Life Capital: ISAs in Practice Today

A market map & deeper look into the ISA category

This past Wednesday (March 27, 2019) was the first ever Life Capital Conference hosted by Slow Ventures, Village Global, The Information, and Cooley.

We discussed the benefits of ISAs (i.e. improved accessibility, incentive alignment, downside protection and outcome transparency), current challenges (i.e. potential for higher costs vs. debt alternatives, adverse selection concerns, and the regulatory environment) and the potential future (i.e. cohorts cross-investing with each other or uncapped upside returns).

We heard from those currently employing ISAs in practice (such as at Purdue University), founders building new types of schools funded entirely by ISAs (such as Lambda School), politicians fighting for ISAs (such as Congressman Luke Messer), and investors financing ISAs or thinking about the future of ISAs (such as University Ventures and USV).

One of the strongest take-aways for us was the overall excitement and agreement that the continued growth and utilization of ISAs will contribute to improved information on what educational institutions and vocational programs provide for students. This increased transparency should enable more accurate pricing and will empower applicants to make better informed decisions.

To continue the conversation, we wanted to showcase more of the current landscape and share some of the most exciting developments in the space.

We further broke up the market map into 3 key categories:

1. Inside the Traditional Education System
2. Outside the Traditional Education System
3. Outside of Education

Inside the Traditional Education System: ISAs as a Financial Aid Option

Vemo Education has emerged as the leading partner for higher education institutions looking to develop, launch and implement ISAs. In 2017, Vemo powered $23M of ISAs for college students across the US.

This is a crucial point: Vemo isn’t competing directly with loans, but instead is unlocking other sorts of value (i.e., helping students better choose their college). The key here is that Vemo links an individual’s fortunes to the institution’s fortunes (rather than focusing on investors like previous providers like Upstart).

Vemo helps universities signal value to students by helping them offer ISAs that signal that the university wants to better align cost with value of its higher education program.

Purdue University

Purdue University is the most prominent university offering ISAs as an alternative financial aid option. In 2016, Purdue University began partnering with Vemo Education to offer students an ISA tuition option through its “Back a Boiler” ISA Fund. They started with a $2 million fund, and since then have raised another $10.2 million and have issued 759 contracts totaling $9.5 million to students.

Purdue markets its ISA offering as an alternative to private student loans and Parent PLUS Loans. Students of any major can get $10,000 per year in ISA funding at rates that vary between 1.73% and 5.00% of their monthly income. Purdue caps payments at 2.5x the ISA amount that students take out and payment is waived for students making less than $20,000 in annual income.

University of Utah

In January 2019, The University of Utah announced the launch of ‘Invest in U’, a pilot program to ensure that students finish their degrees. Funded by $6 million in donor, investor and university money, Invest in U is a perpetual fund that offers ISAs to students in 18 selected majors who are within one year of graduating. Eligible students can receive between $6,000 and $20,000 per academic year at a monthly rate of 2.85% for three to 10.5 years (depending on the major and amount received). Utah sets its payment cap at 2x the ISA amount that students take out and payment is waived for students making less than $20,000 in annual income.

Messiah College

Messiah College began offering ISAs to its students in June 2018. Under the terms of the college’s program, students can receive $5,000 per year in exchange for 3–3.5% of their post-graduation income for 84 months. Messiah set a cap of 1.6x the ISA amount that students take out and payment is waived for graduates whose annual salary is less than $25,000.

UC San Diego

San Diego Workforce Partnership and UC San Diego Extension are partnering to link the cost of higher education and lifelong learning to value. Similar to coding bootcamps, they are offering ISAs for high quality certification programs in front-end web development, java programming, digital marketing and business intelligence. The program is set to launch in Summer 2019.

Students will pay back between 5% and 8% of their income for 36–48 months. The philanthropy-funded ISAs also come with an income floor of $40,000, meaning no payment is owed if you don’t get a job after graduation paying at least $40,000.

The two institutions are leading the way by thoughtfully structuring its ISAs to ensure not only alignment of interests, but also to protect the ISA recipient. Notably, they are incorporating the following principles into their offering:

1. Minimum income threshold has to be informed by local cost of living
2. Payment caps in line with student loans
3. No credit check
4. Criminal history doesn’t affect financing
5. Competency, not pedigree (where one went to school)
6. Built-in career services

This program is one to watch given the opportunity for other philanthropies to follow suit.

