Category Archives: Social Lending

New Peer-to-peer Lender Enters Space.

RainFin: latest entry into peer-to-peer lending – but, in South Africa.

RainFin intends to disrupt South Africa’s financial services sector by allowing credit-worthy South Africans to engage in peer-to-peer lending, cutting out banks in the process and offering higher returns to lenders and better interest rates to borrowers.

Sean Emery, cofounder and CEO of RainFin, says the company’s online platform links people who need to borrow money with people who have money to lend. He says borrowers can access funds at lower interest rates and with better terms and conditions than they could through a bank.

Emery says borrowers may be able to get interest rates as low as half of those offered by traditional banks. Lenders, meanwhile, can achieve “superior returns” on money they loan to others. He calls it “social lending”, and it fits well with American models that are rolling out this year, in advance of the JOBS act and attendant CrowdFunding bill, though Emery contends social-lending is different.

Lending is making the wrong people rich and the wrong people poor,” says Emery. There’s an important distinction between “CrowdFunding” and “social lending”, he says. The latter is a subset of the former and sees a group of people engaging in transactions while sidestepping traditional intermediaries rather than pooling resources to create a product or fund an event.

In order to use RainFin, consumers must be older than 18 and resident in South Africa. The site employs a thorough credit vetting process, after which borrowers can apply for loans of between R1 000 ($123 US) and R75000 ($9,191 US) using the RainFin marketplace.

These are small, short-term loans. Borrowers can specify the loan amount, the maximum interest they are willing to pay and the loan duration they prefer. The maximum repayment period is one year.

Individual lenders, meanwhile, can invest between R100 ($12 US) and R500000 ($61.275 US) in the service and spread it across numerous loans. Investors are not obliged to lend to groups or individuals, and have access to anonymous credit risk information based on factors such as age, gender, location and credit score.

RainFin earns a percentage-based transactional fee on every loan that takes place. Emery says this makes the costs of the platform “completely transparent” to its users. There is a 2% origination fee charged to the borrower and a 1% fee to lender for managing the transaction. Thus, the service takes 3% of a transaction’s value, added to it.

“We believe that consumers have an opportunity to take back some of the power they have given to banks, benefitting each other rather than large institutions in the process.”

Emery says RainFin intends to add other products to its offering, including financing for small and medium-sized businesses and mortgages in coming months.

The service is aimed at two types of borrowers. The first are highly creditworthy borrowers who want a better return on investment than they get currently.

The second is the first-time borrower or a borrower that is shunned by the formal banking sector because of their age — whether too young or too old — or because they are freelancers, students or entrepreneurs.

At launch, the service is designed to handle up to 100,000 users. Emery says there are no plans to launch the service outside South Africa on account of the banking regulation complexities that it would entail. The service doesn’t require a banking license because it doesn’t take deposits.

“In the same way a real estate agent isn’t a bank, we aren’t either. We don’t take deposits and reinvest them for profit; we merely facilitate the moving of money between people,” says Emery.

Co-founder Hannes van der Merwe says RainFin is not a micro-lender. “We are not trying to extract as much money out of you as we can.” He says one of the challenges the service faced was designing a process that would allow users to engage in a legally binding contract online.

Lenders stipulate the interest rate they are prepared to accept and, in the case of two or more lenders offering the same rate, the first to bid on a loan request wins it. The service warns lenders if it appears a lender is taking on too much of a loan and inadequately spreading their risk on the service.

Van der Merwe says lenders can be kept up to date on new loans coming into the marketplace via Web feeds. Alternatively, the service includes an automatic “bid agent” that will bid on loans that meet specific criteria or notify the lender via e-mail.

Emery says the bulk of the service’s marketing will be done online, as that is where its audience is. “We are focused on using the mediums in which we operate so online, mobile and social networks to start with,” he says.

RainFin is funded by SA capital and went live on Tuesday.

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Crowdfunding Update.

David Drake of LDJ Capital and TheSohoLoft.com continues today with his sixth article on his series regarding CrowdFunding for equity solutions, reprinted here with his permission.

