Community-sourced loans for small businesses, with George Cook
I scheduled this episode to follow the Honey Badger episode because I liked the alignment of their names, but I could just as easily have linked it to the Wine Funding episode, because we're once again turning engaged fans into even more engaged financiers! Only this time, we're taking all comers.
So when George says Honeycomb is "helping business owners really activate this community of customers and fans and neighbours that they already have, and to level up those customers and turn them into evangelists for their business by getting them on board and then literally invested in the long term success of those businesses" we hear echoes of Maxime, who described his lenders as "the most sincere and genuine ambassadors you can dream of as a wine estate, because they're part of the adventure, and they share that with their friends."
You can find Honeycomb Credit and all their projects over at https://www.honeycombcredit.com/ Twisted's artisanal egg roll project is already funded in Chicago, but maybe check out InBox Beverage in Chestertown (MD) with their turnkey micro-brewing system; or Bless Thy Skin in Riverview (FL), a black-owned, woman-owned, family-owned business that specializes in skincare products and treatments; or even the Rockfish Oyster Bar, a new seafood restaurant coming to Cleveland’s Chagrin Falls neighborhood... there really are so many great options.
They're on LinkedIn, too, where they publish wonderful little glimpses into those projects and the impact that capitalised small businesses are making to their communities.
You can learn more about me on my LinkedIn page, my action-adventure novels are on Amazon, some versions even for free, and my work with ConfirmU and our gamified psychometric scores is at https://confirmu.com/ and on episode 24 of this very show https://www.howtolendmoneytostrangers.show/episodes/episode-24
Oh, and I'll announce it properly, but I'll be recording an episode of this show at Money2020 Europe in June so if you're going to be there, too, let's meet up. And if you're not, but you would still like to participate in the show, reach out to me at https://www.howtolendmoneytostrangers.show/contact-us
Regards, Brendan
Regards,
Brendan
The full written transcript, with timestamps, is below:
Brendan Le Grange 0:00
Now, I'm going to start today's episode a little bit differently on a personal whim: in last week's episode, I was speaking to a company named after the honey badger, an animal that is always out there in the wild looking for honeycomb. So before we actually get into the meat of our discussion - what inspired the Honeycomb Credit name?
George Cook 0:20
So, without giving too much away about the business model, we have a community sourced capital model for small businesses.
In grad school, when one of my co founders and I were brainstorming on how to put a name to this concept, we kept coming back to bees and building a hive together. And so we were workshopping all sorts of bee themed names. And our classmates told us, well, bees are scary, don't pick a name that focuses too much on the bee, because they sting you.
So we went back to the drawing board, we said, okay, what are the what are the fun parts of the bee? What is the actual thing that they're building together, and so we landed on Honeycomb, the community coming together to build something collaboratively.
Brendan Le Grange 1:06
A honeybee colony needs tens of thousands of bees to work together, each with a definite task to perform, each both dependent on and integral to the work of the others. In some ways, the communities in which we live are similar. That little coffee shop on the corner, the independent bookstore, the craft brewery down the road, we are dependent on their goods and services. While our money is integral to the work they do.
Welcome to How to Lend Money to Strangers with Brendan le Grange.
George Cook, CEO and co founder of Honeycomb credit, welcome to the show.
George Cook 1:53
Thanks for having me, Brendan.
Brendan Le Grange 1:54
Before we talk about a Honeycomb, let's talk about the times we're in at the moment, interesting times in the labour market if you look at employment and what we've gone through with the dips and the peaks through the pandemic and the recovery, in a different timeline, there would be a George Cook at the Bureau of Labour Statistics with a little bit more grey hair, still working on these numbers. So what was your early career like?
George Cook 2:18
Yeah, so my family has been running a community bank in rural Appalachia for 130 years. I grew up in the family business, I spent a lot of time working there doing all the jobs, everything from from working the teller line, but really started to fall in love with with commercial lending.
Ultimately, in undergraduate, I studied economics and statistics. And for a brief moment decided I wanted to be an economist. So I pursued that dream, I went over to the Bureau of Labour Statistics as my first job. I was, as near as I can tell, the only economist in the entire US government who was studying labour data in China, which is a pretty big problem to tackle. And so I was getting calls from senators' offices and Congressman's offices and lots of media inquiries about the data we were putting together. Fascinating, really enjoyed that work and take a lot of that with me.
