Your Rich Uncle
hurst, Alex
"Your Rich Uncle" GETTING REAL ABOUT HUMAN CAPITAL BY ALEX HURST after graduating from college last May, I asked my parents whether they thought my education was a good investment. Not an...
...YOUR RICH UNCLE GETTING REAL ABOUT HUMAN CAPITAL BY ALEX HURST fter graduating from college last May, I asked my parents whether they thought my education was a good investment...
...But I'm willing to bet that it's blind, maybe even actively hostile to future Jackson Pollocks and Stephen Kings...
...MyRichUncle is targeting professional, low-risk students—typically infields such as law, medicine and banking—who can reasonably be expected to earn stable and steady incomes...
...Debt forces people to take jobs they'd rather have avoided...
...It doesn't take a quant jock to figure out that MyRichUncle is an interesting alternative to loans, which are literally drowning students and their families in debt...
...Khan didn't want to get into the specifics of how the system works (it's being patented...
...My mother's response was supportive: "We have never thought of you as that kind of investment...
...But degrees really are good investments: according to the U.S...
...A company named Iempower is breaking a dam in the human-capital business, creating a market called MyRichUnclewwwmyrichuncle.com—that enables complete strangers to invest in students' education, while reaping a nicely quantifiable return...
...Iempower's model is, in fact, a beautiful synthesis of venture capital and securitization principles...
...For example, at .25 per-cent of their gross income per thousand dollars, an undergraduate who receives $25,000 in tuition will owe Iempower 6.25 percent of his or her earnings, for 15 years...
...And from an investor standpoint, MyRichUncle produces an attractive bottom line...
...Too many of my friends are one-person Argentinas, with debt burdens that seriously compromise their ability to pursue high-risk, low-paying talents in fields such as writing, acting, even scientific research...
...Arguably, the real power behind MyRichUncle lies in aggregating the earnings risk, not of future MBAs and lawyers, but of students trying to succeed in pursuits—sports, entertainment, writing, art—where initial payoffs are scant, but the sky's the limit...
...We're not primarily looking to find and fund the next Bill Gates," Iempower founder Raza Khan told me...
...Or wait tables (not the actuarial kind...
...Part of the pitch is for companies that hire those low-beta graduates to use MyRichUncle as a hedge against wage inflation...
...Khan says MyRichUncle has piqued interest at the highest levels on Wall Street...
...36 THE AMERICAN SPECTATOR • MARCH/APRIL 2002...
...MyRichUncle's selection process is almost entirely automated.A computer algorithm evaluates the applications...
...Tack on half that much again for room, books and beer, and even I could be convinced that my brain might have been overvalued...
...Census Bureau, the gap in lifetime earnings between a high school diploma and a B.A...
...This could expose MyRichUncle to the perils of adverse selection students who are confident they will succeed may be leery of giving away their upside.This could leave MyRichUncle with a comparatively weak applicant pool—and potentially undermine its plans for future glory...
...And as the cost of a college education continues to increase at a rate four times faster than the average increase in household income, the trend of heavily levered graduates will only grow...
...So for now I guess those types will still have to look around for an old-fashioned, risk-taking patron...
...Not an unreasonable question...
...four years of tuition alone at the University of Pennsylvania had cost well north of $100,000...
...Depending on a set of variables the type of degree being earned, for example investors will earn from .09 percent to .3 percent of the student's annual gross income, for each thousand dollars raised...
...Not too shabby, especially when you tack on the "feel-good factor," for investing in a socially useful cause...
...In return, students commit to paying back a percentage of their gross income, for a period ranging from 10 to 15 years...
...Founded a year ago and based in New York City, MyRichUncle screens applicants, and agrees to pay some or all of their tuition costs...
...As always, time will tell...
...What Iempower has put together isn't all that different than the relation-ship between a startup company and a Alex Hurst works in Manhattan.venture capital firm, or a public company securitizing its future cash flows with pools of outside creditors...
...From a $50,000 salary, investors will get a gross return of approximately $ 15,000---annualized, that's around an 11 percent return...
...But that's not MyRichUncle's way.As if to emphasize its focus on future cash cows—calves...
...But there are some possible catches.Any smart MBA or future corporate lawyer knows that equity—as opposed to debt—is the most expensive form of capital...
...Already the company has selected 65 students, from more than a thousand applicants...
...Although I'm sure they wouldn't mind if one fell through the cracks...
...But why squander such an interesting model on "safe" professionals—most of whom can get cheaper funding through loans anyway...
...To which my father added, "Or else I would have put my money in something that would have yielded a return besides a 23-year-old headache" But now treating education as an investment—in my father's sense of the word—is no longer just dinner-table chat...
...is more than $1,000,000...
...Longer-term plans include creating a secondary market to trade "bundles" of actuarially similar students, which could explode into a new Wall Street business like mortgages did in the 1980s...
Vol. 35 • March 2002 • No. 2