Perhaps it was no surprise when Mary Schapiro, Chair of the Securities and Exchange Commission, told a House subcommittee that the Securities and Exchange Commission will not meet the July 4, 2012 deadline imposed under the JOBS Act to implement rules for lifting the general solicitation ban under Regulation 506, Section D (advertising rules).

Ms. Schapiro explained to the House Committee on Oversight and Government Reform on June 28, 2012 that the JOBS Act mandates that the SEC create rules that will require issuers to verify that they are accepting investments only from accredited investors who are responding to a general advertisement. Creating such rules are difficult and will require more time. “We want to create something that is workable and usable,” she said. The SEC Chair expects that general solicitation rules will be issued “this summer.”

The SEC’s commitment to provide general solicitation rules this summer is encouraging and badly needed. Representative Patrick McHenry probably summed up the urgency for the rules the best by advising Ms. Schapiro: “Entrepreneurs are waiting and we urge you to move forward with that.”

As the SEC develops rules for general solicitations, issuers must understand that they will need to move cautiously if the plan to use general advertisement to solicit offerings. The JOBS Acts require that issuers verify that they are accepting investments only from accredited investors under the SEC Act. The SEC rules ultimately will determine what verification process is needed and whether any safe harbors are available. We suggest that issuers looking forward to make general solicitations stay apprised of developments as the SEC formulates its rules, so that issuers are prepared to move forward when the rules go public.

The Securities & Exchange Act in 1933 required that only accredited investors could be solicited for investments and non-accredited investors could not be unless they had an exemption through Reg A, Reg D, a Direct Public Offering or a registered security being traded on an exchange.

Under the 1933 Act, the accredited investor was considered someone who made $200,000 per year the previous 2 years and expected to make $200,000 the following year or a couple making $300,000.  Under a later amendment adopted in 1982, another criteria that would allow you to qualify as an accredited and sophisticated investor would be that you had a net worth of $1,000,000.

While the Dodd Frank Act was under consideration, the SEC pushed for a high net worth amount for an accredited investor. This was highly opposed and removed. What was accomplished out of the Dodd Frank Act was:

a) The equity of your primary home would not count towards your net worth.

b) Debt surpassing your equity would count against your net worth.

c) The equity in your summer / vacation / secondary home would count towards your net worth.

The Dodd Frank Act also prohibited the SEC from adjusting the net-worth threshold for a natural person for four years.

If you take inflation into consideration, the $200,000 per year salary in 1982 would be the equivalent of approximately $1,000,000 today, and the net worth requirement set in 1982 would represent a net worth of approximately $10,000,000 today. Wow, that would not leave many people to invest. Another argument would be that are only rich people entitled to invest in private and exciting deals? Are the select few that made money on Facebook the only ones to ‘give it’ to the less rich?

Granted, $200,000 makes you rich today but I was alluding to the rich just like their counter parts in 1933. Remember, the SEC 1933 & 1934 Act was created to protect the non-accredited investors from fleecing but also to assure that they did not leverage their home 99% and spend all their money on stocks that would not only be worthless but put them jobless and homeless. The 1929 crash that led to the great depression was extreme.

While the status quo remains for determining the financial threshold of an accredited investor, a fundamental change is approaching on solicitation. Currently, any issuer intending to rely on Rule 506 of Regulation D cannot engage in any general solicitation or advertising to attract investors. The Jumpstart Our Business Startups Act (JOBS Act) directs the SEC to remove this prohibition, which the SEC expects to implement during the summer of 2012.

Here is a little history on the non-solicitation rule. Be reminded that there was no TV or internet in 1933. The ban on solicitation to non-accredited investors forced brokers and companies to only talk to ‘rich’ people for investments, that is, the accredited investors. The JOBS Act asked the SEC change the writing in 90 days – that is July 4th, 2012 – Independence day – at which point advertising online, via email to millions or on TV would allow you to advertise you wanted capital for your stock to the general public.

Note, you still could only take money from accredited investors but the monumental change is that you can freely advertise wildly. Yet again, you would lose your exemption status under Reg D 506 if you took one single non-accredited investor and they decided to sue you later for loss of capital — a rare occasion but a legal premise that may hold true. So, will this amendment be implemented by July 4th and we will see media go bananas with everyone with their mother advertising stocks of private companies you can buy?

