
Ask HN: "Y Combinator for people?" - cool-RR
Hello fellow HNers!<p>In the last week I've been thinking about an idea that I'd like to share with you.<p>In one sentence: It's a fund which gives high-interest loans of about $100,000 to entrepreneurs.<p>Here's a rough sketch of how it will happen: (all numbers listed here are just suggestions and will probably vary)<p>The fund chooses people who will receive the loan, in a process similar to how YC chooses hackers. The goal is to choose people whose chances of becoming millionaires are as high as possible. Those people are then given the loan. The loan consists of $10,000 paid immediately, and $2,000 paid every month for five years. All money will be lent at an interest of 20% per year. The entrepreneur may pay off any portion of the loan at any time he wishes; Additionally, there will be a deadline, say 5 years, by which he will have to pay off the entire loan.
Entrepreneurs are not expected to report to the fund about their progress, or to explain what they would do with the money.<p>Why is it good for the entrepreneurs?<p>It's a little superfluous to explain, but anyway: The entrepreneurs will not have to work for money. They could spend all their time studying or hacking or working on a start-up without any investment or whatever they want.<p>Why is it good for the fund and its investors?<p>The fund will make a return on the investments paid to it. Assuming the selection process is 85% successful, the total interest generated by the fund will be 5% per year. If entrepreneurs will be willing to take the loans at higher interest rates (I would personally agree to 30%,) the fund interest could exceed 10% per year.<p>(Note about this calculation: it turned out to be a much more complicated one than I thought. If you think I made a mistake and you have the correct result, please examine it very carefully before posting. As for my assumptions, I assumed successful entrepreneurs will pay off the loan after three years, and that unsuccessful ones will take all 5 years, and then only $10,000 will be scraped from the guarantors.)<p>-------<p>The trickiest part, of course, is choosing the entrepreneurs.<p>The goal is to choose people who have the highest probability of becoming rich in the allotted five years. If that can be done well enough, the fund can succeed. I think it can be done, and in a similar way to how YC selects hackers.<p>It should also be noted that even an entrepreneur who has failed to get rich by the end of the four year can resort to taking a job at a big company. One year of that will pay off most of the loan, and will allow him to take a separate loan from the bank to cover the rest. This means that a 85% successful selection process doesn't require that 85% will become millionaires: If 60% become millionaires, and 25% get a "good" job at a big company, then this will also work.<p>-----<p>I would say that this idea is sort of "Y Combinator for people", in contrast to the original Y Combinator which is targeted at companies. Actually it seems like a logical step: If the most important ingredient of a start-up is a determined entrepreneur, why not invest directly in the entrepreneur?<p>So I hope you have some constructive comments about this, and I hope even more that someone reading this will pick up the glove and do it.
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pg
I'd have been the target market for something like this, and I wouldn't have
done it. I would have hated to have debt hanging over me. Equity funding is
better than debt for high risk ventures. But I doubt one could legally buy a
share of someone's future earnings.

~~~
jhancock
I certainly hope it couldn't be legal.

The _only_ way this idea meets my standards is if the loan is invested in a
corporate entity which enables the recipient to fail and walk away from the
debt (and assets, of course).

Let me state this as clearly as possible for anyone that thinks this is a good
idea: "excessive usury" is pure evil. Being able to walk away from failure and
start again is the secret sauce that makes the American economy the envy of
the world.

~~~
moe
Amen.

Part of my motivation to get an investor was precisely to offload that
financial risk to someone else. I'm already putting in at least 2 years of my
life, including a lot of blood and sweat. If I fail then the last thing I'd
want is to spend another X years getting rid of that debt...

Also I'm truly baffled at your statement of:

 _even an entrepreneur who has failed to get rich by the end of the four year
can resort to taking a job at a big company. One year of that will pay off
most of the loan, and will allow him to take a separate loan from the bank to
cover the rest._

Excuse me?

After the 4th year I'd owe you roughly $120000. Most of us mere mortals would
probably need closer to 7-8 years to pay that back.

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ErrantX
Intruiging idea. However it seems extraordinairily high risk for the
investors. You mention choosing the recipients would be tricky and that if
they fail (which I imagine would occur in a high percentage of choices) they
could get a high paid job to pay it off. However:

\- Jobs ar never guarateed. I know some excellent people who have struggled to
find jobs. If they had to apply to a job after 5 yrs of being an entrpeneur I
think they might struggle. "So what have you been up too prior to this?". "Oh,
well someone gave me 5,000 a month for 5yrs and now I need to pay it off."
Even with spin it doesnt sound too hot :)

\- The current economy is shaky. This person has no guarantee for this high
interest loan. If things go south there is _no_ guarantee on the money. Yes
the return is very good (well, sort of good) but the risk seems crazy high.
Expecially as there is no feedback...

