Getting through college is tough and even more so in a recession. The Consumer Financial Protection Board (CFPB) estimates that Americans are currently carrying $165 billion worth of private student loans and nearly a total of $1.2 trillion worth of student debt.
I recently spoke with Dave Girouard, former president of Google Enterprise and now the founder and CEO of Upstart, a crowdfunding service that helps people who are just starting their careers raise capital from backers in exchange for a small share of their future income.
Upstart provides a way for students not to default on their loans and retire their debts in a timely manner, to invest further on their education, or even to raise seed capital for their startup venture. It creates yet another way for crowdfunding to fill in the gap by getting investors to back not just brilliant business ideas but also the people who could be creating those ideas in the future.
David Drake: Upstart’s concept is selling your future salary income for cash today. Your firm sets the term of five to ten years from the date that earnings commence, with a minimum $30,000 per year threshold, or the timetable can be extended. You also only allow entrepreneurs or individuals to offer up to seven percent of their future earnings in total, with an average ask of $25,000 and an average received of $17,000. These fund raises take 30-90 days, and Upstart manages the collection and investor relations for the investors and the lenders. Is that all correct?
Dave Girouard: It’s not technically “selling” anything. Upstart is about raising capital (or borrowing) with repayment defined as a fixed and small fraction of income earned, instead of a fixed interest rate. Upstarts can choose either a five-year or 10-year agreement and can share as much as seven percent of their income (they can raise approximately twice as much for the 10-year as the 5-year contract). The average upstart aims to raise about $30,000, and nets about $25,000. They have 60 days to fund. And we manage all distribution of funds, collection and redistribution of repayments etc. Our investors are referred to as “backers.”
Drake: Technically you are crowdfunding future earnings, for which you do not need to register as a security under SEC regulation. Tell us how you see this working.
Girouard: We are a private offering under SEC rules, only available to accredited investors as of today.
Drake: In your first year last April, you had 83 “upstarts” backed by 135 “backers” with 555 offers, and a total value of $1,030,740. Who are these backers? Do they have to be accredited or can anyone offer to put money in?
Girouard: As of now, we have 130 upstarts, 200 backers, and 1,000 offers made for about $1.8 million. Backers are a varied lot: successful entrepreneurs, venture capitalists, other types of investors. You do need to be an accredited investor today. We hope to change this over the next few months by registering the security with the SEC, similar to what Lending Club and Prosper did in 2008.
Drake: You’ve raised $7.65 million in funding to date, and previously spent eight years at Google. Where do you want the scale to be 18 months from now? Is it domestic mainly or will it be global?
Girouard: I expect to focus on the U.S. for the next couple of years. Each country has entirely different regulations in this area, so I’d rather get it right in one big market before spreading to others. We’d like to have several thousand upstarts funded within a couple of years.
Drake: Who should be looking to raise money against their future earnings on your site?
Girouard: We’re focused today on people early in their careers who need capital to invest in themselves and their careers. This can include eradicating student debt, starting a business, or investing in their skills in opportunities such as learn-to-code programs that are becoming really popular. We see a huge part of our population that has little or no access to capital on reasonable terms, but who could benefit enormously from a bit of economic freedom.
Drake: Who are the ideal investors that should get the most out of this program?
Girouard: Upstart isn’t about donations or philanthropy, but we are mission-driven. Ideal investors are those who are compelled by a novel new financial instrument, are interested in generating a compelling return, but also want to participate in a network designed to help young people succeed and do compelling things with their careers.
Drake: How do you scale this business, as you clearly have to underwrite all the individuals applying, and what are the challenges to growth for your firm?
Girouard: We’re quickly automating many aspects of the underwriting: the identify proof, credit verification, verifying academic credentials, and more. We are confident we can scale that part of our business very quickly. The biggest challenge in a two-sided market like Upstart is to balance supply and demand, to make sure the marketplace works well for all participants. In our short life, we’ve already experienced times when there are too many backers and not enough upstarts, and vice versa.
Drake: How do you differentiate your service from other crowdfunding platforms out there?
Girouard: Upstart is 180 degrees different than other crowdfunding sites because it has real economics underpinning it. On the upstart side, the idea of borrowing from your future self is liberating and has far-reaching potential to unlock value in the economy. On the investor side, the opportunity to invest in the wages and income of a diverse group of people has been discussed for decades, has a risk/return profile that is really compelling, and provides a way to hedge against your own future earnings. The idea of human capital contracts (the economist’s term for what we do) goes back to Milton Friedman, and has potential to create an entirely new asset class for the next 100 years.