Ask HN: "Y Combinator for people?"

I'd have been the target market for something like this, and I wouldn't have done it. I would have hated to have debt hanging over me. Equity funding is better than debt for high risk ventures. But I doubt one could legally buy a share of someone's future earnings.

I understand that debt can be distressful, and thus might even make the entrepreneur less productive. But having a side job is distressful too.

If I had to choose between having debt, and working side jobs like I do now, I would choose the debt. I understand that you would have chosen the side job. I guess the question is, are there enough people who would have chosen the debt?

As for why I would choose the debt: I know at >99% that I could pay it. Therefore it will hardly distress me. Even if my life would turn out to be a total failure I could still get some coding job at a big company, take a separate loan from the bank, and pay it all off in a few years. It would suck, but for a worst case scenario it's not that bad.

"But having a side job is distressful too."

If people aren't willing to give you cash for equity, it's probably a bad idea for a company and you should switch projects. (It's unlikely that you're the one in 100,000 entrepreneur who has a brilliant idea others just can't see the brilliance of.) Otherwise I don't think there's much of a good argument for turning down equity financing for a high-risk venture.

It just makes a lot of sense economically: your biggest asset as a poor entrepreneur is your time and effort, and you need some capital to make your project happen. Investors have a lot of capital, but only a finite amount of time/effort to do things with it. So it's a fair trade: you put in time/effort, and the investor puts in money. If you just finance everything with debt, you end up having to incur both downsides of losing time and money -- and the downside of losing $100k in capital is a lot worse for you than for the rich investor. If the project fails, you'll have to spend time/effort to repay the $100k instead of just moving on to the next project.

jey, I think we sort of lost each other. I have nothing against equity financing.

Sorry, my main point got lost in my comment: I can't see the argument in favor of debt financing for a startup.

I didn't suggest debt financing for a start-up. I suggest debt for funding the entrepreneur's living expenses.

I agree that if the entrepreneur actually starts a start-up proper, he would do best by financing it using equity. But most entrepreneurish activity is not a start-up proper - Just little things you try and that sometimes evolve into big projects. It's hard to sell equity out of those.

You know you can get credit cards, right? If you're willing to pay 20% interest, it's not hard to find 4-5 companies willing to give you cards. (Well, perhaps not in this economy, but as of 6 months ago...)

That's the problem I see with this idea: as soon as you start taking debt instead of equity, your competition changes. And there're lots of people already willing to give you money at 20% interest, even if your qualifications aren't stellar. Besides credit cards, you could just go to Prosper.com.

BTW, I'd be far, far more worried about taking on $100k of debt than you seem to be. Companies fail for all sorts of reasons, and while I won't exactly say that they're beyond the control of founders (mine failed do to my own stupidity), they are often beyond the ability of founders to predict when they begin their venture. And while I was lucky enough to get a job at Google afterwards, it's important to point out that the first few firms to offer me jobs weren't all that great, and it was only because I had cash in the bank that I could afford to wait them out until BigCo Coding Job came through.

precisely, I got a $30K credit card at 0% apr for a year and a half not so long ago. And I get other offers like that all the time.

I doubt one could legally buy a share of someone's future earnings

This idea comes up from time to time and someday might catch on. Here's some recent discussion:

http://www.american.com/archive/2008/june-06-08/popping-the-...

http://blog.gocollege.com/2008/11/30/paying-for-college-radi...

...and the company mentioned in the second piece...

http://www.lumni.net/

No idea if they're legit.

You actually can legally buy a share of someone's future earnings - it's the basis behind the Bowie bonds.

http://en.wikipedia.org/wiki/Bowie_Bonds

There was also a minor league player that was selling shares in himself (although I think he did so in blatant violation of the '33 Act).

Bowie bonds are based on an asset that has already been created, not a person's future output.

I certainly hope it couldn't be legal.

The _only_ way this idea meets my standards is if the loan is invested in a corporate entity which enables the recipient to fail and walk away from the debt (and assets, of course).

