Imagine if you could invest in the education of a girl from Bhutan, where the average monthly income is $150/month, and make her competitive in the global marketplace where jobs pay an average of $6000/month. This 40-fold return on a monthly salary could easily repay investors five- to ten-fold, while making the student ten to 15 times better off. This could potentially be the world’s biggest investment market, since ‘human capital’ represents 90% of the world’s wealth, and equity/stocks only 2%. If only 2% of the global workforce was ‘investable’, a market for funding students would be bigger than the common stock market.
So, with huge wage differences and an enormous market opportunity, why are we not seeing the market mechanism fuelling a capital flow into the education of 200 million young people in emerging markets without access to education?
Market failures in student finance
The first obvious answer is that a global job market, and not just local companies hiring local workers where state borders protect high-paying jobs from global competition, is required. Secondly, the costs of education, and risks in terms of drop-out, acquisition of obsolete skills, or ending in low paid jobs, all need to be lower than the potential gains. Thirdly, it would require world-class education to be universally available and sufficiently specialized in online job opportunities, as opposed to an education tailored to the local job market. Fourthly, it requires a screening process to avoid ‘adverse selection’ of cheaters and free-riders, by distinguishing high-risk/low-potential students from low-risk/high-potential students. Fifthly, it requires a solution to the ‘information asymmetry problem’, since investors often feel uncertain of the true intentions, qualifications, motivations and future earning potential of students. Finally, it requires enforceability and positive incentives for students to repay investors.
Taking these challenges into consideration, who would ever trust an unknown girl from Bhutan, who they’d never met in person, with an investment in something as illiquid as an education? You could not know whether the cost of her education would have any value; you would never be able to estimate what she would be able to earn; you have no way of estimating the risk of her being qualified or motivated to succeed; and you would have no way to get your money back, even if she succeeded. So the simple answer is that no one would invest, hence there is no private capital market for student finance: we’re left with unaccountable charity, tax-payers giving out aid or student debt problems, and the tragic consequence is that the brain power of 200 million young people is being wasted.
Building trust in Startup Coders
This is where CodersTrust comes in. Our big idea is to provide micro-finance for students in emerging markets to upgrade their skills, so they can earn more money on freelance portals such as upwork.com, fiverr.com and freelancer.com.
There are currently more than 5 million companies across the US, EU and AU posting more than 200,000 jobs across 150 freelance portals. There are more than 20 million registered freelancers on these portals, and 2 million actively bidding at any point in time. However, it takes an upfront investment — a laptop, access to the internet, and the right skill-set — to compete for these jobs.
CodersTrust provides the required seed investments into early-stage freelancers, based on a ‘human capital contract’ where the freelancer receives student funding in exchange for a percentage of his or her income from her freelance profile over a fixed period of time. With CodersTrust the girl from Bhutan can essentially share the risk of an education with an investor by selling a percentage of her future income if she is successful on the freelance market. In a sense, this makes the freelance profile a joint-venture startup between the student and CodersTrust as a kind of incubator. Currently CodersTrust manage the human investments in students as a venture fund, taking advantage of risk pooling and diversification: by securitizing contracts and offering investment opportunities on an open market, with CodersTrust as the middleman, the cost of capital for students will be reduced over time. Investment opportunities are both ‘shared equity’ investments and ‘covered impact bonds’, backed by cash flows from the earnings of the online freelance profile.
The idea was originally introduced by the Nobel prize winner Milton Friedman in 1945, without actually being implemented on scale, but with the rise of the online freelance market building a human capital marketplace for student finance is now a realistic prospect.
A better model for education
As opposed to public solutions, that just transfer the risk to taxpayers or student loans that cannot offset the high risk of education, this ‘shared equity’ financing reduces the risk for students, improves information and decisionmaking regarding the value of education, and increases competition between course providers.
The girl in Bhutan will never face the possibility of defaulting, feeling pressure to meet fixed monthly payments, or being stuck with a debt burden while struggling with low-paid jobs. The investor, on the other hand, is in a much better position than the student to pool and diversify risk. With a critical mass of investment, high-income earners will end up covering the losses produced by low-income earners. Education becomes more efficient and the economic value of different courses compared to the cost becomes more transparent. The girl from Bhutan would have a much clearer picture of the potential of investing her time, and the investor’s money, on an education. There are more than 100,000 courses available on over 100 online educational marketplaces, including Udemy, Teachable, Lynda, Skillshare, Courseara and Pluralsight — but besides being too expensive for the girl in Bhutan, there is no way to estimate the expected return from an investment in these online courses. Increased transparency would result in more competition between online course providers, and students would benefit from lower relative costs and the incentive to pursue higher future earning opportunities.
Finally, shared equity financing promotes equality of opportunity for underprivileged, disconnected and remote workers in every corner of the world and addresses the ultimate source of global income inequalities without any downsides, such as limiting competition or distorting incentives.
Fixing human capital contracts with FINTECH
Despite support for the idea from numerous Nobel prize winning economists — and attempts to implement the idea by Pave, Upstart, Yale, Lumnia, Australia — we are very far from having a functioning capital market for student finance. What makes us different, and sets us apart from the previous approaches to the problem, is a FINTECH solution relying on software to make student finance work more efficiently:
1. Everything is online and can be tracked, measured and analyzed in real time. The entire student cycle is online, digital, trackable and partly automated, from marketing profiling on Facebook, to student selection, trial periods, enrollment, e-learning and working online for clients on freelance projects. CodersTrust would not have been possible without Facebook (direct access to 1B people), Massive Open Online (MOOC) companies such as Udemy, Pluralsight and Coursera (providing more than 100,000 world-quality courses available to anyone, anywhere) and freelance portals (160 million jobs to be created by 2025).
2. An integrated ‘Learn&Earn’ approach, with earning from day one instead of incurring debt over a seven year university degree and then repaying it over a 30 year corporate career. The freelance market consists of small “gigs” and “projects”, so students can essentially work from day one and are able flexibly to study when they are on the bench without any projects or tasks. This reduces the required investment and the amount of time before the student becomes ‘cashflow positive’.
3. Everything is focused on building an online reputation for the student, with customer ratings and reviews as an asset for increasing returns, ensuring both a collateral to be confiscated and an incentive for students to keep working from their freelance profile and to repay the 10% commission to investors.
We are still in the early phase of building CodersTrust, but hopefully this article has shed light on the reason we keep working hard every day, and why we believe we’re building the world’s most powerful venture capital opportunity. A world with a functioning capital market for student finance would enable anyone, anywhere, to access the same opportunities we enjoy in the western world. The ultimate promise of CodersTrust is to ‘deliver freedom on a single piece of plastic’ (credit card) to anyone in the world. This is a cause truly worth both investing and fighting for.