But pretty quickly into that process, I learned I was not made to be a bureaucrat.
Brendan Le Grange 3:15
You went from there to TransUnion, which we all know, and then from TransUnion to Zest AI, which I'm imagining, if they're in the AI world, is probably feeling fairly entrepreneurial. But still, you're an employee there. What was the spark that got you to decide, I'm actually going to take that big leap from a small company employee to actually starting my own business with Honeycomb?
George Cook 3:39
Yeah, it's interesting, I think, coming out of the federal government and going to TransUnion was really following my passion for data and being very analytical, but applying that to an industry that I was equally passionate about, having been in the community banking space.
For a while, I was always very interested in the underlying data behind it and how you build products around that data. That led me over to Zest AI who was working on the machine learning side of the house. So taking some of the huge datasets that TransUnion and others were putting together and bringing in alternative datasets and building some really powerful, exciting products to help banks make faster lending decisions.
These are the early days of machine learning, on the bleeding edge there, and fundamentally making consumer lending better. We were making faster, smarter lending decisions that benefited a lot of consumers. But I started to see this theme that the larger banks were taking these tools that we were building for consumer lending, and they were applying it to small business lending to commercial lending. And that really breaks down for a couple of reasons.
One, the average small business in the United States has less than three years of operating history. Two, there's no centralised database, there's no TransUnion for small business data. And thirdly, a coffee shop and a yoga studio and a manufacturing plant looks so much different on paper, it's really hard to build a good algorithm that can tell you which one to lend to, and which one not to.
And so as the financial services industry was shifting from community banking to regional and national lenders, and switching from this relationship banking model to this black box algorithm that I was helping to build, I realised that we were doing a really big disservice to small businesses.
And in fact that over that same time period, the amount of capital flowing from traditional banks to small businesses, was down by almost 50%. So even though more small businesses are being formed, traditional banks are lending less to them in terms of loan volume.
And that started to get me thinking about how I might join a startup or another company that was trying to solve this problem. I looked around a lot, and I didn't see anyone that was solving in a way that I thought was really equitable.
It's funny, I talk to a lot of entrepreneurs, people that need to be their own boss ,that feel really compelled to go out and start a company. That was not me, I was a very happy cog in the wheel. I enjoyed working in corporate America, I enjoyed working in a midsize startup. And really, it was just kind of an alignment of my passions, and a problem in the industry that I saw that no one was solving a really satisfactory way. And some good mentors that pushed me into to take that leap and jump into the entrepreneurial world.
Brendan Le Grange 6:30
Well, let's pick up from that then, because obviously, when you do speak to some of these entrepreneurs, you have this sort of glorious vision of what it would be like to be a founder who had this childhood dream of getting into entrepreneurship - even with them, when you talk about those early days of building a business, they'll talk about the crashing down to reality, of how difficult it is actually to get a business off the ground.
But as a slightly reluctant entrepreneur, a huge problem, enough to motivate you to take this big risk, but then, practically speaking, as you started to try and get Honeycomb off the ground in those early years, what was that founder experience like? What did you learn, trying to build a business and get it going?
George Cook 7:10
I don't know if I could have just jumped straight into the deep end, I dipped my toe in and did it in a very slow, methodical way.
I had the great fortune of meeting one of my co founders while we were in grad school. And I was coming from this big macro economic perspective, just very frustrated about the small business lending environment.
Meanwhile, Ken was coming from it as a small business owner. So while we were in grad school together, he was running a chain of coffee shops, trying to get an SBA loan, a Small Business Administration loan, for his coffee shops, and was having a really hard time doing it. Former investment banker, Ivy League MBA, really smart guy, who was having a hard time navigating this very Byzantine red tape burdened industry and getting himself a bank loan.
And so we put our heads together and started to think through what a solution might look like. And it really started as an academic exercise. We had a marketing class and one of the professors said, Well, you know, pick a startup idea that you might want to try and test out the market sizing concepts we learned in this class.
And so we did it.
