Backing the World’s First Small Business Bond Marketplace
While Wall Street soars to new heights, e-commerce sales hit records, and large corporations consolidate their market power, small businesses are suffering the worst rout in a generation. Tens of thousands of small and medium-sized businesses (SMBs) have permanently closed since March, while many of those still operating have suffered a precipitous decline in business. The carnage faced by small businesses is a major concern for our economy, as SMBs employ 60M people, representing 47% of the private sector workforce in the US. And the importance of minority-owned SMBs cannot be overstated, as they accounted for over half of the 2M new businesses started in the US over the past decade and created 4.7M jobs during that time. Our economy relies upon a healthy small business sector in order to thrive, and given that the outlook isn’t so great at the moment, we need more and better solutions to support SMBs.
The urgency of the challenges facing small businesses during COVID is part of the reason why we decided to back SMBX, the world’s first bond marketplace specifically designed for SMBs (more on the seed round that we led here). SMBX is a Regulation Crowdfunding (“Reg CF”) platform that enables accredited and non-accredited investors alike to back their favorite local businesses by purchasing their bonds in increments as little as $10. SMBX offers small businesses a radical new way of raising capital by tapping into their customers and the local community as a source of financing. The capital also tends to be less expensive and is provided faster with much less bureaucracy compared to other financing sources including Small Business Administration (SBA) loans made through large banks and online lenders.
What really resonated with us during diligence was how motivated many small business owners are to tap into their local community as a source of financing and bypass big banks. On the one hand, is their desire to avoid working with “impersonal” big national banks and “not knowing where [their] interest payments are going.” On the other hand, is the opportunity to pay interest back to the local community and turn their customers into borrowers. Customers-turned-investors is a compelling concept that has the potential to kickstart a virtuous flywheel for businesses that boosts their sales while creating more financing sources. Imagine a customer going around town telling all of her friends about the bonds she purchased of her favorite local business. Many of her friends will likely in turn be interested in both purchasing bonds as well as frequenting the businesses. It’s virality at work, and it’s how we think SMBX will succeed in the challenging task of building a two-sided marketplace. The success of crowdfunding platforms such as GoFundMe (grants) and AngelList (equity) bodes well for SMBX, which we believe will have an even broader appeal given the attractiveness of predictable fixed income returns.
It’s still early days for SMBX but, in addition to getting through the gauntlet of FINRA registration under the Reg CF provision of the JOBS Act, they’ve demonstrated their ability to successfully attract SMB bond offerings and fill them in a timely manner. To date, they’ve filled five bond offerings, and two new bond offerings are currently open — The Cookie Department in Portland, OR, and Uji Time in Berkeley (if you like cookies or ice cream, you can invest with as little as $10 here!). These offerings were priced in the range of 7.5% — 10% (on par with SBA but much lower than typical online lending rates), have durations of 3–5+ years and passed SMBX’s rigorous credit screening process. More offerings are in the pipeline now.
SMBX is led by Ben Lozano, the son of a Mexican immigrant who grew up around small businesses and later went on to get his Ph.D. in Finance from UC Santa Cruz. I like to think of Ben as “Wall Street meets Santa Cruz,” as he is an excellent blend of traditional financial knowledge with radical thinking about how to build an alternative approach to SMB financing. SMBX has been a dream of his since the financial crisis of 2008 and the subsequent credit freeze that disproportionately impacted small businesses. Ben is supported by Jackie Chan as COO who brings a wealth of traditional banking and financial services experience from stints at Nomura, Morgan Stanley, and Merrill Lynch. Bhavish Balhotra serves as CTO and has been a software application developer at two prior financial services companies, and Ben Stein heads up business development and brings his experience from four years at Square selling into small businesses.
Ben and the team’s exciting vision for the future of SMBX includes enabling retail investors to purchase customized and diversified portfolios of local business bonds. Say you’re a Millennial investor who wants to buy a basket of bonds issued by Black-owned businesses in Oakland, or women-owned SMBs in Portland, or mission-driven companies in Detroit. Over time, SMBX will enable investors to purchase customized portfolios such as these, which align with their interests and values while earning risk-adjusted fixed income returns. The company plans to partner with large investment platforms such as Betterment, Wealthfront, and Robinhood to launch these portfolios in the future. The growing demand for ESG investment options, particularly among Millennials, bodes well for this strategy. SMBX also plans to launch a secondary market soon for buying and selling existing SMB bond offerings, which will enable price discovery and investor liquidity, both hallmarks of a well functioning bond marketplace.
Amidst the carnage in the SMB market, we find hope in a company like SMBX, which is part of what drew us to making this investment. They of course can’t single-handedly solve all of the challenges that SMBs face, and they face the arduous task of deciding which businesses are healthy enough to back at a time when they’re seeing record numbers of applicants for the platform. But if history is a guide, we know that credit for SMBs will be scarce for some time, and SMBX is well-positioned to fill this void for top quality SMBs.
We’re excited to be part of this journey, along with the seed round co-investors Unpopular Ventures and Impact America Fund, to build and scale the world’s first small business bond marketplace.
