New approach helps foundations provide crowdfunding loans to creative economy businesses

Although not an artist herself, Kristina Hale had a lifelong fascination with the arts. She was also an inveterate puzzle. But about eight years ago, she began to reflect on what she saw as a lack of black representation in the puzzle industry. Then she came across the work of a painter who she thought would make a great puzzle.

With that, she came up with an idea: puzzles that featured works by artists of color. Six years ago, she started making small batches of puzzles. Then, in 2018, she formed Dope Pieces Puzzle Company, an Atlanta company, to sell its products. Orders really took off after interest in black-owned businesses surged following the murder of George Floyd.

But it was always difficult to keep up with demand and expand to other places. Then Hale learned Honeycomb Credit, a lending crowdfunding platform, which had a new initiative that tied foundation investing to campaigns. She ended up raising about $30,000 from 44 investors, including $10,000 from Souls Grown Deep Foundation and Community Partnership. “I was able to buy puzzles, hire another staff member, and switch brands,” says Hale. “It was a very important investment.”

Loan Participation Fund

Hale is one of the first entrepreneurs to benefit from a new initiative called the Loan Participation Fund. Launched by Upstart Co-Lab, an impact investing nonprofit focused on the creative economy, and Honeycomb, it offers institutional investors a way to participate in crowdfunding campaigns. “When companies raise their minimum goal, it unlocks $10,000 from a participating foundation,” says Laura Callanan, founding partner of Upstart.

Three foundations, all part of Upstart’s impact investing community, have pledged to invest $600,000. Souls Grown Deep and the AL Mailman Family Foundation will invest in black-owned businesses in nine southern states. The Jessie Ball duPont Fund will focus on entrepreneurs in seven northeast Florida counties, with an emphasis on low-income communities, women, or people of color.

Most of the companies that have raised capital through the Honeycomb platform since 2018 are creative economy businesses such as cafes, breweries and fashion brands that also play an important role in local economies. Additionally, 46% belonged to low-to-moderate income communities, 49% belonged to women, and 24% belonged to BIPOC.

Non-profit FJC provides operational support to foundations and acts as a fund intermediary.

A loan crowdfunding platform

George Cook, CEO and co-founder of Honeycomb, whose family ran a small community bank in rural Appalachia for 130 years, worked for many years as a consultant to financial services companies. During that time, he saw the big banks gobble up more and more little guys and he worried that this would limit the amount of capital available for small business loans.

Then, in 2017, he and small juice company owner Ken Martin discussed ways to bring more community-driven capital back into the independent small business equation. Eventually, they had an idea: to create a crowdfunding platform for loans allowing participants to invest in community businesses. “As the business grows and repays the loan, investors know their money is going to work in their own community,” says Cook. “And as businesses thrive in their own community, investors can benefit.”

They issued their first loan in 2018. To date, they have worked with over 200 companies. By leveraging not only Honeycomb’s analytical capability, but also Cook’s deep understanding of small business risk, the platform is able to raise funds for businesses unable to secure loans from banks. Half of the businesses on Honeycomb have been turned down for an SBA loan or by a CDFI.

Level the playing field

Callanan partnered with Cook in 2020, when she learned that 80% of businesses on the Honeycomb platform were creative economy businesses. Cook, as it happens, had previously explored ways to encourage institutional investors, especially local foundations, to help provide loans to businesses on the platform, especially those in underserved communities struggling to achieve their ambitious goals on the platform. “We were looking for a way to level the playing field,” he says.

For her part, Callanan understood that while many foundations understand the impact small businesses can have on communities, they face many logistical challenges in controlling these businesses and managing relationships. Putting their heads together, Callanan and Cook hatched a plan. Each foundation would write a check, deposit it into an account, and specify the types of businesses they wanted to target. Then Honeycomb, which would receive a 6% to 8% closing fee on each loan, would find and review these businesses and help engage their communities.

Each participating foundation begins with a commitment of at least $250,000, granting loans of $10,000 to up to 25 companies. To get this money, each campaign must meet a minimum goal. This is done through the usual crowdfunding strategy, reaching out to customers and other members of their community, but with the help and guidance of Honeycomb. “The foundation money isn’t really going to work in the business until the crowd gives a thumbs up,” Callanan says. The first investment, from Souls Grown Deep, took place earlier this year. A total of five companies have received investments.

Net of administrative fees, foundations are likely to earn returns of 8% to 9%, according to Callanan. “We believe in the impact of companies having access to capital, but foundations want to know they’re making a good investment at the same time,” she says.