David Girouard, founder of Upstart.com

The company also gets two new board members, Bob Kerrey, the former senator from Nebraska and former president of the New School, and Jessica Jackley, co-founder of Kiva, which helps organizations obtain microfinancing.

David Girouard, the former president of Google Enterprise, founded Upstart last year because he thought that the difference between a smart grad starting his or her own company or not often boils down to relatively small amount of money. “At Google, we hired hundreds of great young people who couldn’t put together $30,000 to buy a car if their life depended on it without going into credit card debt,” he told me last year.

Goal: Helping  students stick with school, then launch

Upstart’s goal is to match those students with backers/mentors — mostly tech industry veterans like Andy Palmer, co-founder of Vertica. The Upstart entrepreneurs agree to give up  a set percentage of future earnings — capped at 7 percent — in return for the backer or backers’ investment.

“An upstart can have as few as 3 or up to 30 backers,” Girouard said in an interview. “How much they can raise can vary to over $100,000 but the sweet spot is $30,000 to $40,000.”

In the past year, more than 80 grads have been funded and 135 backers signed on. And Upstart, which started out focusing on select universities, has now opened up the program to all comers. This is not a charity: Upstart gets 3 percent of the patron’s initial contribution. If the effort pans out and the entrepreneur repays the patron, it also collects a 0.5 percent service fee, down from 1.5 percent last year.

Kicking the can down the road?

Upstart, based in Palo Alto, Calif., stands in contrast to the Thiel Fellowship, which pays smart college kids to drop out and pursue their business objectives rather than staying in school. Girouard has said repeatedly that degrees have value and hopes his program will encourage students to stick with their studies until completion..

Still, Upstart came under some fire — including from some GigaOM commenters — who said it just encourages students to incur more debt, “kicking the can down the road,” when they should just dig in and self-fund or take their first jobs to make money before setting out on their own.

Girouard maintains it’s a creative and low-risk way for these would-be entrepreneurs to get funding that could mean the difference between founding a startup or not.

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And now he’s backing a new project that would let corporate Media Lab sponsors fund students’ startups after they graduate, according to this Scott Kirsner story in The Boston Globe.  That means big name companies including Samsung, Panasonic, AOL etc. could pony up to fund a stipend for MIT graduates to build the company or technology of their dreams.

This is still early stage. Asked to comment on the report, an MIT spokeswoman said “the program has not yet been approved or funded, so the Boston.com story was a bit premature.”

Industry-funded academic research projects are problematic. Critics say that private companies use universities, which often are publicly funded,  as petri dishes for their own R&D purposes. Company-funded college research can also lead to squabbles over  who owns intellectual property rights of work done at the school but partially or wholly underwritten by private industry.

Here’s the crux of the issue from Kirsner:

“One key purpose of the new fund, Ito explained to me recently, will be to encourage students to finish their degrees before they start companies. “We want students to stay focused while they’re here,” he said. But once they’re done, the fund will provide a six-month stipend to lay the groundwork for their company, and help make sure that the new venture has clear rights to the intellectual property they developed while at the Lab. (In the past, there has been a somewhat vague non-exclusive right granted to students to commercialize technologies that they worked on while at the Lab, Ito said.)”

The idea of encouraging college researchers to stick around for their diplomas is actually of note. Obviously MIT has a vested interest in its students completing their coursework, but some in tech say this is a waste of time and resources. These skeptics include early Facebook investor Peter Thiel who has funded two classes of Thiel Fellows. These young technologists get money to leave school and pursue their work. His argument is that it’s better for promising talent  just to get to it rather than put in their time at college, running up huge student loan debt.

That’s a premise that Upstart, founded by Google veteran David Girouard, for example, finds troubling. Upstart invests in promising graduates of specified schools in return for a percentage of their future earnings. Again, you have to graduate to get that Upstart money.

Whatever happens with Ito’s new project, it’ll be interesting to see how this plays out.

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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

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That scenario bugged Dave Girouard. A little over a year ago Girouard, who was then president of Google’s enterprise unit,  was talking to friends and family who saw that drama play out again and again. Grads with computer science degrees from top schools and a flair for Ruby programming, have no trouble finding work they love. But for smart, creative seniors without those specializations and who carry big school debt and have risk-averse parents, any idea for a startup dies in its cradle.

Girouard had some personal experience here. It was a stretch for his family when he got into Dartmouth.  ”We could in no way afford it, but my father was adamant that I should do it no matter what,” he said. He graduated with the requisite “ton of debt” which only rose when he went to grad school. When he got out, he took the most lucrative job he could find at Booz Allen. As soon as he paid what he owed, he quit to join Apple.

