New Crowdfunding Twist: Invest in a College Grad
Christina DesMarais, Aug 9, 2012
Is it crazy or brilliant? An ex-Googler aims to help graduates follow their entrepreneurial dreams–in exchange for some of their future income.
Flickr/ Yovany Alas
Many VCs and angels like to say they invest in people, not ideas. After all, ideas can change–and fail–but a smart entrepreneur is presumably more dynamic and valuable. Well, a new start-up called Upstart is putting that idea to the test.
It’s a funding platform through which accredited investors can back promising college graduates and help them make their way in the world-whatever that way turns out to be. Founder Dave Girouard, who left his post as Google’s head of enterprise to build Upstart, says that too many talented college graduates take unexciting jobs to pay off debt instead of following their dreams. “My career was heavily influenced for the first six or seven years by student debt,” he told CIO Journal. It wasn’t until his loans were mostly paid that he took a big salary cut and went to Apple, he said. Upstart is his answer to the problem. How It Works Instead of funding good ideas, Upstart investors provide mentoring and capital in $1,000 increments to recent college grads who look as if they will succeed someday. Using an algorithm that takes into account salary statistics, grades, and other factors, the company claims it can predict the future earning potential of these upstarts. In exchange for funding–which recipients can use to pay student loans, focus on a craft, build a start-up, or even write a book–these grads agree to hand over a portion of their future income for at least the next decade. To get the money, a recipient posts a profile on the Upstart site, where the platform calculates the person’s expected income for the next 10 years. He or she can then ask for funding up to a maximum of 7% of that future income.
The amount the upstarts pay out to their investors depends on their income tax filings and is capped at how much they received plus an annual rate of return of 14.9%. In years during which the recipient makes less than $30,000, he or she won’t have to make payments, although that scenario adds an extra year to the contract–up to a maximum of 15 years total. Although recipients can buy out their contracts early, a person without the ability to do this–say, someone with only mediocre business success–could be signing up for 15 years of entanglement with Upstart. It’s a Crazy Concept The Upstart concept sounds a little nuts on several levels. First, predicting a person’s success is a gamble, and I don’t care what kinds of algorithms are involved. Start-ups–even those built on solid ideas–fail all the time for a plethora of reasons. And given the high rate of start-up failure, why would these young people want to saddle themselves with a decade or more of debt? Normally when a start-up fails, entrepreneurs can simply try again. If an Upstart recipient flounders, he or she still has to cough up a percentage of any income over $30,000 for at least a decade. That’s quite a commitment, and one that could hinder involvement in any other ventures that might present themselves. But Better Than a Bank Loan On the other hand, because Upstart takes only a percentage of income when recipients are making money, the concept beats traditional loans, which demand payment regardless of your circumstances.
In addition, the mentoring investors bring to the table gives these young folks a huge advantage over anyone trying to go it alone. As accredited investors, they must have either a net worth that exceeds $1 million or income that has exceeded $200,000 for the past two years to participate. And speaking of business know-how, Girouard himself has some. He developed Google Apps and turned it into a $1 billion a year business. Not everybody thinks Upstart is a crazy idea. Girouard created the platform with funding from Kleiner Perkins, Crunchfund, NEA Ventures, and Dallas Mavericks owner Mark Cuban. As for how Upstart plans to profit, the platform takes a 3% cut of the funding amount and a 1.5% cut of the amount paid back to investors. For now, Upstart is in a limited pilot and is working with 2010 to 2013 graduates of any discipline–not just tech stars–from a handful of institutions, including Arizona State University, Dartmouth College, Rhode Island School of Design, the University of Michigan, and the University of Washington. Upstart investors have backed seven recent college grads who have received anywhere from $10,000 to $50,000 each. Check out their profiles at Upstart.