No, the SEC will not allow such madness as they will implement a safe harbor to assure that the ‘accreditation” of an investor through this means is verifiable and not necessarily just self-monitored by the issuer.

David Drake is a founding board member of CFIRA. Crowdfund Intermediary Regulatory Advocates, or CFIRA, was established following the signing of the Jumpstart Our Business Startups (JOBS) Act. CFIRA is an organization formed by the CrowdFunding industry’s leading platforms and experts. The group will work with the Securities & Exchange Commission (SEC), the Financial Industry Regulatory Authority (FINRA), and other affected governmental and quasi-governmental entities to help establish industry standards and best practices. For more information, visit http://www.CFIRA.org. Connect with TheSohoLoft at facebook.com/TheSohoLoft and sign up for newsletters at www.thesoholoft.com, or contact Donna Smith, Communications Manager, for more information at 212.845.9652 or via email at donna@LDJCapital.com.



Since this post dating back to April of this year, got such a huge audience today, I thought I would re-post it again. Enjoy!

iPeopleFINANCE

Can you tell the difference?


Mitt Romney has gone to great lengths to distance his Massachusettshealth plan from the ObamaCare Act, without specifically or even generally, providing any insight whatsoever into what he perceives to be the  differences, so I guess it is up to us to try and do that. The facts appear to be that there are an awful lot of similarities between the plan he signed in Massachusetts in 2006, and the one that President Barack Obama signed in 2010.

Key among them: Both leave in place the major insurance systems; employer-provided insurance, Medicare for seniors and Medicaid for the poor. They both seek to reduce the number of uninsured by expanding Medicaid, and by offering tax breaks to help moderate income people buy insurance. In both cases, people are required to buy insurance or pay a penalty, via  a mechanism called the “individual mandate” in ObamaCare, and “individual responsibility” in 

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Peer-to-peer Lending Update.

It’s time for an update on peer-to-peer lending and social finance.

Years ago, clipping coupons from bonds was the province and passion of people in retirement. Today, a tidal wave of aging boomers want income, but traditional sources basically suck. Ten-year ­Treasury’s yield 1.6%. Safe-money bank CDs? 0.5%. Investment-grade corporate bonds are delivering 3.2%.

So retiring boomers are seeking alternatives. That’s why dividend stocks and annuities are very popular. But, there’s another cool source of high yield investments that are rapidly growing in popularity. Peer-to-peer lending, or making personal loans via the Internet, using websites like LendingClub.com and Prosper.com, have proven to represent a new and attractive asset class for a broad range of investors.

       

They have been around for 6 years and have had some bumps, including weathering a financial crisis and the current recession, peer-to-peer (P2P) lending has earned its place on an income investor’s menu.

The basic premise of these bank disintermediaries is that they harness the networking power of the Web to match people who have excess cash, with people in need of it, or those who simply want to do things like refinance credit card debt.

The key to its success has been how the sites have managed the inherent riskiness of unsecured personal loans. Believe it or not, it is now possible to earn yields of 6% or more, making relatively safe loans to complete strangers.

Los Angeles financial advisor Brendan Ross committed $300,000 of his own money to Lending Club in early 2011. Based on his quarterly interest payments he claims he has accrued about $40,000 in income to date. Annual yield: 10.2%.

“I’d been tracking the P2P space pretty much since the inception,” Ross says. “I was waiting to feel like its loan underwriting model had matured.”

San Francisco’s Lending Club is the largest P2P lender, followed by its crosstown rival Prosper. And, there are several other, specialized sites (like iPeopleFINANCE) who offer a lending model that is different than the securitized model of Lending Club and Prosper. These offer a direct lending model where an investor chooses one individual borrower based on an affinity profile and makes a small, short term loan where the investor can earn higher interest rates, yet still be able to enjoy mitigated risk.  Lending Club and Prosper have loaned a total of more than $1 billion since inception, in 112,000 loans.

