook
And so if you over forecast your revenue, you end up with a big balloon payment at the end. If you under forecast your revenue, you end up with much larger monthly payments than the business had forecast. So it can be a really good instrument for high growth small businesses. But there's some risks for businesses with revenue based finance. And so oftentimes we hear from business owners that debt just makes more sense for them.
Marcia Dawood
Yeah. And what's the traction been like of attracting new investors to a platform like this?
George Cook
Yeah. So we have about 16,000 active investors in the platform right now. Yeah. So what we find is many investors will find us because like I said, their favorite small business is raising money. And they say, oh, that's great, I'll throw in $100. But then they see the repayment, and they say, oh, this is really cool. What else is on here? Where else can I put my money to work? So we use that local connection to really introduce people to the concept. But then you start to see this light bulb go off and people start to realize that, hey, investing in small businesses is actually a new asset class.
George Cook
I can diversify my portfolio and feel good about where I'm putting my money to work at the same time.
Marcia Dawood
Totally. I love that. Plus, I'm guessing honeycomb can be done on your phone very easy. I've been hearing from a lot of Gen Z's, and I'm sure the gen A's will feel the same way, that they really want to have everything right there. They want to be able to click a couple of things and be able to invest.
George Cook
Yeah. So it's all very mobile friendly. We're rolling out an official mobile application later this year, and that's exciting to me because if you think about how you engage with a small business, it's usually not sitting at home in your office, on your desktop computer. Right. You're probably not looking up small businesses while you're at home working, but while you're out in the world, you're at the farmers market, you're walking down Main street. That's when you're really having those interactions with main street entrepreneurs. And so to bring the investing experience into the store, to come back to the coffee shop example, imagine while you're waiting for your latte, getting a text message that says, hey, do you want to invest? And literally a couple of clicks of a button on your phone, and you're invested while you're standing in the shop. There's some really cool things we can start to do with mobile applications over the next few months.
Marcia Dawood
That's great. Yeah. So I would imagine they would have a little sign with a QR code. You could just click, click, and now all of a sudden you're on the platform.
George Cook
Exactly.
Marcia Dawood
Very cool. Wow. Are most of the companies finding their investors organically themselves, or are you seeing that there is going to be some type of almost like a snowball effect where people will want to just go onto the platform and see what they could find?
George Cook
It's both. And really, we find about 70% of the investors today are coming from the same community as the small business. So that's a pretty strong sign that people are discovering the offering through the business owners, right. And that's us giving them social media templates and email templates, and we even have phone scripts for them. Right. We give them a lot of tools to have both the confidence they need, but also the resources they need to tell their story and activate their local network. And then simultaneously we also have this big pool of honeycomb existing investors who are coming on and building portfolios and cross pollinating across the platform. And then increasingly we also have some institutional investors who are participating on the platform as well and also building portfolios across the site.
Marcia Dawood
That is really encouraging. I mean, I'm a huge fan of crowdfunding on every level. Everything from donation based crowdfunding, rewards based crowdfunding. I remember when Indiegogo first came out in Kickstarter. I was like, this is cool. I can actually purchase something. It's prior to manufacturing, but I can be one of the first people to get it. I get to try it out.
Marcia Dawood
I thought that was totally cool. Then when equity crowdfunding came around, I'm like, okay, this seems like a cool way to learn about it, not have to put up tens of thousands of dollars right out of the gate and be able to experience what it's like to invest in an early stage company or a small business. And now I talk to a lot of entrepreneurs, and of course, most of the entrepreneurs that I'm talking to as an angel investor are scalable big tech companies or whatever. But I do talk to a lot of small businesses and they are always hungry for how can I do something to raise money? I don't probably have an exit event or a big thing that's going to happen at the end of this, but I've got a steady good business going on and I would like to grow it. So it seems like this would be the perfect fit.
George Cook
Yeah, we hear that story every single day, right? And I think there's a lot of glamour around equity investing, but the reality is, for the local hardware store, what does it mean to own 20 shares in the hardware store. Right. It just means there's probably a lot of paperwork for everyone involved ten years from now. But finding the, I think from an entrepreneur's perspective and from an investor's perspective, it's really important to find the right financial product for the right business and the right lifecycle stage of that business. Right. There are some businesses that equity makes sense earlier, but maybe debt makes more sense later on in their life cycle. So we really are all about kind of listening to the entrepreneurs and making sure we're lining up the right financial product with where they're at in their lifecycle stage.