Let me state this as clearly as possible for anyone that thinks this is a good idea: "excessive usury" is pure evil. Being able to walk away from failure and start again is the secret sauce that makes the American economy the envy of the world.

Amen.

Part of my motivation to get an investor was precisely to offload that financial risk to someone else. I'm already putting in at least 2 years of my life, including a lot of blood and sweat. If I fail then the last thing I'd want is to spend another X years getting rid of that debt...

Also I'm truly baffled at your statement of:

even an entrepreneur who has failed to get rich by the end of the four year can resort to taking a job at a big company. One year of that will pay off most of the loan, and will allow him to take a separate loan from the bank to cover the rest.

Excuse me?

After the 4th year I'd owe you roughly $120000. Most of us mere mortals would probably need closer to 7-8 years to pay that back.

Why should personal debt contracts be legal but not equity contracts? Equity contracts are actually more progressive - you don't have to pay if you're not making anything, and those who strike it rich cover the costs of those who make less. I actually think we should fund the education system through personal student equity (rather than taxes and student loans). If a school fails to teach students to read, it will lose out when the kids cannot earn as much later in life.

Certainly excessive usury is wrong, but being able to walk away from debts causes it's own problems. Because of the ability for people to just walk away from debt, they acquire more of it without the attention of paying it off. This can cause lenders to be more wary of loaning money, as well as waste resources when that person spends the money on a house or other item they don't need and can't pay for.

Intruiging idea. However it seems extraordinairily high risk for the investors. You mention choosing the recipients would be tricky and that if they fail (which I imagine would occur in a high percentage of choices) they could get a high paid job to pay it off. However:

- Jobs ar never guarateed. I know some excellent people who have struggled to find jobs. If they had to apply to a job after 5 yrs of being an entrpeneur I think they might struggle. "So what have you been up too prior to this?". "Oh, well someone gave me 5,000 a month for 5yrs and now I need to pay it off." Even with spin it doesnt sound too hot :)

- The current economy is shaky. This person has no guarantee for this high interest loan. If things go south there is no guarantee on the money. Yes the return is very good (well, sort of good) but the risk seems crazy high. Expecially as there is no feedback...

When YC funds hackers they choose projects that may or may not succeed - which is a risk. But there is a modicum of protection in the funds. They also take an involvement in the business and provide valuable advice that will help it get off the ground. In your scheme it is something of a fire and forget.

If I had 100,000 to invest/spend somewhere I would certainly play it on other risks (definitely trading 20% year on year for 10-15%) with more security.

(btw are you calculating interest year on year or per total exp? yoy your stats are ok, but per total your average is actually makign a loss of about 3% (ish)).

EDIT: I just realised you said $2000 a month - not $5000. Last year I was on the same salary (in the UK £1000 a month, which is probably a touch less). I lived at home with my parents and paid them £120 a month rent. Even then I just about managed to have any liquid income (buying foodand contributing to the house bills). Were I living on my own (payinf real rent) I dont think I could afford it :D (would be a push) and certainly not afford the facilities to be an entrepeneur.

One other thought that occurs to me is that becoming a millionaire (which I think is well within the capacity of the majority of people here) is something that usually takes a lot longer than 5 years :)

Drip funding an individual for that length of time is unlikely to make them successful either - 5000 a month is enough to live on fairly well but if they are still relying on it after the first 2 years then I dont see them succeeding... a lump sum up front (or payments over 2 years) would probably have a better effect.

Giving the individual liquid funds above what is needed to live will probably show greater returns in the end :D

About the calculation, I assumed that the fund takes loans from an imaginary bank at an interest rate "r" to pay for the loans. I calculated how high the r can get for the fund to break even, and that's the result I gave. (I solved it with Mathematica.)

I have a question. Are you making the loan to the corporation or to the individual?

