This past July, HBS ‘11 graduate Rachel Kim exchanged a fraction of her future income to a group of investors for $100,000 today. The money paid off Rachel’s student debt and helped fund her startup, Nailed Kit, while earning her a group of mentors committed to helping her navigate the next 10 years of her career.
Rachel raised these funds using Upstart, a crowdfunding platform that allows investors to buy equity in the predicted income of promising graduates looking to raise money. These young adults, called “upstarts,” typically use the funds to invest in themselves– whether it be paying for business school, enrolling in coding bootcamps, funding their startup, or even taking lower-paying jobs that afford greater growth opportunities. In return, investors earn a targeted 8% annual return, based on an income prediction model Upstart uses to determine how much money each upstart can raise for every 1% of future income they share over the next five or 10 years.
Upstart was founded one year ago by Dave Girouard, former president of Google’s enterprise division. Girouard’s goal was to give young adults access to the social and financial capital needed to hotreplicaonline pursue their career goals, on terms that would be inherently affordable. Over the next year, Dave brought on two co-founders, built a fourteen-person team, and raised venture capital from Founder’s Fund, Google Ventures, Khosla Ventures, Kleiner Perkins, and Eric Schmidt. So far, Upstart has funded sixty-six upstarts with over $1.5M.
The idea of investing in people rather than companies isn’t new. Over fifty years ago, Milton Friedman proposed human capital contracts as a way to finance higher education. Since then, much progress has been made that makes investing in human capital more feasible: 1) the growing popularity of crowdfunding and alternative financial investments (notably Lending Club, Prosper, and SoFi), 2) the availability of data needed to price of human capital contracts, and 3) shorter average career tenures in modern society that makes individuals themselves the only reliable constant in their professional future.
Creating a crowdfunding marketplace is inherently challenging–especially when the product is a person’s future potential. The biggest challenge involves convincing young adults that securing cash upfront has significant upsides for their futures. Talented graduates see their future incomes as relatively secure, obviating the need for additional funds. But they overlook the opportunity costs incurred by lack of discretionary funds during what is arguably the most formative years of their career. Having more money earlier in life allows one to attend professional school, trade money for time and use that time to learn a new skill like coding, or travel to expand one’s perspective and sense of possibility. These and other similar activities constitute foundational investments in oneself that, made early in life, are likely to yield compounding returns for the rest of one’s life.
So why raise money via an equity-like instrument, rather than taking out a traditional loan? With loans, the borrower always knows what his payments will be–but won’t know whether he can afford those payments. On the other hand, while an upstart cannot predict how much his payments will be, he knows those payments will always be affordable because they compose only a small fraction of his income. This inherent affordability gives upstarts the freedom to act in the interest of their future self without the constraints of fixed payment loans. Rather than optimize for short-term income, upstarts can work towards their long-term personal and professional growth. They can take greater career risk, optimize for learning rather than immediate income, and free up time to pursue meaningful, high-impact projects. Moreover, Upstart allows young adults to build a personal board of directors committed to helping them navigate their career by offering mentorship, connections, and job opportunities.
Diversification is another significant benefit of raising money on Upstart. Most people diversify their investments among various asset classes, but oddly they remain overexposed to their own personal income, reducing their financial stability. Upstart allows individuals to reduce this overexposure by borrowing from their future selves and investing those funds into other assets, perhaps even in other people! In this way, upstarts can hedge against career risks such as job switches, unsuccessful startups, disability, and other unpredictable events.
Sharing one’s future income might sound like a scary proposition, but for many the benefits outweigh the alternative of traditional loans or the alternative of not raising money at all. Raising funds with equity reduces financial risk, attracts mentors who are incentivized to provide advice and connections, and creates the career flexibility that allows people to truly set their own course in life. Human capital is the biggest asset class in the world; isn’t it about time that we start investing in it?