College Debt Waivers: A Possible VC Innovation
I read an interesting post by my friend Ed Kohler of Technology Evangelist today (you may remember all of the video he and his team shot for TECH cocktail 2 - thanks again guys!). Ed wonders whether a lot of budding entrepreneurs never get to carry out their business dreams because they need to pay off educational debt.
The story that Ed thinks may be the case all to often is as follows: Student has a great idea but has to put it off in order to take a “safe” job that allows him/her to whittle down their debt. While he/she works this safe job they may meet someone, get married, have kids, take out a mortgage, etc. which forces him/her to further put off their idea since they now have dependents and a mortgage and maybe even have some debt from school left. The dream is crushed and the world is left with one less exciting idea.
Ed sees this as an opportunity for VCs to innovate. He suggests VCs find exceptional students with good ideas coming out of school and offer to:
- Pay off their debt
- Pay them a salary - maybe $30,000/year
- Cover their housing
The VC would get equity in the new venture as usual and would shell out $100,000 per student on average according to Ed which, if even a few of the companies made it would be a good deal for the VCs.
I think Ed’s idea is a great one and very innovative. I have no doubt that a lot of ideas go to waste each day due to college debt and this would help to alleviate that problem. The ideas that are saved could also end up as huge wins for the VCs that came with low investment cost. Everyone wins. However, there are a couple issues to consider.
- VC Fund Sizes
- Inexperienced Entrepreneurs
VCs have differing fund sizes and numbers of partners so not all VCs will be able to put small amounts like we’re talking about to work. Perhaps angel networks and angels in general are in a better position to take this innovation and run with it. They can generally put smaller amounts of money to work and don’t have other constraints that come with a VC fund.
Since the entrepreneurs will be very inexperienced good advice will be very useful. Investors that try this innovative approach will need to be able to advise and mentor the entrepreneurs they pluck out of their cap and gowns. The better the investor can mentor and provide connections to the entrepreneur the higher likelihood the venture will succeed.
All in all I think finding students just out of school and taking care of their debt in exchange for equity in their company is a great idea. It allows good students to become entrepreneurs. Investors will see more deal flow. More interesting ideas will come to light and benefit the world.
As always, I would love to get a discussion going on this topic. The more we can talk through new ideas and refine them the better.
Photo Credit: KrassyCanDoIt on flickr
Eric - this sounds like a very promising idea. At least from a person that is a post collegiate debt holder. I am not in the tech industry, but am a wannabe entrepreneur in the fitness and coaching area. My senior year in college (2000) I saw a huge lack of sites available for people to get specific and personal advice for fitness and health behaviors. Most sites were generic advice giving content models.
I tried my hardest to convience a few peers to seek out and solve this problem, but in the end it didn’t work out because of the risk involved. Primarily because we all had student loans that would be coming due.
I took a “regular” position (swim coach / exercise specialist) and soon found myself not satisfied but paying the bills. As it turns out, those sites are a dime a dozen now, but there is still a lot of room for improvement in my opinion.
Fearing the thought of always being a swim coach (I wasn’t great at it), I compounded the issue by attending graduate school. I thought it was the answer.
To summarize, I feel that my field is dense with issues like you mention. My peers and I have found that if you can’t find a way to go into business for yourself, you don’t make it either. So this catch 22 drives many into jobs that they don’t enjoy and didn’t get educated to do. In fact, I would estimate that around half of all my graduate school classmates do not work in our field for fear of striking it out on their own and not being able to pay the bills.
Thanks for the topic.
Gary Ditsch
4 Jan 07 at 10:44 am
Eric, I’ve actually given this some thought - and envision a sort of artist colony-incubator for entrepreneurial talent. It would be sort of like a venture incubator, and would provide office space, graphic and website design, legal advice, accounting expertise, engineering talent, a structured mentor program, and even housing for selected entrepreneurs and their teams. A panel of vc’s and business execs would elect entrepreneur candidates for a two year term to reap the benefits of the incubator support, and if the business doesn’t take off by year 2, entrepreneurs graduate.
Matt Jaunich
4 Jan 07 at 3:31 pm
Awesome idea Matt! If you want to brainstorm on this with me shoot me a note. I think the idea has potential.
Eric Olson
4 Jan 07 at 3:44 pm
A college grad will be lucky if all they have is student loans to pay off. With the way the credit card companies attack these kids fresh out of high school, with no education in credit and debt. A lot of these students get credit card offers with a limit over 5k right off the bat. They do this for two reasons, one they know alot of kids are still supported financially by their parents who will pay off their debt. And two, if a student has no parental support they know they will have this person paying off their debt for years after they graduate. This isnt even to mention student loans. I personally feel every high school senior should be offered a class in their school to educate them on credit and debt. This would help alot of young people not fall victim to the never ending credit treadmill.
Steve "The Debt Reduction Man" B
28 Jun 07 at 1:01 pm
Man, I would have loved to have had that opportunity coming right out of school. I know personally, my student loan payment was around $600 a month - and that was with commuting to campus so I didn’t even have housing costs within my loans.
James Root
1 Feb 08 at 1:36 pm
Ed’s idea on debt is a great one and very innovative but for most students the only financial mistake is the accumulation of such debt. Without debt, students can become wealthy and expand on their dreams at any pace. It’s a simple matter to make a clear choice to do without for future gains.
Debt Free IQ: TJ
12 Mar 08 at 12:54 pm