Richard Frethorne was just a young man in England looking for a way to get ahead, to make a name for himself. There was a lot happening—society was changing, new industries were opening up. But Frethorne, coming as he did from a lower-class background, didn’t have the resources he needed to pursue the opportunities he saw. So, like many of us, he went into debt. Turns out he didn’t enjoy it very much.
Born in the 17th century, Frethorne wanted to travel to the New World. America was just starting to play host to its first wave of opportunists, but Frethorne lacked the capital required to pay for a voyage. Instead, he became an indentured servant, paying for his passage with labor instead of money. His plan was to work for four to seven years, and then he would have his freedom as a full-fledged colonist.
Soon after he arrived at Jamestown colony in Virginia in 1623, Frethorne realized he needed a lot more than just labor to improve his lot. There is “nothing to be gotten here but sickness and death, except [in the event] that one had money to lay out in some things for profit,” Frethorne wrote in a pitiful letter to his parents in March 1623. “But I have nothing at all.” He begged his family to either buy him out of his servitude (pay back his debt) or send some capital in the way of “meal and cheese and butter and beef. Any eating meat will yield great profit.” Frethorne may have been starving, but at least his debt would be paid off in less than a decade rather than over the course of a lifetime.
Today, just as in the 17th century, going into debt can be a way of getting a shot at social mobility, as it theoretically was for Frethorne (the colony’s charter was revoked in 1624, with Virginia becoming a royal province rather than a free and open society). In our own time of rampant inequality, debt still thrives as a path to gaining access to a better life: Getting a loan against credit is the standard method of buying a house, starting a business, and going to school.
The crowd-investment model for human capital has the unique advantage of not exacting painful debt if a gamble—on education, or a new job, or a new company—doesn’t work out.
It’s this kind of self-improvement debt that a new batch of technology start-ups are targeting. Companies like Upstart, Pave, and Lumni are acting like Kickstarter platforms for people instead of businesses or products. Through them, it’s possible to invest in a human being, funding their education or professional development and getting a cut of their future profits in return.
The investment structure is based on the concept of human capital, or the intangibles like knowledge, creativity, and personality that combine to form a worker’s ability to produce profitable labor in the current economy, particularly in the post-industrial context of the United States. Politicians often talk about investing in human capital—building better schools and community institutions to build better workers and promote economic growth. But these businesses are making the phrase literal, turning people into profit.
Of the existing start-ups in this space, Upstart is the most like Kickstarter. Accredited investors can pick among potential individual investees, who pitch themselves with short written blurbs and resume samples. (Unlike more public platforms, the networks can only take money from investors with licenses since crowd-investing is illegal, for now at least.)
The company uses a statistical model to “predict each upstart’s income over the next decade” and create a funding rate, the amount of venture capital the individual can raise for each one percent of their income they choose to pay back to investors annually over a five- or 10-year period. Those who receive the money can pay no more than seven percent of their annual income based on U.S. tax returns, and they don’t owe anything for years they earn under a set amount—guarding against a kind of investment-induced bankruptcy.
On Upstart, it’s people like Rachel Honeth Kim who steal the spotlight. She’s a Harvard MBA who worked at Google and Zynga who plans to open her own company—all factors that would suggest a high future income and payoff for investors.
Both Lumni and Pave focus on funding causes that include a social-good angle. Pave’s mantra—“talent is an asset”—suggests that human potential is a commodity that can be easily monetized. Investors can choose to invest in individuals or groups of talent in particular areas—Columbia students, perhaps, or architects—with the aim of creating a seven percent return on investment again based on earnings. Pave’s success stories range from $12,000 to $50,000 worth of funding, too little to make a dent in the largest of student loans, but enough to smooth a major career transition.
Lumni is explicitly devoted to funding students, and the company’s results are already impressive. It creates a group portfolio of students that investors can fund, often supporting schools in developing countries. According to the company, an investment in Chilean students has already returned 20 percent, twice the estimated profit and almost three times the return of most hedge funds.
These start-ups are entering a void in our country’s social and financial support infrastructure. Student loans, the debt-of-choice for educational opportunity, are increasingly failing both students and the country. Out of $1 trillion in loans, $180 billion is in default or forbearance and $315 billion isn’t being paid back by students who are still in school or are deferring payment, according to Politico. One in eight borrowers end up defaulting.
The crowd-investment model for human capital has the unique advantage of not exacting painful debt if a gamble—on education, or a new job, or a new company—doesn’t work out. And though it’s early days for this type of portfolio, the initial signs are far more positive for both investors and investees than the crippling debts that are preventing students from pursuing careers they’re suited for. Some bets won’t pay off, of course, but like venture capital investments in actual start-ups, there’s always the chance of hitting the next Facebook or Apple, the future Mark Zuckerberg or Steve Jobs. And even investees that don’t hit the jackpot will still benefit from the opportunity.
Crowd-investing in individuals resembles most not student loans or Richard Frethorne’s indentured servitude (though the start-ups have been compared to that practice, which is now universally illegal). It actually seems more like a guild or apprenticeship system, the social labor structures that were prevalent centuries ago but have largely faded away. A young worker would enter into a partnership with an established company, working for them while learning a trade, and be supported with room and board or a nominal salary in return. In both cases, a little bit of sustainable debt offers a big opportunity.
As student loans continue to show their adverse effects on individuals and our culture’s youth as a whole, we should be looking to alternative strategies to offer those who might not have immediate access to the resources they need a chance to see what they can do with that capital. Start-up economics has its downsides, but it excels at letting entrepreneurs give it their all in an effort to succeed—just what we should be doing with our students.
