Upstart offers a way for smart college grads who want to start their own companies to get funding — typically up to $50,000 — along with an experienced mentor who supplies that funding. That can be enough cash to buy computers (or rent Amazon EC2 time), pay off some school debt, or rent an office. So what’s so bad about that?
It turns out that entrepreneur and college prof Daniel Abadi has a bone to pick with that model.
In a blog post, Abadi, who is a noted Hadoop expert, chief scientist at Hadapt, and an associate professor of computer science at Yale, says he was initially intriqued by Upstart but then saw some things that concerned him.
“A deeper look at the Upstart Website reveals a problematic clause that is attached with the funding of the student start-up ideas. This is not a traditional crowdfunding model where investors receive equity in the start-up in exchange for their investment dollars. Instead, the investors get a percentage of the student’s income for a 10-year period in exchange for the investment. This way, in the likely event that the student’s start-up idea does not work out, the investor is able to receive a nice return on investment by taking a cut from the student’s hard-earned salary when the student enters the workforce.”
The problem is that, many students have unrealistic expectations of success and given that the failure rate of startups is high — some say that 11 out of 12 fail — the entrepreneur still has to pay the Upstart mentor a portion of annual earnings — whatever their source — as agreed upon no matter what. Upstart itself gets 3 percent of the patron’s initial contribution. And, later should the startup succeed, Upstart collects a 1.5 percent service fee when the debt is repaid.
Mentorship over money
Upstart CEO and Google veteran David Girouard said the program is almost more about the mentorship than the money. “It’s possible (and actually likely ) that startups fail,” he said via email. “The idea of Upstart is you have backers that help you well beyond any particular startup or initiative — they are with you for at least the duration of your commitment.”
And, there are some protections in place. The deal is negotiated up front and the percentage taken from yearly income is capped at 7 percent. If the entrepreneur makes less than $30,000 in a given year, payment is waived and another year is added to the payout timeline, which is capped at 15 years.
Of course, naysayers contend that 7 percent is a pretty hefty take for young people who are also likely saddled with school debt.
Girouard said the program was specifically designed to facilitate investment in a person, rather than in a company. “We aren’t really a substitute for venture capital or angel investing — funds are typically used to retire debt or pay living expenses rather than corporate expenses,” he said via email.
Others in the tech world have other ideas about helping startups. The new Cambridge, Mass.-based hack-reduce program, for example, is a 501-3c charity that will give a select set of big data entrepreneurs a leg up without taking a piece of the action, according to co-founder Chris Lynch, who posted a comment to that effect on Abadi’s blog.
Feature photo courtesy of Shutterstock user wavebreakmedia