Lending Club currently issues about $45 million in loans a month versus Prosper’s $13 million per month. Prosper ran afoul of the SEC in 2008 and temporarily shut down to “revamp its risk-assessment model” which is corporate code for getting into SEC compliance.

At Lending Club, after a quick registration you can sort through hundreds of potential loans. Each loan has its own risk rating, term (either 36 or 60 months) and rate of return.

Loans with the highest rating—based on the borrower’s FICO score and some additional analysis—pay in the 5% to 9% range—about the same as junk bonds. Interest rates on riskier loans range as high as 31%. Both companies also offer diversified funds of aggregated loans and IRA options.

Lending Club and Prosper vet thousands of loan applications, whittling down the pool to only those borrowers the company deems least likely to default. Renaud Laplanche, cofounder and CEO of Lending Club says his firm declines about 90% of all borrower applications, focusing on the 10% of borrowers with the best credit. Which makes them essentially, banks.

Of course, defaults do happen. Lending Club’s top-rated three-year loans expect a default rate of around 1.4%, and the riskiest loans, offering rates as high as 25%, have a 9.8% default rate. By contrast junk bonds have an average default rate of 1.9%.

It’s prudent to opt for the pools of hundreds of P2P loans both sites offer. That’s how advisor Ross is earning 10%, despite a handful of defaults on direct loans he made, because his defaults were offset by his performing loans. With the emerging market lenders like iPeopleFINANCE, the investor cannot hedge his risk in the same way, but due to iPeople’s proprietary credit scoring algorithm, an additional 20% of applicants get funded, and get a higher credit rating than their FICO scores would yield from the big-3 credit bureaus.

Additionally, iPeople insures that each borrower has in place a free, pre-paid, re-loadable debit card that receives a direct deposit with each paycheck that guarantees the loan payment, so the risk of default is very low. iPeople is targeted to young Gen-Yers and to returning Vets from Iraq and Afghanistan. Both of these groups have had little opportunity to establish credit, prefer a more cash-oriented lifestyle, and seek relationships with non-traditional banks. iPeople offers a suite of mobile cash applications tied to the debit card, that can be downloaded to smart phones, and can efficiently deliver banking services to customers 24 hours a day, 7 days a week, wherever they may be.

John Mack, former chairman of Morgan Stanley, is a convert to P2P lending. After committing several million of his own capital to such loans, he joined Lending Club’s board in April, lending a strong measure of credibility to the space.

Of course, a couple of former Wells Fargo executives have joined iPeople’s board as well, sending strong messages to the markets that peer-to-peer lending is here to stay.


Crowdfunding Entrepreneur Gives Commencement Speech.

A pioneer in the Crowdfunding space is making the commencement speech to the UCLA class of 2012.

Entrepreneur Jessica Jackley, co-founder of an innovative peer-to-peer micro-lending website, will be the UCLA College of Letters and Science‘s 2012 commencement speaker. More than 6,000 students are expected to receive bachelor’s degrees at the ceremony, which will be held tomorrow, June 15, at Drake Stadium on the UCLA campus.

 “Jessica Jackley’s seminal work using social media to create social change makes her an ideal selection to reinforce this year’s commencement theme of leadership that is transformative,” said Judith L. Smith, UCLA dean and vice provost of undergraduate education. Hear, hear!

In 2005, Jackley co-founded the micro-lending site Kiva, a hugely popular and successful International micro-lending site, which allows Internet users to lend as little as $25 to individual entrepreneurs, providing affordable capital to help them start or expand a small business. Kiva has facilitated nearly $300 million in loans among individuals in more than 200 countries.

 She also co-founded and was CEO of ProFounder, which provides new ways for small business entrepreneurs in the U.S. to access startup capital through Crowdfunding and community involvement.

She is also a venture partner with Collaborative Fund, which focuses on investing in creative entrepreneurs who want to change the world through emerging technologies.

Jackley has been recognized widely for her leadership and accomplishments. She is the recipient of the 2012 Symons Innovator Award from the National Center for Women and Information Technology and was honored with the 2011 “No Boundaries” Innovation Award from The Economist magazine. She was a finalist for Time magazine’s 2009 ranking of the 100 most influential people in the world.

