In simple terms, investment is all about taking a leap of faith in something in hopes of a good return on your money. We are accustomed to investing in anything from governments to corporations, or from financial instruments to derivatives of those instruments. However, there is one thing that has been widely ignored in the world of investing: people. Although ‘investing in people’ has been a fairly sexy topic in human development or management science literature, we haven’t really been able to wrap our minds around the notion of investing monetarily in people. Well, looks like that’s bound to change very soon thanks to a few startups that want to shake this perception, starting with those who need it the most: students.
Upstart, which was launched in October 2012 by Dave Girouard, ex-President of Google Enterprise and VP of Apps, and has raised $ 6 million from venture funds and Silicon Valley types soon thereafter, helps youngsters (‘Upstarts’) find accredited investors willing to give them loans in return for a share of their future earnings. By June 2013, more than 50 people had already raised $1.4m on Upstart. Technically, it is a rather straight-forward loan, where the ‘Backer’ is looking at annual 5-8% return and the maximum an ‘Upstart’ can share is 7% of their estimated annual income over 10 years.
And Upstart is not the only player in the field. Pave, another American start-up, also has a similar platform. German firm CareerConcept helps students raise funding for their studies and Lumni, with a focus on low-income students in countries such as Mexico, Chile, Peru, Colombia and now the US, has already allowed more than 3,000 youngsters to raise hard cash from individuals and institutions.
It should be noted that such ‘income share agreements’ were not unheard of until very recently. Such a system in which individuals would sell ‘stock’ in themselves to investors who would finance their education and training was first introduced in 1954 by Milton Friedman, Nobel-winning American economist and statistician who taught at the University of Chicago for more than 30 years. And there have been a few outlier individual examples here and there like Kjerstin Erickson, a 29-year old Stanford graduate and founder of a non-profit in Sub-Saharan Africa called FORGE, who was offering 6% of her life’s income for $600k. Yet, one could argue that the fact that notion of income share agreement may seem too unorthodox or even creepy to many, in addition to the lack of institutions that would facilitate such transactions has undermined its recognition and adoption by the investment community. But good news is that change is near. What’s more, it’s not only Upstart and the alike that are trying to fill this gap. Last year, income share agreements made it to the US headlines when state of Oregon introduced legislation that could broaden their use primarily for student funding by formally defining their terms. The approved bill will create a program in which all students enrolled in state colleges would pay a certain percentage of their income for about 10-20 years rather than paying tuition. Such legislations would undoubtedly help make income share agreements mainstream in the near future.
So what does this mean for the curious Youngsday reader? It does depend on whether you are a prospect investor or a young professional trying to pay back your student loans, invest further in your professional development or start your own business. In any case, there is probably something in it for you!
For backers, it is mainly a new, promising option. Upstart and the alike offer a new legitimate investment alternative with favorable rates of return. Platforms go through an arduous screening process of prospect candidates and use sophisticated algorithms that take into account their background, career plans and business ideas if any to project their potential earnings, and segment the Upstarts based on loan grades (ranging from AAA – lowest risk / return – to D – highest risk / return -). From there, you can browse through Upstart profiles and decide which to invest in, or let their ‘Auto-Invest’ feature take care of it for you.
For upstarts, it gives them a breathing room while they try to get their businesses off the ground post-college, or before settling for the first job offer in hand before their college loan repayments kick in, not to mention the inherently flexible repayment terms and the free Kickstarter like exposure for the entrepreneur types. They only repay their backers when they begin earn more than a certain amount – $20k/year for Upstart -. What’s more, and most platforms also cap total payback – five times the amount raised on Upstart -. So if you end up becoming the next Mark Zuckerberg, you won’t have to pay billions back to your backers.
Most importantly, it brings back the human element to investing, in its more natural form. Seldom, we invest in intangible things or entities which we can’t interact with and have close to zero influence on their success. But this can change when you truly invest in people. As a backer, you can build a personal relationship with your upstarts and can even mentor them or help them with their business ideas. As an upstart, you can expand your network or even meet your next employer. Your bank or the stock exchange can’t get you that!
 The idea shows up as a footnote in Milton Friedman and Simon Kuznets, Income from Independent Professional Practice (Cambridge, MA: National Bureau of Economic Research, 1945). Friedman later explored it more fully in “The Role of Government in Education,” later reprinted in Friedman, Capitalism and Freedom (Chicago: University of Chicago Press, 1962).