After about two years of pandemic-related delays and disappointment, San Francisco-based adult ice cream company Humphry Slocombe finally opened its first location — and fifth overall — on the Peninsula this week.
“Honestly, it was a relief,” CEO Jina Osumi said of the proverbial ribbon cutting. “Early sales show it’s going to be a great store, and the neighborhood has welcomed us with open arms.”
What went surprisingly smoothly was getting financing for the new store, which is typically a stumbling block for small businesses reeling from the pandemic.
Instead of relying on a typical bank loan, Humphry Slocombe was able to raise $250,000 from 180 individual investors by offering “small business bonds,” a new financial product created by SMBX, a 35-person San Francisco startup.
In 2020, when Humphry Slocombe was looking to raise money for a new Redwood City location, they were mostly turned down by banks. The lenders who called them back offered money, but at exorbitant interest rates.
“Instead of a bank, I would rather borrow from those who believe in our business and are enthusiastic supporters of our business,” Osumi said. An added bonus was that there was no need for a personal guarantee, a fiscal trap that can trap optimistic entrepreneurs in personal bankruptcy or house foreclosure.
In 2012, the enactment of the JOBS Act opened the possibility for private companies to issue public securities. SMBX was formed to provide access to capital without forcing entrepreneurs to give up capital. Since launching in February 2020, approximately 70 companies listed on the SMBX platform have raised more than $6 million to help support and scale their ventures.
“Our vision was really to build a new public marketplace for small and medium-sized businesses,” said Ben Lozano, CEO and founder of SMBX.
Lozano, who has spent more than 15 years in academia and describes himself as a “recovering finance professor,” saw the difficulties SMEs faced in accessing capital as the son of a CPA in Southern California.
“Historically small businesses that wanted to borrow for financing had only one option, while large corporations like Coca-Cola can issue bonds on the public market.
Basically, a bond is a type of credit financing that takes the form of a loan from an investor to an organization—in SMBX’s case, a small business—that is repaid over a period of time with interest. In the case of Humphry Slocombe, the company sold $250,000 worth of bonds at 8% interest with a five-year maturity.
Here’s how it works: Interested companies work with SMBX who analyze their financial history and develop a risk profile. Then the startup does additional checks to make sure that “in all likelihood, barring a disaster, they will be able to service the debt,” Lozano said.
From there, the “bond” deals are available to anyone with a credit card or bank account to make purchases. Investors have the option of investing as little as $10 in a business, although most opt for much more: typical investors are business buyers, locally oriented people looking for a way to support their communities, or seasoned small business investors. Once the offering closes, a repayment plan begins, whereby investors are guaranteed a certain return over the life of the bond.
SMBX takes a seeding fee equivalent to approximately 4% of the total bid. The startup has raised $15 million from investors including Group 11, Better Ventures and Impact America Fund.
To date, SMBX has not experienced a single bond default, although Lozano acknowledged that it is only a matter of time. For now, the company is trying to eliminate that possibility by carefully checking the businesses listed on the platform.
As for Humphry Slocombe? They stay busy buying flavors like Vietnamese Iced Coffee and Secret Breakfast (Bourbon+Corn Flakes) for Bay Area customers. But if they ever needed to dip back into the well for more capital, SMBX would be at the top of the list.
“I’m not sure if any loan could be considered fun, but if a loan could be fun, it would be this one,” Osumi said. “You get the same funds at the same rate, but the money is coming from real people who are getting their money back, instead of going into the bank’s black hole.”
Kevin Truong can be reached at [email protected].
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