Jackley earned an M.B.A. from the Stanford Graduate School of Business and a bachelor of arts degree in philosophy and political science from Bucknell University in Pennsylvania. She is currently a visiting practitioner at the Stanford Center on Philanthropy and Civil Society.

Crowdfunding continues to legitimize and come of age.

 


Collaborative Consumption!

And, now for something completely different.

Collaborative Consumption is a phenomenon that describes a lifestyle generally associated with the Gen-Y population and has grown out of an ethos of sharing, a sense of community, and a sensibility around reuse, recycling and conservation.

The resulting economic model (and you all know how I love economic models) is based on buying, selling, sharing, swapping, bartering, trading or renting access to previously owned products. Technology and peer communities are enabling these old market behaviors to be reinvented in ways and on a scale never possible before.

From enormous marketplaces such as eBay and Craigslist, to peer-to-peer marketplaces such as Tradepal, Fiverr, emerging sectors such as social lending (Zopa), peer-to-peer travel (CouchSurfing, Airbnb and Onefinestay), peer-to-peer experiences (GuideHop), event ticket sharing (unseat.me) and car sharing (Zipcar or peer-to-peer RelayRides), Collaborative Consumption is disrupting outdated modes of business and reinventing not just what people consume but how they consume it. Collaborative Consumption is sort-of the opposite of Conspicuous Consumption, where instead of choosing to drive a new BMW, the status achievement is more associated with driving a used 1970s Volvo.

Collaborative Consumption sites are proliferating on the web, with new platforms announcing their launches on almost a daily basis. These platforms are pioneering new spaces, and while they are all tapping into the Gen-Y zeitgeist, they press human behaviors to such an extent that they are all experiencing a certain amount of initial resistance due largely to inertia.

Getting people to try an idea that might be perceived as ‘risky’, like sharing your home with a stranger, is difficult to actually accomplish over the web.

This foray into the world of Collaborative Consumption raises interesting behavioral and technical questions.  How do we use technologies to enable trust between strangers? Is it even possible? What’s the best approach for building critical mass?  How do we know when and how to scale? How do we design a user experience that gets to the essence of what people want? How do we build a trusted brand in the community?

Almost all Collaborative Consumption marketplaces depend on matching what people want with what other people have. Obviously, this raises the issue of building a critical mass of inventory (users, products or services) on both the supply and demand sides of the equation, but which side should one focus on first?

Many of these sites seem to lean on the supply-side in order to create a sufficient number of choices to both entice and retain users who are shopping for stuff. Easy to talk about, but hard to do.

One of the not so obvious pitfalls is to try and be everything to everybody, which will usually result in chaos. It is far better to limit the number of choice variables while you build up a controlled market of supply and demand. If you were offering ridesharing services, you may initially limit your offering to certain streets and routes and only during certain hours of the day. Known commute corridors during peak commute times for instance.

If you were offering to match up weekend accommodations, you might limit the locations to areas within walking distance of common tourist attractions in a given city. Or, near main subway or bus stops that serve the entire city.

This is why these marketplaces happen mostly on a local or neighborhood level, as people share working spaces (for example, on Citizen Space or Hub Culture), gardens (Landshare),experiences (GuideHop) or parking spots (on ParkatmyHouse). However, Collaborative lifestyle sharing is beginning to happen on a global scale, too, through activities such as peer-to-peer lending (on platforms like Zopa and Lending Club) and the rapidly growing peer-to-peer travel (on Airbnb and Roomorama).

In order to build a community of trust that will engender sharing and overcome the barriers associated questions like “do I really want to share my apartment with a stranger?”, successful sites will have reached out to their target community during launch and asked what the community wants the site to do and what they would like to see when they engaged. This is the first step in building a brand within the community that will support growth and expansion, based on complete transparency and honest communication.

In future blog posts, I will address the growth of the Collaborative Consumption online markets and the specific issues of critical mass, scale, user experience, trust and branding in detail. If you are interested in this topic and learning more, please drop a line to steve@ipeoplefinance.com. I am really interested in hearing about your experiences with peer-to-peer sites. Thanks.


