The start of Nathan Sharp’s story sounds familiar: In 2012, he found himself graduating from Dartmouth College with an MBA and $100,000 in student debt. But rather than take whatever job would help him make his monthly payments, the entrepreneurial-minded Sharp took $50,000 from backers using a start-up called Upstart — and agreed that in return he would give his investors a portion of his future income.
Think of Upstart as Kickstarter (the online funding platform) meets the government’s Income Based Repayment program, which caps loan payments at 15% of discretionary income. Founded by Google‘s former head of enterprise, Dave Girouard, Upstart is the latest initiative aimed at getting young people to strike out on their own before the responsibilities that come with a family and a mortgage set in. “They’re at a good time in their lives to take risks,” Girouard said. “But a lot of times, even when students have something interesting they’d like to do, they say ‘I’m going to accept this job…’ and its usually for very pragmatic reasons.”
“Universities are really well set up to help students go down the traditional path—it almost happens by default,” Girouard continued. “That struck me as a misallocation of capital in a sense because for what amounts to a relatively low amount of money—$20,000 to 30,000 in debt—kids are making decisions that are probably going to change the entire course of their careers because often when you get onto the treadmill of the corporate job path, you never get off.”
Upstart encourages students to go their own way. This is how it works: Beginning in the spring of their junior year, college students or recent grads—anyone from a poet who wants to start a literary magazine to a business major looking to build a boutique hotel in Brazil—can apply to be an “upstart”. The applicant is screened to make sure they are who they say they are and the company predicts how much money they will make over the next decade. That information becomes their funding rate, which helps determine how much they can borrow and how much they will need to repay. On average, for every $6,000 a student wants to borrow, they must pay back 1% of their income. (Right now, Upstart is very selective about the students it accepts—they want people with high-quality profiles and clear goals—but in the future Girouard says they would like less of the arbitrar of who is funded, so long as a set of minimum requirements are met, and let the marketplace decide.)
Once accepted, the student’s profile that explains who they are, what they hope to do and the amount of money they want to raise goes live on the site. Potential investors, known as backers, which currently include several VPs at Google, review profiles and decide which people they want to throw their support behind. In exchange, backers can expect to get approximately an 8% return on their investment over 10 years.
Unlike the traditional angel investor, the backers are not investing in a company—they are investing in the person and essentially betting on his or her future potential—so it’s in the investors best interest to advise the student and help them reach their goals. “The backers share the upside and the downside,” Sharp said. “They have great incentive to see you do well, so they’re really going to work for you.” Sharp said his investors are already looking down the road beyond the company he is currently starting, to what comes next. “They’re in this for the long haul,” he said.
In exchange for the money, the upstart agrees to pay back a portion of their future earnings to the investors. They sign a contract and self-report their monthly earnings, which are checked against their tax returns each year. In Sharp’s case, he agreed to pay his backers 2.5% for 10 years in exchange for $50,000 upfront. He used that money to pay off half of his student loans, which not only lightened his load, but gave him lower monthly payments for the duration of his payment plan. The lessened debt load gave him the more leeway to start his company, Clutch Retail, an online shopping tool that allows users to collect and track products they’d like to buy, which will launch as early as next month. “Upstart gave me a lot of breathing room to get my business off the ground,” Sharp said. “My loans required me to pay the same high amount every month, regardless of how I was doing. With Upstart’s income-sharing model, I pay more when I make more and I pay less when I’m earning less, so it seems much more flexible, and quite frankly, like a more humane way of offering student debt.”
So far, since its launch in Oct. 2012, Upstart has 30 upstarts and 60 backers and is in the process of combing through hundreds of new applications. In 10 years, Girouard predicts they can help create more than one million new businesses in the U.S.
Upstart uses the tricks Girouard learned at Google to estimate a students’ potential. Not every student is worth the same amount of money, therefore there can be two upstarts who requested the same amount, but who are asked to pay back different portions of their income. “Not everyone is able to raise capital on the same terms,” Girouard said. “If you have a computer science major from Stanford with a 4.0, then the model would predict much more income for them over a 10 year period than a lot of other people.” For example, Sharp, who graduated from a top-ranked MBA program where the average starting salary is some $180,000, only has to pay back 2.5% of his earnings over 10 years, whereas a student who graduated from an undergraduate program where he or she can expect a starting salary of roughly $70,000, might have to pay about 7% of their income over time.
Upstart’s model is an idea colleges may want to pay attention to, Sharp said. The current higher ed financing model awards loans to students without taking into account what major or field they choose to pursue and whether they will be able to pay the money back one day. “I think that if universities adopted this model, they would be forced to take more responsibility in helping students succeed in their careers,” he said. “If universities shared in the success or failure of their students, they would have to rethink the way they provide their education and career services.”