And then we took a startup class, and we took a strategy class, and we started just build on it. And every class we took, we said, oh, the markets really big. Oh, the strategies seems to work really well. The partnership focus, you know, this is this is going to tie in really well to the existing ecosystem. And just starting to check a lot of boxes of these frameworks we were learning in business school together.
And by the end of business school, we were at this crossroads where we both had attractive job offers and in the financial services industry, or do we go and take the leap and start honeycomb. And we had a professor who pulled us aside and basically said, if you start Honeycomb, I will be the first cheque into the business.
That was the confidence building and the motivation to take that leap and start it. And from there, we went into an accelerator programme and built the product and got the myriad regulatory approvals, we had to get to get it up and running. And it's been a journey from there kind of a six and a half, seven year journey at this point.
Brendan Le Grange 9:19
You're the sixth generation of community bankers in your family. Honeycomb, the very name as you described at the start is all about community. But you've brought that forward to the modern day and what it means with current technology - so before we get into the nuts and bolts of the products as such, how do you create and nurture the sense of community within the product, within the philosophy?
George Cook 9:43
In a world where it's so easy to click three buttons on your mouse and have something delivered to your house through Amazon, how do we make sure that we're continuing to foster and build that community that is literally right out our front doors?
And so for us, it is helping business owners really activate this community of customers and fans and neighbours that they already have, and to level up those customers and turn them into evangelists for their business by getting them on board and then literally invested in the long term success of these businesses.
Brendan Le Grange 10:23
Let's talk about that, in practical terms, when you talk about helping the customers becoming participants in these businesses, what does that actual product look like? How is the lending happening?
George Cook 10:34
Yeah, so Honeycomb is a community sourced capital platform for small businesses who are looking to raise expansion capital, to take their business to the next level.
These are typically brick and mortar, Main Street, small businesses, independently owned small businesses - we have also worked with some ecommerce businesses as well, where their community might be more virtual, but still a very strong community.
And so the way the experience looks and feels for a user, is that a business owner comes to Honeycomb, they apply online, they are submitting financial information, not dissimilar to what they're submitting to a bank or traditional lender, we've got a pretty rigorous due diligence process and we're vetting each of these businesses, we're evaluating their past financials, we're evaluating their business plan.
And then, if they're approved, we will invite them on to the Honeycomb platform, we will work with them to build a campaign page to share their offering with the world. It's not totally dissimilar from a Kickstarter or an Indiegogo campaign page, but really, the whole idea here is that instead of donating $100 and hoping that the t shirt comes in the mail, you're investing $100 or $1,000, and earning really nice competitive return, while at the same time supporting a business owner that has some meaning to you.
Maybe it's a demographic group you want to support, maybe they're in your local community, maybe they're your favourite butcher, whatever it might be, but really allowing individuals to earn a return but to put their money to work in a way that is meaningful for them.
Brendan Le Grange 12:09
You mentioned the vetting, and I think what's key is in we think of Kickstarter, you know, it's got a chequered history, in terms of what products and services get put up there. And sometimes the story can become the only focus and how motivating is that story for me to get involved. But we don't always know whether there's actual screening happening in the background. And I saw some some comparisons between yourselves and, and other players in the sort of broader space. And one of the things mentioned was the sort of level of vetting that happens, perhaps, somewhat linked to your history in the credit world.
Talk to me a little bit about how you screen the providers to make sure that the loans that they're taking are what I guess fit for their purposes, but also to protect those that are putting the money in.
George Cook 12:59
What I realised when working in commercial lending at a small community bank, is that when the small business comes to that community bank, whether consciously or subconsciously, the lender, who is making the lending decision, knows that business, they know if they open their shop on time, they know if they've shovelled their sidewalk in the winter, they know if the bakery makes a good, bad get, right. And that information is working its way into the underwriting process.
Now, that's not to say that the financials aren't important, the financials are critically important. I just think too often in the world of lending, people say, let's just do qualitative lending, let's just evaluate if the, if the back end is good, or let's just look if the books are good. But the reality is to get a full, holistic picture of the risk of a business, I believe that you have to look at both of those things.