Outside of the Traditional Education System: ISAs for Vocational Training

“Lambda School looks like a charity from the outside, but we’re really more like a hedge fund.

We bet that smart, hardworking people are fundamentally undervalued, and we can apply some cash and leverage to fix that, taking a cut.” — Austin Allred (Lambda School CEO)

Founded in 2016, Lambda School is an online bootcamp that trains students to become software engineers at no upfront cost. Instead of paying tuition, students agree to pay 17% of their income for the first two years that they’re employed. Lambda School includes a $50,000 minimum income threshold and caps total payments at an aggregate $30,000. They also give students the option to pay $20,000 upfront if they’d rather not receive an ISA.

Lambda School’s curriculum includes the following tracks: Full Stack Web Development, iOS Development, Android Development, Data Science and UX. Lambda School students end up with 1,500–2,000 hours of training, comparable to the level of training they’d receive during a CS-focused portion of a four-year CS degree. Their full-length program is 9 months, but students have the option of enrolling part-time as well.

The program is optimized for workplace-relevant skills, but Lambda doesn’t just teach its students computer science, it also offers students a series of career and professional development workshops and an internal apprentice program. Each student is assigned a career coach and students get to participate in company presentations, with hiring managers from companies like The New York Times, Uber and Etsy. Lambda School has raised $48 million from venture capital investors such as GV, YC, Bedrock Capital and Stripe.

Holberton School is a venture-backed startup that’s rethinking how we learn by providing a full-stack software engineering education built on a project-based and peer learning model. Students pay nothing up front and enroll in a two-year program. In exchange, students agree to pay 17% of their income for 3.5 years once they find a job paying at least $40,000 per year (with a cap of $85,000 total payments).

Holberton School, named after Named after Frances Betty Holberton (one of the original six programmers of the ENIAC), has raised $13M from investors including Trinity Ventures, AME Cloud Ventures, Omidyar Network, Reach Capital and even R&B singer Ne-Yo. It has campuses in San Francisco, New Haven, and most recently launched international programs in Colombia.

Through its Catalyst program, General Assembly (“GA”) offers ISAs for its immersive full-time user experience design, web development and data science programs. These programs are 2–3 months long and cost ~$15,000. Once graduates land a job earning at least $40,000 annually, they’ll start paying back 10% of their income over 48 months (with a cap of 1.5x the cost of tuition). GA gives students a three-month, payment-free grace period. GA currently only offers ISAs to US citizens or permanent residents who are 18 or older.

Founded in 2012, Make School is a two-year computer science program marketed as an alternative to a traditional four-year university program. Make School is unique in that it is accredited (via a partnership with Dominican University) and its students earn a Bachelors in Applied Computer Science degree. They are taking advantage of the college model for distribution (with plans to turn Make School into a college itself).

Make School enrolls 200–300 students in its annual cohorts and claims that its graduates start their careers with an average salary of $95,000 (on par with graduates from top-tier programs). Students have the option of paying $70,000 upfront ($40,000 in year one and $30,000 in year two), but the majority of students opt for using an ISA to finance their education.

If they choose a full ISA, they pay no upfront tuition and agree to pay 20% of their gross salary for 60 months (only paying when they have a job making more than $60,000 / year). Make School students also have the option to pay half of their tuition upfront and pay for the remainder with 20% of their gross salary for 30 months. Make School has raised $10 million from investors such as Kapor Capital and YC.

Founded in 2017, Pathrise (YC ’18) is an 8-week long career accelerator that helps students break into software engineering, product management, data science and UI/UX design jobs. Their offering is less like a traditional coding bootcamp, rather it’s highly customized to the student’s schedule and goals. Pathrise helps with your online presence, networking, interview preparation and some hands-on project-based work. The group of students they work with is diverse, with many first-generation university students who don’t have the existing network of professionals and peers to talk to about how to prepare for a technical interview (see their FAQ for more details).

Pathrise charges no upfront tuition for its fellowship, but requires that full-time job seekers pay back 9% of their first year’s income over the course of six months. For internship seekers, Pathrise reduces this to a 6% annualized percentage for the income share. Students can choose to opt out of the program after two weeks with no liability. Pathrise has raised $1 million in seed stage financing from GoAhead Ventures and Y Combinator.