You Say You Want A Revolution?

The JOBS Act – what it really means for the future of Crowdfunding.

So, my assumption here is that you already know about Crowdfunding, either because you have been following my blog or just because. But, maybe everyone on the planet doesn’t know. In case that’s true, let me explain. Crowdfunding is a mechanism that takes advantage of the reach of the Internet to offer opportunities to invest in startup enterprises to anyone with Internet access and a credit card or a PayPal account.

The whole idea is to bring the world of startup investments to ordinary citizens who would like to gamble some of their money on what might become the next Google. In addition, it provides a simple platform for entrepreneurs to post their business plans and raise money to launch their businesses. The JOBS Act is legislation that was passed recently in the U.S to kick-off a startup economy. The Securities and Exchange Commission has 270 days to examine and propose regulations that will support this legislation when it becomes law in February of 2013. The JOBS Act will have thrown 80 years of SEC laws relating to securities under the bus, so the SEC needs this time to temper the Congressional zeal for this passage.

The original driving energy really came from the credit markets that are still broken and would appear set to remain that way for a long time to come, and the regulatory requirements governing most businesses, which usually come later in the lifeline of a startup project. Congress seems to have wanted to find a way to reduce the regulatory oversight while still offering a modicum of risk management by establishing rules that govern the offerings of startup businesses on these Internet platforms. In early discussions, the SEC seems focused on education and not so much on risk warnings. In fact, the JOBS Act turned out to be the result of a conflation of six separate bills, all trying to put forward the same rough objectives.

Congress did what Congress always does, and ended up with a compromise bill that reduces the burden of some of the regulations found in the Sarbanes-Oxley act while still inffusing the new act with some form of  regulatory relief. As is always the case, we never get a pure solution to a simple problem from these guys. It isn’t in their DNA.

The main issues are around education, risk management and the scope of these offerings. Congress tried to reduce the reporting requirements and corral the size of individual and overall investments in a single project, by suggesting some limits for investors and some basic reporting requirements by the businesses. Presumably, the Obama administration and the SEC will take the narrowest possible interpretation of the reporting requirements, so it doesn’t become another source of opaque business practices of the sort that led us into the worst recession since the 1930s. I mean, really sophisticated investors clearly had no idea what they were buying when they purchased the top-trench of a collateralized CDO in the mortgage market, yet they were heavily vetted and qualified as to their level of “sophistication”. We know where that led. So, the SEC argument to focus on the education component of these investments rather than the risk disclosures seems silly, and I hope they see the light before they implement something that failed so miserably on Wall Street only five years ago.

If anything, the financial advice the SEC should require should be along the lines of “Do you understand that most startups fail and that you could lose all of your investment?” And, “It is a really good idea to spread your investment across a broad portfolio of startups, so that if a few fail, you are protected by the one or two that might succeed.”

One of the cool things that has happened in the CrowdFunding space as (I believe) an unintended consequence of the Kickstarter phenomenon, has been this notion of aggregating a built-in customer base WHILE one is in the process of creating product, and the result, which is often squeezing out the failed attempts through the initial market response inherent in the project funding. So, in other words, if your project gets over-subscribed, there is probably a market for what you are trying to produce, and if everyone hates the end-result, you get instant market feedback long before you have committed lots of capital to a failed design.

And, to be clear, Kickstarter is NOT a CrowdFunding platform, even though at first glance it may appear as such. Kickstarter helps aggregate donations for projects. If in return for your donation, you get a coffee mug or an invitation to a film party, then cool. It does not raise money for people to build companies. That indie film is not being produced in a distribution environment. Kickstarter is very careful about which projects it approves. And, it may never choose to participate in the SEC-regulated Crowdfunding space next March. If it ain’t broke, don’t fix it and who wants the SEC breathing down your back?

So, at the end of the day, I think the SEC will err on the side of education vs. risk management, there will be far greater funding restrictions than the JOBS Act intended, the Crowdfunding space will look really different in 24 months than we envision it today, with perhaps far more entertainment related endeavors (games, music, video, films, TV pilots) getting funded in much the same way as the music business became more indie in the last 10 years, and the venture capital community will basically remain unaffected one way or another, as entrepreneurs learn how difficult it is to round up all the devils in all the details.