And I believe that in this consolidating banking industry that we have, it's really hard to get that qualitative data in a scalable way. It's hard to have boots on the ground and every corner of the country, it's hard to have this huge branch footprint that you're going to support.
So instead, Honeycomb secret sauce, well, not so secret, we're talking about it on a podcast, is this idea that if you can get local people who know the business the best to vote with their wallet, it creates this whole new element of bringing that qualitative data to bear, but only if they've passed certain quantitative thresholds.
And so specifically, we look very closely at past financial performance. We will occasionally work with startup businesses, but most of the businesses we work with have existing operating history they've been up and running for looking at their business plan and how the business is trending. We're making sure they've got a clear head on their shoulders and a path to repayment looking at debt service coverage ratios and total debt burden of these businesses.
We're also taking into account some variables that others aren't looking at. So we are looking at online social media engagement, for two different reasons.
One, we want to make sure we're bringing businesses to the platform that have a network that they can tap into, and are going to be successful. We want them to be successful, and they want to be successful, we want to make sure we have a good user experience. But we also have identified that that's a really powerful risk indicator, quality and volume of online reviews quality of customer engagement in digital spaces, it actually is helping to determine the risk of these businesses side by side with a more quantitative, before we open it up fully to the crowd to vote with their wallets.
Brendan Le Grange 15:43
If you think about the work you've done with Honeycomb, you know, the loan set, you've empowered the fans that you've helped move to businesses, what are some of the impacts you've seen? What are some of the good success stories that people can look to?
George Cook 15:56
Yeah, it's really interesting, because one of the discoveries we had is raising capital this way, raising capital from from local community members is not just unlocking loans to populations that might be having a hard time getting loans from from traditional sources.
But it turns out to be really catalytic for these businesses at the same time, because there's a pretty dramatic behaviour change, if you can tell your story in a really authentic way, and share with the world what it means to open that new location, or to buy that food truck or to get this new piece of equipment. So you can launch a second product line. And you can talk about what that means not just to the business, but to you personally, as an entrepreneur, to your family, and share that message with your fans and your customers. They're going to come along on that ride with you, right, and many of them will financially come along on that ride with you by literally investing in the campaign. But we also find that a lot of people just emotionally come along on that ride as well.
So, by the end of the campaign, we're finding that these businesses now have dozens, if not hundreds of people who are coming along on that ride with them. And that's turning into a real revenue for these businesses.
The average Honeycomb customer is growing at about 10 to 15%, a year before they come to Honeycomb. The year after they run a campaign, that growth rate is jumping to 60%!
So it really is activating the local community. But beyond that work, we're helping them build their digital presence. Online reviews are doubling year over year, Google News media mentions are going up 80% year over year. So they're really helping to build this digital footprint, they're really helping to tell their story in a way that resonates with the community, which is so important for these businesses to take that next step that's been this tremendous unlock for us that it's not just the fact that we're able to activate capital in places that that are often unable to get capital. But we're really able to help businesses get to that next level with the capital.
Brendan Le Grange 18:13
I've seen you on LinkedIn out and about, working in the breweries, working in the ocffee shops, seeing what your customers are up to, and really getting your hands dirty. They're what's the kind of philosophy there for you and your staff in terms of meeting their customers where they are.
George Cook 18:28
For us, it's so critically important to understand the customer and what their day to day looks like.
Because the people we're selling to, are often the same people that are in the kitchen flipping the hamburgers, right? These are owner operated businesses, they are busy. It's literally in the name right? That business is busy, right? They have a lot on their plate, literally and figuratively. And so for us, we have a philosophy to make sure that we're getting out and talking to our customers as much as humanly possible.
We call it NIHITO: nothing important happens in the office.
And once a quarter all of our employees have to get out and shadow a business owner for the day. Just follow a business owner around the last quarter I shadowed one of my favourite restaurants. And I showed up. And it turns out the host had called in sick. And the business owner said, well, today was supposed to be my back office day so, George, you're the host.
So I sat 200 tables I was going going going! And it's that's a day in the life right? When we're calling that business owner. They're literally sitting at a table because their host showed up sick.
We get so many really authentic learnings by getting out sitting standing, working side by side with business owners that hopefully help us create a better product to be really true to our mission, but also to make sure that we're building it in a way that resonates and can help these businesses grow and thrive.
