Want To Invest In People Instead Of Companies? Now You Can! (Entrepreneurial Intelligence)

Crowdfunding is a busy place these days.  While the largest and most popular site, Kickstarter, continues to fund a variety of creative projects (last year Kickstarter funded more creative projects than the National Endowment for the Arts...), specialty crowdfunding platforms are now available for everything from education to issues in the developing world to scientific research to, of course, porn.

For me, understanding crowdfunding is becoming an increasingly important part of what I call "entrepreneurial intelligence" - or, stuff that is outside entrepreneurs' control but is still critical to their success or failure.  Crowdfunding is rapidly filling a space left untouched by bootstrapping, angel investors and venture capitalists and understanding the strengths and weaknesses of various crowdfunding platforms would seem to me to be a critical intelligence requirement for entrepreneurs.

One of the most interesting of the new crowdfunding platforms is Upstart.  Upstart allows you to invest directly in a person.  In other words, you give them some money now to pay off a loan or to learn to code or to expand a business, and they promise to pay you a small percentage of their income over the next 5-10 years.  Repayments are capped (typically at 3 to 5 times the amount invested) so people can pay off their backers early if they make a lot of money.

 

Like a venture capitalist or angel investor, you could lose all of your money if the person you backed doesn't make enough.  Upstart uses statistical models to predict how much the "upstart" will earn over the next ten years based on degree, school attended, test scores, number of job offers, work experience, etc.  The amount the upstart can ask from backers is based on this model but as Upstart notes:  "Any estimate of returns is highly speculative, subject to a high degree of variability, and not based on historical experience. The pricing engine is novel and untested and relies on broad-based statistical data that may not be representative of any individual’s actual future income."

This is, however, a pretty good deal for investors if everything works out as planned.  A $300 return on a $100 investment over 5 years represents a nearly 25% annual rate of return.  Sure beats the 2 bucks your average money market fund will likely yield over the same period...