There is a unique opportunity for the VC community to form an incubation-like support structure to provide infrastructure nourishment for all these startups, but I would be surprised if that happens. It seems more likely to me that the platforms themselves will look to provide these sorts of services as part of their service suite. There is also an opportunity to form a “Startup University” to prepare young entrepreneurs for this new “industry” in much the same way as MIT prepared young software engineering students for the computer technology evolution.

And, lastly, the nascent industry’s attempts at self-governance, while really well-intentioned will likely have little or no real impact on the space. People tend to do what they want.

Whatever forms all of this takes, I think we will have lots of job creation, a new rapid-development technology revolution, and the beginnings of an expansive and exciting world of commerce within the U.S. economy. And, it is really cool!


Startup University.

So, while reading all of the doom and gloom over the mounting student loan debt, it occurred to me that maybe we are on the wrong track entirely.

Maybe we have dug so deeply into this mental trench of “higher education” that no one has stopped to think for decades that there might be another model. I don’t mean two year industrial education or skill programs, where we turn out machinists or bartenders or hotel managers, but an entirely new way to look at education.

What if instead of the $25,500 (average reported student loan debt in 2011) and the estimated $60,000 in expenses, we substituted an entrepreneurial educational program that begins in high school instead? Not for everybody, but for those who think they might have an interesting idea and who aren’t interested in the conventional college student track.

Here’s how one would work and how it might make much more sense than what we have now. Public high schools would implement an elective  program in the sophomore year that would trace the history of entrepreneurship in this country. Maybe it supplants American History for that year. Much more interesting and relevant anyway.

Juniors and seniors would be able to choose an entrepreneurial curriculum instead of American History, Industrial Technology, Math, Language or Art. I mean, have you ever learned anything useful or relevant in history, math, language or art? Courses would concentrate on topics like starting a business 101, investment and funding, marketing, consumer behavior, general accounting, equity, sales, law and economics. Lecturers could be successful entrepreneurs from the world of high technology and consumer marketing. In addition, students would begin lab projects in their junior year, focused on creating the infrastructure for their future businesses. Upon graduation, students could elect to go on to a traditional four-year college or university or opt instead to enter a startup university. They would be encouraged to take their projects with them. Where else does that happen?

The startup university could be a joint venture between our Federal government, which could divert the funds it spends on educational subsidies ($30B), the leading venture capital funds who would invest a small percentage of their new funds, and the top universities in every major city that together, could create an open-ended program that would serve as an incubator for these entrepreneurs and their start-ups. Then, high school graduates who are ready to pursue their dreams of creating their own businesses, while skipping those years of dubious value that they would otherwise spend in college, could get right down to the business of business without any student loan burden or the distractions of college campuses. Because the program would be open-ended, it would self-select winners and losers, just the way the markets do in real life. No degrees. Just startups. Like, I don’t know, one of these guys:

The experience, connections and exposures would be invaluable. The VCs and perhaps the universities would take small seed-round positions in each startup and A round stock would be available to everyone involved, including teachers, mentors, VCs, universities and incubation administrators. Students who fail in their initial attempt would be well-positioned to try again. These kids won’t need jobs.

I am sure this notion is too radical for entrenched educators and politicians to even acknowledge as a possibility, but then what does that say about our educators and politicians? Too risky. Too controversial. Too much investment at stake.  Too radical. Things are fine the way they are. The system is working. Really?

Let’s just say we get this done. Imagine the innovation that would come rolling out of high schools, and a couple of years later. Who invented Instagram? Facebook? Google? Apple? Microsoft? All in their 20’s. All in college. How many jobs? How many countries? How much impact in the world? Facebook would be the third largest country were it a country. 

Think about the simplicity of business models like Pinterest or Instagram. Instagram, a simple mobile app for photo sharing with Twitter-like friends. OK. You can apply 17 filters to enhance the cool-factor of the photo, but so what? A $1B acquisition one year after launch?  15 million subscribers? Pinterest. An online scrapbook for other people’s content? 20 million subscribers? Why would anyone want to go to college?