Founded in 2017, Microverse offers a six-to-eight month long, full-time remote software development course with no upfront costs. Microverse students receive job interview prep, have unlimited access to a career coach when they graduate and only pay once they receive a job as a software developer. Graduates agree to pay 15% of their monthly salary up to a cap of $15,000 once they get a job as a software developer making at least $1,000 per month.

All of Microverse’s courses are online and its methodology uses collaborative learning. Each student works with a pair programming partner, a standup team, a mentor and technical support engineers who are graduates of the program to help and design development projects using technologies such as JavaScript, React, Ruby on Rails and Node.js.

Examples of ISAs and ISA-like financial products outside of Education

Bowie Bonds

Musician David Bowie (along with his investment banker, David Pullman) was ahead of his time with “Bowie Bonds,” the first instance of intellectual property rights securitization, allowing fans to own a piece of an artist’s future earnings.

Unlike ISAs, Bowie Bonds were asset-backed securities of current and future revenues tied to the 25 albums that David Bowie recorded before 1990. In exchange for $55 million, Bowie gave up royalties from those albums, which generated the cash flow that secured the bonds’ interests payments.

Other artists such as James Brown and the Isley Brothers also securitized some of their collections, but since the 1990s the market for celebrity bonds has been limited.

Mike Merrill: The First Publicly Traded Human

The story of Mike Merrill is a fascinating one.

In 2008, when he was 30 years old, Merrill divided himself into 100,000 shares at $1 apiece and let people buy stakes in his life. Investors give Merrill money, and in exchange, he values input on major life choices based on how many shares an investor holds. As Merril describes it on his website, “my stock price will become a benchmark for my success; the higher the stock price, the more optimistic my shareholders are.” You can literally check his live ‘stock’ price here.

Merrill pitches the concept as an ‘experimental decision-making engine’, and less as an investment:

“Business is a social science of managing people to organize and maintain collective productivity, and to accomplish particular creative and productive goals; after all, the etymology of the word “business” refers to the state of being busy.

It’s not about generating profits, particularly, although that will likely happen: it’s about a group of people working towards the same goal. By using an adapted structure of the market economy, you and I have a ready-built mechanism for operations, accountability, and measuring success that is not only well documented but also easily understood.”

Founded in 2012 by a former Benchmark GP, Fantex was a company that allowed individual investors to buy and sell shares in entities tracking the earnings of professional athletes. NFL players such as Vernon Davis and EJ Manuel sold rights to their future earnings in exchange for some of the proceeds of the placement of a tracking stock. In some cases, Fantex has had to sue athletes to recoup payments. In August 2018, a judge ruled that Titans wide receiver Kendall Wright pay $400,000 to Fantex, money he owed after taking $3.2 million in exchange for a 10 percent interest in his “brand income”. Before it shut down in 2016, Fantex did IPOs for six athletes (worth $26 million) along with $60 million in private placement transactions.

Poker players have been selling action, or backing each other for probably as long as poker has existed. Professionals often teach students for free, but arrange to back them in exchange for a stake in their upside (aligning incentives).

Founded in 2013, YouStake is an open marketplace where fans can directly sponsor their favorite players for as low as $20, giving the player a way to hedge while giving fans a share of the upside potential. Players offer their own terms and YouStake takes care of the contracts, tracking and analytics, transactions and payouts in exchange for a small fee

Attracting Foreign Talent with ISAs

With the ongoing shortage of CS grads, ISAs can be used to fuel the migration of diversified foreign technical talent to the US.

Technical talent can be found around the world, however, the most attractive salaries, work culture, and an open environment are offered in the US. An alternative solution for the US tech shortage is not to merely educate more CS majors but to bring top talents from around the globe to the US. However, immigration and relocation of top talents are costly. Immigration is convoluted and presents a risk. Using ISAs, talented and extraordinary immigrants may find the right financing in order to establish a career in the US without the need to risk their life savings or go through the hassle of getting a loan.

PassRight, The O-1 Visa Company’ — is reducing the roadblocks faced by foreign talent who qualify for the O-1 Talent Visa by financing their entire immigration costs in exchange for a percentage of their salary.

PassRight believes that Income Sharing Agreement model is ideally suited to the industry due to the high wages on offer. PassRight offer several financing models, one of which is an annual repayment of 17% of your salary, capped at $30,000 if you land a job

Conclusion

We hope this previous Life Capital Conference was just the first of many. We’re looking forward to continuing the conversation!