If you are making the loan to the corporation, then it'd a fine business. You are basically limiting your upside, as opposed to an equity investment, but you will be able to calculate your revenue stream more easily. If the loan is to the corporation, then the founders won't be liable for the money, and you're just another investment vehicle.

If you are making these loans to the founders, then you're just another credit card company. I doubt there will be anyone good competing for your loans. The good people will get the equity, and only a dope would take a $100,000 loan at 20%, for anything. Maybe you can sucker some college kids like the credit card companies do.

"It should also be noted that even an entrepreneur who has failed to get rich by the end of the four year can resort to taking a job at a big company. One year of that will pay off most of the loan, and will allow him to take a separate loan from the bank to cover the rest."

So, if in one year your hypothetical recruit could pay off the majority of this $100000+ %20/year loan, why wouldn't they just work for one year at big co, save a bunch of money and then quit to do the startup?

A year is a very long time to lose, in my opinion. That's why I wouldn't do it. But for a worst-case scenario, I find it acceptable.

I'd be interested to know what your assumption is of net income this person would have to receive in order to be able to pay off the majority of the loan in 1 year.

Maybe I read this too quickly, but the vast majority of people you'd want to lend this kind of money to are either (a) not going to want to borrow money at 20% interest, or (b) have access to far lower interest sources of funding, even in the unsecured context. This idea doesn't make much sense to me.

As for (a): 20% is considered a huge interest by most people. But that's because most people are not entrepreneurs. A good entrepreneur is a poor college kid at age 20 and a multi-millionaire at 27. That's a growth rate that far exceeds 20%.

I would personally take that loan at 30%, and even more.

For (b): I don't have access to such a thing. I found that without a job I couldn't get a loan bigger than $10,000. I would be very happy if you showed me a program which would give me a big loan, at any interest rate which is below 40%.

A good entrepreneur can also get equity financing on reasonable terms, usually.

For a start-up proper, yes. But most of my projects are not really start-ups which I can sell equity from.

Imagine you decide to study some cool new technology. You are making a bet: Learning this technology now might get you a great reward in the future, but you can possibly just be wasting your valuable time. So it's a sort of mini-startup, your study of this technology. But you can't sell equity out of that thing.

How do you expect to pay back debt then?

If you're looking for ways to support talented people with pie-in-the-sky ideas, that's what the Macarthur Fellowships are for. Those are outright grants, so the people in question can concentrate on what they love and not have to worry about paying back a high-interest loan.

Maybe 1% of startups get VC or angel funding. Do you really believe that getting funding is easy? Especially in this climate, investors wouldn't put money in Bill Gates today if he begged.

No. I believe that good entrepreneurs are that rare.

High interest loans would likely get defaulted on, as $100k isn't very much money for someone who has a house, good credit or a co-signer who can help them get more.

It'd be a small sector of people who'd qualify and among those, they'd either be ill equipped to hit a home-run the first time out or other factors would preclude them from succeed the way they'd want to.

I appreciate the sentiment, but I think there are a lot of better ways that you could reach "ordinary people" (aka, folks who don't know what Y Combinator is and would never care) without offering them high interest loans.

The barriers to entry to capital are high and programs that say "forget business plans that no one reads, lemme see what you can create in a short period of time," are the right model, but there are status quo ways to do that and the pitch of "we can create millionaires" isn't going to do much for the ones you're asking to pony up the cash.

You can finance yourself with credit cards for a far lower interest rate than this. If you're betting on your ability to pay back debt, and there's no value add for taking the money (such as an investor with connections), then you go with the cheapest cash available.

The two credit cards I have will give me a maximum loan of $3,000 if combined. If a credit card gave me $100,000, I'd take it.

Your a priori success-rate of 85% is hard to manage and 5-10% annually in return is too low for that risk. I can invest in opportunities with a higher return on equity and have things better under control.

But your scheme is flawed in just another way: You invest in the entrepreneur, but you don't profit from his success. You're just granting a credit (% on capital), not making an investment (% on performance).

