On paper, Nathan Sharp, 27, had all the makings of a budding entrepreneur. The Kentucky native studied economics at Harvard and went on to graduate from the Tuck School of Business at Dartmouth.
But like so many of today's college graduates, Sharp's student loan bill was enough to make him question the risk of striking out on his own.
“In business school, there were a ton of people in my class interested in [launching our own businesses], but very few of us took the plunge,” he says. “The more I talked to people, the more I realized it was because of student loan debt.”
The average college graduate is saddled with $27,000 worth of student loan debt when they finish school. Even with a solid business plan in place, that kind of debt can be a major barrier to would-be entrepreneurs, forcing them to give up, turn to small business loans or at least delay their plans.
But what if a wealthy investor promised to finance their venture in exchange for a slice of their future earnings?
That’s the basic concept behind Upstart, a website that connects brilliant but broke college graduates to investors who can help get their business plans off the ground. To be an Upstart, applicants must promise between 1% and 7% of their future earnings to their investors (called “backers”). During years when they are in school or earning less than $30,000, they don’t owe anything at all.
Upstart is just the tip of the iceberg in the growing trend of human capital investing. In July, Oregon lawmakers passed legislation that would give students a free ride to state schools, with the promise that they’d pay a percentage of their income after graduation. Meanwhile, sports marketing and management firm Fantex made headlines last month when it started signing professional football players in exchange for a stake in their future earnings.
The tie to future pay has led some to liken human capital investing to a modern day version of indentured servitude. But if businesses like Upstart can succeed, they have a shot at proving otherwise.
We explain how it works and look at how four budding entrepreneurs are using the site to help launch their ventures to varying degrees of success.
Investing in people
Since launching in November 2012, more than 250 backers have made a collective $2 million investment in Upstart projects through 1,200 unique offers. More than 70% of Upstart applicants have been fully funded, according to a company spokesperson. (Upstart investors must either earn at least $200,000 a year or have a net worth of $1 million.)
People seeking funding for a business idea must go through a rigorous application process meant not only to suss out their business plan but also get an idea of their future earning potential. To accomplish that, Upstart uses a unique algorithm called a “pricing engine” that factors in the applicant’s education history, area of study, SAT/ACT scores, work experience, outstanding job offers and any other information that might give clues about their earning power.
Once their application is accepted, would-be entrepreneurs build a fundraising page with their business proposal and credentials laid out, just like an artist might raise funds on Kickstarter.
Then the site’s cache of backers have their pick of the litter. Investments start at $100, and backers can fund however much they'd like. On the flip side, Upstarts can also deny investments from backers if they choose.
An Upstart has to reach at least $10,000 in funding before they can access the funds. If they reach that benchmark, the money is theirs and they can use it for whatever they want, from student loans to renting office space for their new business.
What sets Upstart apart from sites like Kickstarter and GoFundMe is that successful fundraisers are required to pay a percentage of their future earnings back to their investors for a period of either five or 10 years. Once Upstart determines the applicant’s earning potential, it assigns a payback rate of between 1% and 7% of their future earnings.
A fair price to pay
A slice of one’s salary is a reasonable price to pay, says Rachel Kim, 30, who raised $100,000 on Upstart to launch her own cosmetics company this year. About 6% of her future earnings will be split among some 37 different backers.
“I think it’s extremely fair to give away 6% to people who believed in me when I had nothing,” she says. “I wanted a runway to see how far I can take my business … and the fact that I can protect my downside is really valuable to me. It’s not like a fixed cost I have every month, like student loans.”
Kim graduated from Harvard Business School in 2011, and like many of her classmates was bursting with ideas for her own start-up, but shackled to a massive student loan bill.
“I had about $60,000 worth of student loans and I wasn’t quite sure I was ready [to launch my business],” she says. So she took a couple of well-paying jobs, and eventually wound up running marketing for a sports blog. She managed fine financially, but when the site was sold to Turner Broadcasting Company, she started flirting with the idea of branching out again.
She was eager to capitalize on the fast-growing nail art trend, coming up with her own DIY nail kits. It took a few months to hit her fundraising goal of $100,000, half of which she put toward her student debt and half toward launching Nailed Kit . She officially launched in September, selling kits for $14 each, and is already signing wholesale agreements to start distribution in Europe.
Student debt in the way
Like Kim, the only thing stopping Sharp from putting his Dartmouth MBA to use was his six-figure student debt.
He happened to be in the audience when Upstart founder Dave Girouard visited his alma mater to judge an entrepreneur competition in 2012. At the time, Upstart was little more than an idea, but Sharp was sold. “I talked to David after the presentation and told him I wanted to stay in touch,” says Sharp, who was one of Upstart’s seven pilot applicants.
At the time, he had an idea to launch an e-commerce site that would let people set their own prices for any product they found online and give merchants a chance to deliver on the offer.
He called the company Nifti and set a fundraising goal of $50,000 — enough to pay his rent, create a website prototype and bring on a few people to help.
He reached his goal within a month with support from roughly 15 backers, five of whom became mentors. “Most of the time, if you’re a first-time entrepreneur, you have to raise money from the first person who writes you a check and that can be a huge mistake,” Sharp says. “What Upstart allowed me to do was to take my time and make sure we were raising money from the right people.”
Sharp launched Nifti in July and used his connections from Upstart to secure $800,000 in additional seed funding from venture capital firms and angel investors.
“I still have about $50,000 in loans left to pay off, but I am able to stay on top of of my loan payments and pay myself just enough to cover living expenses,” he says. “We’re set for a while.”
A way to a higher degree
Michelle Onuorah, 22, graduated magna cum laude from the Biola University, in La Mirada, Calif., in 2012 with a degree in film and more student loan debt than she’d care to admit.
She’s currently on day 40 of a 60-day fundraising effort on Upstart to raise funds to pursue a Master’s in Fine Art, pay down some of her debt, and get her own publishing platform off the ground. (All applicants have 60 days to reach their fundraising goal.)
“I’d be thrilled if I could raise $25,000,” says Onuorah, who has raised about $7,000 from three backers so far. The real challenge, she says, has been stopping herself from individually contacting potential backers, a major no-no at Upstart.
“I like to take challenges by the horns and do my own thing, but when I first signed up, the staff at Upstart really encouraged us not to spam the backers,” she says. “There are days when I feel hopeful and there are days when I just want to look up every investor and tell them to look at my profile.”
Whether or not Upstart works out, she’s saving up to apply for graduate programs anyway — the old-fashioned way.
“I’m working part-time in retail during the holiday season to pay for grad school application fees,” she says. “There’s not much more I can do in terms of the [Upstart] process.”
Trina Spear, 30, has no problem shaving 1% off the top of her earnings from FIGS, the medical apparel company she launched this year with a $20,000 infusion from Upstart lenders.
The real payoff wasn’t the money, she says — it was the networking opportunities.
“People get really excited and rally around you because Upstart creates this platform so people can push forward and help you,” says Spear, who also graduated from Harvard Business School in 2011. “[One backer] personally invested $25,000 in the company after [I finished raising funds through] Upstart and he has introduced us to all these venture capital funds, one of which invested $250,000.”
So far, Spear has raised an additional $2 million from VCs. She’s focused on growing the business with the new funds, and at the same time those $1,500 student loan bills she gets each month are a lot more manageable.
“To be honest, I was thinking a lot about this type of Upstart business model when I was in business school,” she says.
“Companies are able to use debt to finance growth and people are mostly only able to use debt. Why isn’t there a [human capital] option?”