Debt and the decisions it drives is a problem for the students — obviously — who doesn’t want to follow their bliss?  But it’s also an issue for society at large which misses out on the job creation that can come from small businesses. It bothered Girouard that investment banks and law firms became the default destinations for grads that would have liked to strike out on their own.  So he started talking to experts — to economists, to academics. He looked at government statistics. He looked at crowdfunding sources like Kickstarter and Indiegogo. He decided he wanted to build a startup to help startups, resigned from Google in March, and launched Upstart in April.

One of his findings is that it doesn’t necessarily take a fortune to help get someone started. Many of these kids couldn’t put their hands on $30,000 if their lives depended on it without credit cards, but if they could, it would be enough for them to rent office space, buy computers, hire some help, Girouard told me last month. And that, at least gives them a shot.

Matchmaking new talent and tried-and-true talent

The Redwood City, CA. company — now with eight employees  – helps to match promising upper classmen from select  schools — including Rhode Island School of Design, Dartmouth, University of Michigan — with patrons that have money to invest and business experience to share. (Upstart just added Berkeley, Harvard, NYU, Stanford and Yale to its roster.) Thirteen mentors signed up initially, including Frank Moss, professor  at the MIT Media Lab and a long-time industry exec; and Andy Palmer, who co-founded Vertica Systems) and VoltDB.

It should be noted that Girouard himself left a solid gig at Google — something his financial advisor counseled strongly against — to launch this effort with backing from Google Ventures, Kleiner Perkins Caufield & Byers, NEA and Mark Cuban. He was joined by Damon Whitsitt another former Googler and a few others. They wanted to find a way that investors share in the entrepreneur’s upside but that also limits the downside risk to the entrepreneur. If the startup doesn’t work out, the investors don’t recoup their investment, but the feeling is they have enough money and expertise to sustain the loss.

Again, the idea was to fund the person, not the startup, paying X amount for a certain percentage of that person’s income — regardless of its source — over  ten years.

In coming up with a plan, Girouard initially thought of some sort of auction:  ”Here’s Bill, who’ll graduate from Stanford with a Computer Science degree. What’s 3 percent of his income worth to you?’ and have the investors bid it out. One problem was figuring out how much a given person’s earning potential would be over the period in question.

Serendipity strikes

Right around then, Girouard heard about “a kid” in New York who was working on way to forecast an individual’s earning potential over time. This “kid” was Paul Gu one of the first class of Thiel Fellows.  He had been a double computer science/economics major at Yale but left after three years to pursue his research.  By the time Girouard reached him by phone, Gu had aggregated a couple of publicly available data sets to help in this task.

Why was Gu pursuing this? Because his friends were taking jobs they didn’t want because of student debt, he told Girouard. Bingo.

Within days, Gu flew out to meet with Girouard and Whitsitt. ”As soon as I saw what he was doing, I thought why the hell do an auction? Let’s just price this ourselves and we can build a model without burdening the backers,” Girouard said.

Gu came aboard as Upstart’s first non-Google employee. From that time on, Gu and team have been gathering data from the government, from schools, from private sources who collect salary data using it to fine tune the model. They recruited prospective grads and backers in parallel. Since the pilot program went public in August, nearly 300 backers/mentors have signed on, Girouard said, and Upstarts is launching road shows at college campuses this fall to talk up the program.

Basically, the applicant asks for a set amount (funding is capped at $50,000). Upstart then uses its “proprietary models and analytics to figure out the fraction of their future income they must agree to share to raise their desired amount,” according to its website.  The recipient gets X dollars for each 1 percent of income shared up to a maximum of 7 percent. No payments are expected when the recipient makes less than $30,000 per year.

As an aside, Upstart structured an agreement that incents Gu to return to Yale to finish his degree — which Gu said he intends to do.

Doing well by doing good

This is not a totally philanthropic effort. Upstart gets 3 percent of the patron’s initial contribution. And should the effort pan out, when the entrepreneur pays back the patron, Upstart collects a 1.5 percent service fee.

Both Gu and Girouard brim with enthusiasm about the effort. They feel they are doing well by doing good. Coming up with the analysis is challenging.  And they all seem to like each other. “I like to call it the stuck-in-the-airport-together-for-four-hours test,” said Gu. “We’re happy to spend time together. A lot of time in the valley, there’s this culture of ‘we’re so super smart that we know everything.’ Well, we definitely don’t have that here. There’s not a lot of ego,” Gu said.

After eight years at Google, Girouard seems to be loving the startup vibe. He likes to quote Andy Berndt, head of Google Labs, who used to say  (paraphrasing here) “why is it that 10 people sitting in a room at a startup is bliss and ten people sitting in a room at a meeting is painful?”

There is no indication at all that anything about Upstart is painful to its founder. “The funny thing here is we’re all in a big room with four big tables but no matter what happens, we all end up clustered around one table,” Girouard said.

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That’s a resource that Upstart hopes to nurture by finding private funding and experienced mentors for young talent, says Upstart founder David Girouard, an ex-Google exec.

