Investing in Human Capital, One Person at a Time

Last week, we got an email from Freakonomics reader Paul Gu, a Thiel 20under20 fellow and founding team member of Upstart, a startup from former Googler Dave Girouard aimed at matching promising young students with financial backers. Here’s how it works:

Upstart aims to help you with the most important part of pursuing your dreams — taking the first step. It may be as simple as applying for an internship, relocating to another city, or spending a few months in a garage working on your idea. Your Upstart backers will provide you with a modest amount of capital, combined with the support and guidance you’ll need. In return, you share a small portion of your income for 10 years. By matching you with the right backers and by providing just a slice of economic freedom – where repayment is based on your future success — we help you get started on the right path.

In addition to being an Upstart employee, Gu is also a participant.  We were curious about why someone with such high potential future earnings was willing to give away a percentage of his hypothetical millions … here’s how he explained his decision:

For me, becoming an upstart is good economics. I’m stepping away from the hedge fund path to build a startup. That’s a much higher risk, higher volatility path, and most of the income potential is concentrated years into the future. Taking an Upstart investment makes it possible for me to access the educational and long-term benefits of working on a startup I’m passionate about without the loss of financial security or flexibility to make efficient consumption choices today (e.g. choosing housing with a shorter commute). Since Upstart determines each upstart’s funding rate offer based on his or her academic and career achievements, it makes economic sense for individuals all along the talent distribution.

Upstart participants aren’t all future tech millionaires.  Shanaz Chowdhery, a Yale senior, is planning to use her Upstart funding to launch her teaching career:

I did Upstart for a few reasons.  I’m from a low-income background and I’m a first-generation college student, and before Upstart, I wasn’t financially prepared to graduate and pay for all of the associated costs of starting a life in the “real world.” Upstart has given me an opportunity in which that transition to post-grad life is no longer a huge stress, and I don’t have to take some high-paying job right after graduation or take out loans just to get my career started. Teach For America is a great opportunity for me to give back to a world that has given me so much and to teach students from backgrounds like mine that anything is possible; with Upstart, I can concentrate on what matters: I can do something that makes me feel fulfilled and that is worthwhile without having to worry as much about whether I’ll be able to afford to do so.

In addition, I like the idea of being a walking investment: I have eleven backers, four of whom are my mentors, and having their financial and personal support is an unparalleled way to motivate and help me  pursue my dreams and goals. One of my mentors is from a background that’s very similar to mine, and just in the week that we’ve known each other, I’ve already learned so much. I just have this feeling that she’s going to be instrumental in my future–and that wouldn’t be possible without Upstart.

Amy Palmer is an Upstart investor and one of Shanaz’s backers.  “Shanaz Chowdhery is a perfect example of how Upstart will change the game,” says Palmer. “She is following her passion and giving back to society by doing Teach for America. It’s a win/win/win.”

Palmer, who is backing four other Upstarters in addition to Chowdhery, explains that her motives aren’t necessarily purely financial:

I wanted to be a part of something that was innovative and helpful. I would say my expectations are very small, not to say that I don’t expect big things from my Upstarts. I do. I just try not to get caught up in what is in it for me. Way more exciting to watch and help when needed and know in my heart that it is the right thing at the right time. What goes around, you know? I like the idea of supporting hard workers who believe in who they are. They are already hugely successful and ahead of most by having the confidence to put themselves out there with Upstart.

In addition to funding, Upstarters received varying levels of help (career advice, introductions, etc.) from some backers.  “A lot of this isn’t yet well-defined,” says Gu, “but Upstart is building a mentorship application on mobile/web to facilitate relationships between upstarts and their backers by allowing upstarts to give backers updates and make requests.”