Brendan Le Grange 19:58
One of the common criticisms, almost a cliche, of the banking setup in a traditional world would be that the restaurant owner who knows running a restaurant so well, who can do every job there is in his restaurant, when he has to go to the bank, he's then got to go and walk into a completely alien world where nobody understands what he's doing. And they just want to look at the financials, and it's quite intimidating, and highly stressed.
So by using the community by becoming part of the community, you break down those walls, and then people can talk a little bit more about what they need without this sort of fish out of water feeling that you would get if you go into a marble-floored bank, in the in the traditional world.
Obviously, though, you know, talk about these these increases in growth 10% or 60% growth. It's always great for a business owner to do that. But we're in pretty rocky economic times at the moment, so more than ever, businesses want to have all engines firing here to make sure that they can survive these tricky times.
If you think about Honeycomb, and the communities you're a part of, as you look forward for the rest of the year. What are you seeing your customers do? And what are you doing to help those customers through these volatile times,
George Cook 21:14
It's still, believe it or not hard to find labour, there's still labour shortages for a lot of of independent businesses, costs are continuing to go up. And at the same time, their customers are more jittery than they have been and are being more thoughtful about about saving and spending less money out. So it's a tough time for business owners.
From our perspective, there's a couple of things that we think about. One is how can we foster a community amongst our alumni businesses, so people that have raised money on the honeycomb platform, how can we get them to share best practices with each other, I am not going to be able to offer advice to restaurant tours on how to better market their restaurant, however, other restaurant tours might be able to do that. And so creating opportunities and content for business owners to talk amongst each other share best practices to vent a little bit.
But beyond that, from a macro perspective, at the first whiff of recession, the first lending that banks cut back on a small business lending. And we've already seen that happen, that banks are just not lending to businesses right now. What that means is you have a lot of super prime businesses, a lot of really, really credit worthy small businesses who might have a very long existing relationship with their traditional lender, but they can't rely on that relationship right now, they might be finding creative ways to grow through this downturn, but they don't have the capital to be able to do that. And so it's a challenging time for small businesses.
But at the same time there, there are winners out there, there are businesses that are finding ways to grow and evolve and keep taking taking steps forward through these challenging times. And the reality is they just don't have a lot of sources of capital to be able to make those pivots. So there's some interesting opportunities for Honeycomb to step up.
Brendan Le Grange 23:11
And I was just thinking about this as you were talking there, but it probably comes down to some extent about who are you important to. And as a small business looking for maybe $10,000, $50,000, $100,000 even, you're not that important to a big bank. So as a big bank looks to pull back, you know, they're not worried about whether they think you're $50,000 here or there. But you're really important to their community, you're part of the value for being there and providing the business. So also, when we think about your cost benefit discussions that are happening in the back of people's minds, you want to be talking to somebody who values you and your community is foremost there.
So yeah, it'd be really interesting to watch how that develops, obviously, for everybody involved a slightly tricky time, with the promise of better times ahead, but great to hear what's happening, and really just great to hear such impacts coming through from credit. You know, it's not always an industry with the cleanest of reputations and the best of impacts on its customers. So it's always nice to hear the sort of proper use of credit as a as a tool to build businesses, their their people appreciate to keep jobs and money in local economies more so than ever now, when times are tough.
So George, thank you so much for your time, if people want to become a part of these communities that people want to learn about Honeycomb, read some of the case studies, some of the content you put out there, where are the good places for them to go and follow your story and to learn more.
George Cook 24:33
You can check us out at www.honeycombcredit.com
Brendan Le Grange 24:36
Perfect, and I'll put that link in the show notes as well. George, once again, thank you so much for your time. Thanks for having me read it.
And thank you all for listening. Please do look for and follow the show on your favourite podcast platform and share the updates widely on LinkedIn where lending nerds are found in our largest concentration. Plus, send me a connection request while you're there.
This show is is written and recorded by myself Brendan le Grange in Brighton England and edited by Fina Charleson of FC Productions. Show music is by Iam_Wake, and you can find show notes and written transcripts at www.HowtoLendMoneytoStrangers.show
And I'll see you again next Thursday.