Marcia Dawood
Yeah. So what are some of the predictions that you have for crowdfunding as an industry?
George Cook
Yeah, look, I think with regulated crowdfunding, the industry, I think, took a little bit longer than people expected to really start to tick up. And there's a couple of reasons for that. Right. It took a while to get the word out there. People have fundraised the same way through angels and venture capitalists, or through banks for hundreds of years, or in the case of banks, and for decades in the case of venture. And it took a while for people to understand how crowdfunding works and what crowdfunding does and what it doesn't do. But really, over the past couple of years, we've started to see it click right when we talk to business owners today, it's not, what the heck is this? It's like, oh, yeah, I heard so and so did this regulated crowdfunding, or I heard so and so raise money through crowdfunding. So it's becoming more of a household concept, particularly for business owners, both high tech, high growth, and main street business owners.
George Cook
And that's creating a really powerful tailwind. I think the past couple of years, we started to see some really strong growth. I think it's going to continue. For me, one of the really exciting things we're seeing at Honeycomb is that we have institutional capital investors taking this really seriously. And the more institutional capital you get on the sidelines, the more you can think about larger offerings, the more you can think about larger, more sophisticated businesses who are further along in their process. And the more of those businesses you can serve, the more they become a lighthouse for up and coming businesses. Right. If the well established coffee shop that everyone loves and everyone knows across the entire city raises a million dollars on a platform like Honeycomb, everyone else starts to take notice of that and becomes a billboard that reinforces investment crowdfunding.
George Cook
So I think we're hitting that tipping point. We're really starting to feel that momentum across the industry, and I think there's big things coming.
Marcia Dawood
Yeah, I totally agree, and you're right, it probably took a little bit longer. You're talking about, like, from 2016 when the regs changed for equity crowdfunding. But at the same time, I feel like it does take a while for platforms to get built and the regulatory to be in place and for people to feel comfortable with making these types of transactions, even if they are at the beginning. A couple hundred dollars or a couple of $1,000, it's still a lot of money. So of course, I can't let you go without talking about Pittsburgh because I love Pittsburgh so much. And you're there now with your company right down the street from Duolingo and Google in East Liberty, of all places, which used to be a terrible place to go back when I lived there in the very beginning. But tell us a little bit about what it's been like having your business in Pittsburgh. And I know that Pittsburgh is just such a thriving city now.
George Cook
Yeah, it's funny because I grew up not terribly far from Pittsburgh, about 2 hours outside the city, but it had actually been about 15 years that I had not been to Pittsburgh at all when I decided to kind of move back to western Pennsylvania. And my co founder, Ken and I, we started the business while we were in grad school up in New Hampshire. And we knew we couldn't keep the business in New Hampshire, but we didn't know where to take it. We actually went on a little roadshow and we visited twelve different cities from Atlanta to Detroit to Denver, and we went all over the country and trying to figure out where we were going to set up shop. And we came and visited Pittsburgh and fell in love. There was a fantastic accelerator program called Alpha Lab that's still going strong. And yeah, we got interviewed at Alpha lab and we got accepted. But I remember we were sitting the night before our Alpha lab interview, and we were at a hotel in Pittsburgh.
George Cook
I kept thinking to myself, when did Pittsburgh get cool? Right? Like, when did this happen? And it was just so much fun to be there. It's a small tech ecosystem, but it's really tight knit, and the resources here are fantastic. A lot of really exciting things coming out of Pitt. A lot of really exciting things coming out of Carnegie Mellon. A lot of really inspirational entrepreneurs here in Pittsburgh. You mentioned we're around the corner from Duolingo, and so many great things coming out of duo. So there's just a lot of really cool things happening here. And at the same time, it's still a very affordable place whenever you're on a startup salary to kind of sit down your roots and live comfortably.
George Cook
So we've had a blast here. And. Yeah. Couldn't imagine any of the other places we went to. Obviously, great ecosystems in other cities, too, but feels like a really authentic place for us to be serving main street small businesses from.
Marcia Dawood
Yeah, I just think it's such a great place. Love it. And, of course, big shout out to Catherine Mott and all the things that she's done to make Pittsburgh so incredibly entrepreneurial, friendly. Well, George, thank you so much for coming on the show and telling us all about honeycomb credit and about helping small businesses around the country to be able to thrive. Thanks for in on.
George Cook
Thanks, Marcia.