Some recent graduates — hoping to escape from student debt, start a business or learn new skills — are using an innovative crowdfunding site to promise a percentage of their future earnings in exchange for cash in the short term.
Rachel Honeth Kim, a Harvard Business School graduate living in San Francisco, is raising $100,000 so she can pay off her loans and jump-start her business. To get the cash, she signed on with the crowdfunding site Upstart.com. She committed to paying back the money over 10 years, through a percentage of her income that will depend on the final amount of money she raises.
"The biggest thing for me was the financial implications of going out on my own," she said. "The only thing that's kind of been holding me back is the debt I have."
Kim quit her job four weeks ago, and started Nailed Kit, a custom nail art kit for parties. "It's so liberating to finally be able to take the plunge," she said.
What makes Upstart different than many other crowdfunding services is the investment in people's future earnings.
"It's actual investment in a person as opposed to stock or companies," said founder and CEO Dave Girouard, a former Google executive.
Unlike Kickstarter, where backers support a specific product, Upstart backers invest in the people behind the business or product. If the first business fails, as many startups do, the relationship between backer and the young entrepreneur, or "Upstart," remains the same, but so does the financial obligation.
This is why, Girouard said, many Upstarts use the money to pay off debt or learn a new skill, such as coding, instead of funding a specific project or product.
"They might be pursuing something where they might not be making money" but it will pay off in the future, he said.
Trina Spear, a Harvard Business grad who successfully raised $20,000 through Upstart, used the money to pay for her move from New York City to Los Angeles, where she started a business.
Her company, Figs Scrubs, a fashionable and tailored line of medical scrubs that donates a set of scrubs to doctors in need for every set sold, was invested in further by some of the backers that supported Spear initially, she said.
"The money wasn't the primary reason I was doing it," she said, adding the partnerships she has made with backers has been invaluable. Girouard calls Upstart one part bank, three parts social network.
Backers must be accredited investors in the eyes of the Securities and Exchange Commission, with a minimum net worth or annual income, but Girouard hopes to open up investments to more people. So far, about 200 backers have invested about $1.4 million in 100 people, Girouard said.
Upstart provides a fundraising goal based on a proprietary income prediction model where higher potential earners can raise more money through the site. A Harvard Business School graduate who finished their MBA in 2012 can raise $43,400 in exchange for 3 percent of their income over the next 10 years, but an art history major who graduated from Boston College can raise $14,700 for the same income percentage, for example.
"Computer science majors from great schools earn a lot of money, it's relatively predictable," Girouard said, in response to concerns about putting a monetary value on people. "We don't try to position things as a judgment on a person. We're sensitive to that."
Spear likened the practice to an advance on a book deal, or a record contract.
"Why is it that companies can finance their growth through both equity and debt, but people can only finance their growth through debt?" she said.
Kim said she's optimistic about the payoff from Upstart.
"The worst case scenario is I pay my student debt," she said. "Anybody who has an idea should have an opportunity."
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