Upside: Jobs. Education tied directly to student’s goals. No debt. No endless credit, housing or debt bubbles. Banks no longer in control. Innovation. Entrepreneurship. Returning America to the ideals of global leadership, economic growth, individual freedom and the pursuit of wealth and happiness.

Downside: NONE.


Predators In The Mist. Not What You Think.

Do you want some frightening news about college kids? No, it’s not that. And no, it isn’t related to sex, drugs or rock and roll. Or, even student loan debt, now having grown to over $1.2 Trillion, overtaking total US Consumer Credit Card debt.

 

No, the news is that American college students have lots of credit cards, are loaded with credit card debt, use them frequently, and have absolutely no idea what they are doing. And, it’s a growing problem. In 2004, the average college student had $946 in credit card debt. By 2009, the average stood at more than $4,100. That is a 434% increase in credit card debt in just 5 years. Think about that.

These findings are from an academic paper on credit card debt and the larger issue of financial literacy among college students. Results of the survey, conducted by researchers from five American universities, were published this month, coinciding with Financial Literacy Month, and they are shocking.

As I mentioned in an earlier blog post, 70% of American college students have credit cards, 84% of those students do not know their cards’ interest rates, 75% of them don’t know what their late payment charges are and 70%of them don’t know what their over- limit fees are.

Therefore, it’s no surprise that more than 90% of college students who hold credit cards are carrying monthly credit card debt.

And guess which course of study these students were majoring in? Yes. Business.

Nearly all of the 725 students who took the survey in fall 2009 were business majors — likely to be among the most financially astute of their generation. Credit card knowledge and general financial literacy we would suppose are even worse among others of the millennial generation, whether in college or not.

“In America, credit cards on campus have been a disaster, leaving students buried in debt before graduation, often with little hope of paying off the debt before high fees and interest double the amount,” the study’s authors said.

“It’s not just college students — you could also argue that young people out in the work force, from a practical standpoint, should be more educated about this because they see these financial issues in play every day.” ,” said one college professor.

“Some have exclaimed that credit cards are a greater threat on campus than alcohol or sexually transmitted diseases … ,” the study’s authors said. “It is too late to implement a ban when nearly every student already has a credit card.”

“A lot of students have been lured into getting credit cards by companies that often set low initial limits and then start pumping them up. They get into it as a way to enhance their cash flow, but they’re not really thinking too much about the long-term ramifications about what they’re getting themselves into.”

Only 9.4% of credit-card-carrying college students paid off their debt in full each month, a sharp drop from the 32% found by a survey just 5 years ago. The general on-campus ignorance concerning interest rates, late payment charges and over-limit fees shocked the researchers, particularly when it came to interest rates. “Since the interest rate is the primary cost of credit, a financially literate student should know the interest rate he/she is paying,” the study said. “We predicted this amount to be high, since so many credit card issuers advertise these rates as a key marketing tool. We were surprised, but not in a good way.”

The survey was conducted by researchers at the University of Central Oklahoma, Midwestern State University in Texas, Texas A&M University, the University of Texas and Framingham State University in Massachusetts. It was published in the April 2012 edition of the International Journal of Business and Social Science.

“This result may also explain part of our national problem with credit,” the study said. “If our college students don’t understand credit costs, what can we expect from the larger portion of our society without a college education?”

But, this may not be a natural corollary, as there is nothing that says college students should understand how credit works any better than a single Mom of 22 working at a clerical job. In fact, the better question has to go to the quality and content of the education our Business majors are getting in our colleges. Aren’t you shocked that over 70% of Business majors don’t know how much they are paying in interest, how much their over-limit charges are, and how much their late payments fees are?

Is there another corollary here too? Might it be possible that if tested, our business majors might not understand how discounted cash flow analysis works or why and when you might want to use it, or be able to explain the future value formula for calculating the time value of money and compounding returns? Does that scare anyone? What if 70% of all business majors failed that pop quiz?

Business Major.

This, of course leads me to my next blog post which is all about a revolutionary alternative to college, student loans and high school curriculums. I know. You can’t wait.