Crowdfunding students: Start me up

Helping youngsters to sell stakes in their future

WHEN Matthew Kulp graduated from the Rhode Island School of Design last year, he became part of an intriguing financial experiment. To help pay back student loans and fund a new design company, Mr Kulp raised $38,500 via Upstart, an American firm that helps youngsters, or “Upstarts”, find wealthy investors willing to give them hard cash in return for a stake in their future earnings. This novel application of crowdfunding promises to be both popular and controversial.

Upstart, which recently raised almost $6m from venture funds and Silicon Valley types, is not the only outfit promoting equity-like investments in young folk. Pave, another American start-up, has developed a similar service. CareerConcept, a German firm, helps students raise money for their studies and Lumni, which focuses on low-income students in countries such as Mexico, Chile and America, has already helped almost 2,000 youngsters raise cash from individuals and institutions.

The notion of “human-capital contracts”—or “social financial agreements”, as Oren Bass, a co-founder of Pave, prefers to call them—may seem creepy. To many, it sounds like indentured servitude. But the notion of acquiring a stake in someone’s future earnings is not unprecedented. In professional poker, for instance, players often raise money from investors who then pocket a chunk of any winnings.

Pave and Upstart have developed offerings that are a mix of LinkedIn, a social network for businesspeople, and Kickstarter, a popular crowdfunding site that lets folk invest in new products. Candidates post gushing profiles of themselves and describe what they intend to do with the money they are after. Potential investors, who also post profiles, offer cash to individuals who catch their eye.

If they invest, the backers receive a percentage of the person’s pre-tax income over a number of years. Pave and Upstart allow youngsters to choose the percentage of their income to share with investors. In return, the matchmakers pocket a sliver of the money raised, as well as a management fee from investors. Pave lets its “prospects” share up to 10% of their future earnings. Upstarts can offer up to 7% of their income. Upstart also caps total payback at five times the amount raised, so that if someone creates the next Google they don’t have to hand over Croesus-like sums of money to their investors.

Both businesses are still in their infancy. Dave Girouard, the boss of Upstart, says that more than 50 people have raised a total of $1.4m using its platform. But they are confident they can grow fast, for several reasons. One is that, unlike interest payments on traditional loans, repayments fall if a person’s earnings decline. Another is that young graduates who dream of launching a business or writing the Great American Novel can use the cash to pay off their student debts without having to take a mind-numbing corporate job.

A third attraction is that investors have an incentive to mentor people they back—although the sites do not make this easy to do online yet. Shanaz Chowdhery, who has used Upstart, says one of her backers even sent her a free subscription to study materials she needs to get into law school. “The social benefits of this approach to raising money are 50% of the equation,” says Sal Lahoud, another Pave founder.

Not everyone is impressed. Jonathan Frutkin, a lawyer in Arizona who has studied crowdfunding, worries that young people lack the nous to make wise financial decisions. “The penalty for being younger, more desperate for money and less experienced is that the average prospect is going to get a bum deal,” he wrote in an April blog post about Pave and Upstart.

Yet both Mr Kulp and Ms Chowdhery have clearly thought carefully about the trade-offs involved. Ms Chowdhery even built a spreadsheet to model her likely future earnings under different scenarios before deciding to choose crowdfunding rather than a bank loan. As Pave and Upstart get bigger, they may scoop up less discerning customers. For now, the young people using them deserve more credit than Mr Frutkin is willing to give them.

From the print edition: Finance and economics
Source: SAN FRANCISCO Chronicle |From the print edition, June 13, 2013


This RSS feed URL is deprecated, please update. New URLs can be found in the footers at [...]

NPRAfter Outcry, Crowdfunding Site Patreon Backs Off Plan To Raise ...NPRThe popular crowdfunding service Patreon has backed off plans to change its payment structure, after widespread, vocal and passionate opposition from creators and their fans. Last week, the site announced it woul [...]

TechCrunchHow hate speech crowdfunding outfit Hatreon crept back online ...TechCrunchIf you want to make a living creating white supremacist content, you're probably not going to do it via sites like Kickstarter and Patreon, which prohibit hate speech. Fortunately there's Ha [...]

EntrepreneurWhy Some Small Business Owners Are Turning to Crowdfunding to Save Their CompanyEntrepreneurMany owners of beloved local businesses, especially in pricier cities, have been forced to swallow their pride and appeal to their customers in times of crisis -- a process streamli [...]

CoinDeskKickstarter ICO? Don't Count On It Says Crowdfunding Leader ...CoinDeskThe company most widely associated with crowdfunding, Brooklyn-based Kickstarter, has no plans to get into the initial coin offering (ICO) business. Coming in response to the news yesterday that compet [...]

ForbesCrowdfunding Do's And Dont's From iFundWomen's Karen CahnForbesDuring our conversation, she was transparent in sharing that her first software company, VProud, failed because she “did everything backwards” and spent too much time trying to perfect the product. “Pe [...]

CryptoCoinsNewsCrowdfunding Giant Indiegogo Looks to Make ICOs MainstreamCryptoCoinsNewsCrowdfunding platform Indiegogo has a plan to help initial coin offerings (ICOs) break into the mainstream, even as the U.S. Securities and Exchange Commission (SEC) is ramping up its oversight of [...]

WRAL Tech WireBack story: How, why investor Mark Easley brought crowdfunding platform Localstake to NCWRAL Tech WireRESEARCH TRIANGLE PARK – Earlier this week, WRAL TechWire broke the news that Triangle investor and crowdfunding advocate Mark Easley was bringing Localstake, a crowdfun [...]

Crowdfunding via Customers: Is This The New Startup Capital?Customer ThinkWith more and more companies in a variety of sectors developing new crowdfunding campaigns, it makes sense to ask whether crowdfunding is likely to replace startup capital in the near future. Crowdfunding is qui [...]

TechCrunchFormer Gawker employees are crowdfunding an effort to buy Gawker.comTechCrunchWhile Univision acquired most of Gawker Media's sites last year (and renamed them as the Gizmodo Media Group), the deal didn't include Gawker itself. In fact, BuzzFeed reported last month [...]

CFB Finance


  • Crowdfunding
  • Crowdfund
  • Peer to Peer Lending
  • FinTech
  • Reg A+
  • Reg CF
  • Crowdfunding USA

Press Release

Live Crowdfunding .tv

What's Next Step in Regulation A+ JOBS ACTS Title IIII :L Interview : Steve Cinelli with Brian Korn Securities and Crowdfunding/Peer-to-Peer Lending Lawyer, Watch more video library | Conference | Interview | Campaign Showcase | Research | Education |