And there alread _are_ such schemes, where investors can give money to high potentials and profit from their later income. These high potentials have to take a life insurance for the case they die in the meantime...

You will have a bunch of free-loaders taking the money and then declaring bankputcy or otherwise weaseling out. YC does not give that much money so it's not a problem for them (they also make you go over there so it's actually easier to ge a job for any would-be free-loader).

The big problem to solve is reputation - if you can reliably figure out who is trustworthy then you might be onto something.

Also, debt is a lousy choice - investor upside is limited and not proportionate to the amount of the value they bring to the table. Equity will make a much better choice. I don't think it should be hard to draft up a contract that says "I will give up 10% of my earnings over 100k/year up to the maximum of $1m total in exchange for $100k investment". Talk to a lawyer about this. But once again, anyone can simply declare bankputcy and get rid of this contract.

Your problem is about finding a) honest and b) resourceful people to invest into.

I think you're missing two key points about YCombinator:

  - YCombinator doesn't make you give the money back if your thing doesn't take off.
  
  - YCombinator's isn't really giving you money.  They're giving you influence and contacts.  That's *huge* in this industry.  The money is not really a factor.

All your program seems to offer would be a loan with a bad interest rate. As others in this thread have noted, that sounds like a bad investment from both sides.

Now if you could come up with something that actually modeled what YC does, but for individuals instead of companies, then that might be a good idea. "Here's 20k and a pile of help. Knock yourself out, but we get 6% of anything big that you do".

The only part I agree with is investing in the entrepreneur. Check out http://www.entrepreneurcommons.org/

Your major flaw is that you assume 85% success. The truth is that for $100,000 loans, most entrepreneurs will spend it and then default on the loan.

Entrepreneurs will invest the money you give them: hire people, hire contractors, build stuff, etc. Once their venture fails, they come back to you and apologize, but the money is gone.

To use your words, your plan is great for the entrepreneurs, and very lousy for the investors.

"...the total interest generated by the fund will be 5% per year. " "...the fund interest could exceed 10% per year."

I can buy MO right now at a dividend yield of 7+% and have equity in the company. Assuming zero change in the dividend payout or stock price over the next 5 years - which I don't think is any more unlikely than your assumed 85% required success rate, the 5%-10%/year (with no equity) from your assumptions doesn't seem quite so attractive.

Won't work, here's why: As an average schmo, I can access (via credit cards) just as cash at a similar rate. And if I fail, I can walk away from it with no danger to my reputation. Credit report, yes, but who cares about that? You are a sucker waiting to get milked.

This sounds a lot like a student loan, except with a much shorter term and higher interest rate.

There will likely be problems with usury laws in various states that regulate the maximum amount of interest charged on a loan.

Short of a DNA scan, it is hard to see how one could select the best individuals. If one could show that one's parents were big business people, that lends confidence, but there is always a chance someone is on the short end of the gene pool. Would not it be great if we could predict the winners from the losers in society ahead of time, based on some selection criteria. But this is difficult. A DNA scan (expensive in itself) could show health and even cognitive fitness, and that could be augmented by IQ tests, etc., but there is not a sure way to do this. Only markets can determine fitness, and that is in retrospect. Ahead of time, I do not see how we can predict the fittest members of society, which is what this scheme would demand, the ones "most likely to become millionaires". Performance picks the smart from the dumb, but predicting this ahead of time is dubious. A DNA scan is as close as you could get I suppose, to weed out people with a likelihood of developing mental problems later on in life, etc., but still, there is error here. You want to find the Over-Man of Nietzsche. In my opinion the only Over-Man is that what the market determines. And you can't ever know that ahead of time, even with DNA sequencing. That helps your probabilities but you are still playing dice. Frankly I feel there is no such thing as the "Over-Man", there is only people whom markets favor over others, and knowing which ones those are going to be is rather hopeless.

Forget DNA and the over-man. For starters I would take the 200 best rejected candidates from Y Combinator.