The goal is to enable people close to graduating who have good ideas for a startup to actually pursue them instead of taking a job that’s less inspiring but necessary to pay back the school loan debt loads that many students shoulder. (The average school loan debt for a graduating senior is just over $23,000 last year.)

“At Google we hired hundreds of great young people who couldn’t put together $30,000 to buy a car if their life depended on it without going into credit card debt,” Girouard told me in a recent interview. This funding can be used to pay for office space, staffing, the cost of living — whatever they need.

On Wednesday, Upstart will formally announce the program and introduce seven students funded under its pilot program along with 13 backers including Andy Palmer, a serial database entrepreneur and Frank Moss, professor at the MIT Media Lab, managing partner of Strategic Software Ventures, LLC, and a former exec at IBM and other tech companies.

Phase two of the program will start this fall at five universities—Arizona State,  Dartmouth, University of Michigan, University of Washington,  and Rhode Island School of Design. And there will be more to come, Girouard said.

Backing the person, not the project

There’s a couple of cool things about this model. First, Upstart doesn’t target the already sought-after computer science or engineering superstars from schools like Stanford and MIT. That is by design. “We wanted diversity,” Girouard said. “The early input is this could really work for artists and designers – people who could build their own sole proprietorship businesses.”

Second, recipients don’t have to cough up a huge chunk of equity in what they create.  Investors actually buy into the person, not the project itself, in return for a portion of that person’s income over time, but there is a cap, Girouard said. “There’s an algorithm, for every 1 percent of your income you’re willing to commit, you can raise X dollars, with 7 percent being the cap. Depending on the school, your GPA, we can project your income out over 10 years. But you give up zero control, no equity in whatever you do,” Girouard said.

The model is reminiscent of medieval patrons who funded artists. “It’s like Kickstarter or Indiegogo but instead of backing an idea or project, you’re backing a person,” Palmer said in an interview.

Pairing mentors with entrepreneurs

That sounds like a win-win situation for prospective entrepreneurs who need funds and advice and for established business leaders who like to work with young people. But it’s bigger than that, says Moss. Startups create a huge proportion of new jobs. The Bureau of Labor Statistics estimate that 65 percent of job growth comes from companies with fewer than 500 employees.

“We have to experiment with new ways to empower grads to pursue their dreams and passions or our society is in trouble, “ said Moss said. Moss, as you might guess from his MIT affiliation, is not a fan of the notion proposed by VC Peter Thiel Thiele that school is a waste of time for true entrepreneurs. Students should go to school, but we also need to find a way for them to build companies — not just default to going to an investment bank or big company to pay the bills, he said.

Vincent Lucero, of the University of Washington, netted $25,000 to fund his startup Soaring Squirrels, which is building a mobile game that teaches kids about the environment as well as a gaming platform that will make it easier for developers to put games on all the major platforms easily and for users to move their saved games from device to device. Lucero and his partner are using the funding to pay for their graphic artist — they prefer “old school” graphics. He is also joining Google but will pursue the startup separately.

Nathan Sharp of Harvard got $50,000 to help pay his student loans and give him some breathing room to bootstrap his business — PayOrPass — an e-commerce platform that lets shoppers tag any product on any web page with “a non-binding best-offer bid.” PayOrPass then takes those sales leads and broadcasts them to its merchant partners who can fulfill the orders.

Since he was already well into development, he would have launched the startup regardless but the Upstart money gives him more time to find the right investors and to pay off some of his college loans.

You can read more about the Upstart program here on Girouard’s blog.

Soaring Squirrels Cast illustration courtesy of Marina Montes

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During his eight years with the company, Girouard helped lead Google’s push to take on Microsoft  in desktop applications and email,  two areas where Microsoft dominated. While Microsoft remains atop the heap, Google was able to parlay its cloud-based infrastructure to win some share and to compete for some high-profile accounts.

Its aggressive subscription pricing on Google Apps and Gmail — not to mention the free versions – forced Microsoft to offer cheaper hosted versions of Office, SharePoint, and Exchange email.

Girouard also spearheaded the Google Appliance push to embed Google search inside customer data centers. Sundar Pichai, SVP of Google Chrome and apps, will take on Girouard’s responsibilities, CRN reported.

Girouard posted news of his career change to his Google+ site Friday night,  the same day Google confirmed a report that it hired Digg founder Kevin Rose. Rose’s new duties were not specified.

For all Google’s effort, the incumbent powers Microsoft Office and Exchange Server still lead the corporate applications and email market.  Last fall, market researcher Gartner estimated that Google Apps for Business represented less than 1 percent of Google’s overall revenue and there is some doubt as to whether the enterprise apps business remains a priority for the company.

Still, market share and revenue may never have been Google’s goal. By offering a lower-cost option to the Office/Exchange tandem, Google forced the market leader to respond, and that may have been the point all along.

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