Why Millionaires Are Lining Up To Help Students Pay Off Debt
They must be doing something right. Since launching in November 2012, more than 200 backers have made 1,000 unique investments in Upstart projects. Of the 120 Upstarts on the site now, about half have been successfully funded.
L.A.-based entrepreneur Tony Safoian was an early supporter of the site. He's run his own successful cloud computing and IT consulting firm, SADA Systems, for over a decade, working closely with Upstart's founders back in their Google days.
“It took me a while to understand the business model, but I definitely feel like [Upstart] is potentially groundbreaking,” Safoian told Business Insider. “I always like being on the ground floor, not taking a massive risk but … literally being a customer or a member and getting integrated that way.”
How does it work?
After passing a rigorous background check, 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” (i.e. investors) have their pick of the litter. Investments start at $100, and backers can fund however much or little they'd like. On the flip side, Upstarts can also deny investments from backers if they choose.
What sets Upstart apart from other crowdfunding sites is the option backers have to also offer themselves up as a mentor.
For Safoian, who has invested $10,000 in seven Upstarts since January, that was the rewarding part.
“I’ve offered my mentorship to all of them,” he said. “I thought it was kind of the right thing to do … and if my relatively small [investment] helps move the needle for this entrepreneur or student, then that’s going to make me a bigger believer in the platform.”
Among his mentees is Matthew Kulp, 23, a Boston-based furniture designer who hails from the Rhode Island School of Design.
Kulp, who had worked for a start-up during college, fantasized about launching his own eco-friendly furnishing company. But with $27,000 worth of student loans to contend with, he was stuck.
“I started to think about [launching my own company] in my junior year but I had this looming debt,” Kulp told Business Insider. “It started to create this pressure and I felt like I had to apply for jobs I wasn’t particularly excited about or passionate for.”
He heard about Upstart from a school administrator, and six months after graduating, he decided he had nothing to lose by trying.
"By backing me, you will give me the ability to put aside my student loans and get started on my vision for a different kind of company," he said in a video plea for backers on his profile page.
By mid-April, about four months after beginning to fund-raise, he had attracted a dozen backers, including Safoian, and raised $38,500 in seed money. Not only were his loans put to rest, but he could start pumping funds into his business. As a bonus, it pays to have insights from people who've already gone through the motions.
"Coming from [a design school], I have a creative background but not necessarily great understanding of some of the business components," Kulp said. "So mentorship has actually proven to be the most valuable part."
Already, networking with backers has led Kulp to an affordable startup workspace in Providence, R.I. and helped him kick up interest from other companies and entrepreneurs.
What's in it for the backers?
Let's be real. Warm and fuzzy feelings only go so far. Just to qualify to be an Upstart backer, investors have to either earn more than $200,000/year or be worth more than $1 million. These aren't charity workers –– they're business people first and foremost.
For their trouble, backers are guaranteed a percentage (up to 7%) of their Upstart's income for 10 years after they launch. There are some exceptions in place for students who have trouble getting off the ground or are still school, but Safoian said he's already beginning to see fruits of his investment.
"We're getting to the point where there's potentially such a large disruption in the higher education model that maybe we'll have people in the Upstart model who don't have student debt because they never went to school," he said. "I'm not 100% sure if using these funds strictly [to pay off student loans] is enough ... but I hope to see a model in the future where that's not even the major element of why they're [fundraising]."