When YC funds hackers they choose projects that may or may not succeed - which
is a risk. But there is a modicum of protection in the funds. They also take
an involvement in the business and provide valuable advice that will help it
get off the ground. In your scheme it is something of a fire and forget.

If I had 100,000 to invest/spend somewhere I would certainly play it on other
risks (definitely trading 20% year on year for 10-15%) with more security.

(btw are you calculating interest year on year or per total exp? yoy your
stats are ok, but per total your average is actually makign a loss of about 3%
(ish)).

EDIT: I just realised you said $2000 a month - not $5000. Last year I was on
the same salary (in the UK £1000 a month, which is probably a touch less). I
lived at home with my parents and paid them £120 a month rent. Even then I
just about managed to have any liquid income (buying foodand contributing to
the house bills). Were I living on my own (payinf real rent) I dont think I
could afford it :D (would be a push) and certainly not afford the facilities
to be an entrepeneur.

~~~
cool-RR
About the calculation, I assumed that the fund takes loans from an imaginary
bank at an interest rate "r" to pay for the loans. I calculated how high the r
can get for the fund to break even, and that's the result I gave. (I solved it
with Mathematica.)

------
andrewljohnson
I have a question. Are you making the loan to the corporation or to the
individual?

If you are making the loan to the corporation, then it'd a fine business. You
are basically limiting your upside, as opposed to an equity investment, but
you will be able to calculate your revenue stream more easily. If the loan is
to the corporation, then the founders won't be liable for the money, and
you're just another investment vehicle.

If you are making these loans to the founders, then you're just another credit
card company. I doubt there will be anyone good competing for your loans. The
good people will get the equity, and only a dope would take a $100,000 loan at
20%, for anything. Maybe you can sucker some college kids like the credit card
companies do.

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gcheong
"It should also be noted that even an entrepreneur who has failed to get rich
by the end of the four year can resort to taking a job at a big company. One
year of that will pay off most of the loan, and will allow him to take a
separate loan from the bank to cover the rest."

So, if in one year your hypothetical recruit could pay off the majority of
this $100000+ %20/year loan, why wouldn't they just work for one year at big
co, save a bunch of money and then quit to do the startup?

~~~
cool-RR
A year is a very long time to lose, in my opinion. That's why I wouldn't do
it. But for a worst-case scenario, I find it acceptable.

~~~
gcheong
I'd be interested to know what your assumption is of net income this person
would have to receive in order to be able to pay off the majority of the loan
in 1 year.

------
admoin
Maybe I read this too quickly, but the vast majority of people you'd want to
lend this kind of money to are either (a) not going to want to borrow money at
20% interest, or (b) have access to far lower interest sources of funding,
even in the unsecured context. This idea doesn't make much sense to me.

~~~
cool-RR
As for (a): 20% is considered a huge interest by most people. But that's
because most people are not entrepreneurs. A good entrepreneur is a poor
college kid at age 20 and a multi-millionaire at 27. That's a growth rate that
far exceeds 20%.

I would personally take that loan at 30%, and even more.

For (b): I don't have access to such a thing. I found that without a job I
couldn't get a loan bigger than $10,000. I would be very happy if you showed
me a program which would give me a big loan, at any interest rate which is
below 40%.

~~~
nostrademons
A good entrepreneur can also get equity financing on reasonable terms,
usually.

~~~
cool-RR
For a start-up proper, yes. But most of my projects are not really start-ups
which I can sell equity from.

Imagine you decide to study some cool new technology. You are making a bet:
Learning this technology now might get you a great reward in the future, but
you can possibly just be wasting your valuable time. So it's a sort of mini-
startup, your study of this technology. But you can't sell equity out of that
thing.

~~~
nostrademons
How do you expect to pay back debt then?

If you're looking for ways to support talented people with pie-in-the-sky
ideas, that's what the Macarthur Fellowships are for. Those are outright
grants, so the people in question can concentrate on what they love and not
have to worry about paying back a high-interest loan.

------
omnivore
High interest loans would likely get defaulted on, as $100k isn't very much
money for someone who has a house, good credit or a co-signer who can help
them get more.

It'd be a small sector of people who'd qualify and among those, they'd either
be ill equipped to hit a home-run the first time out or other factors would
preclude them from succeed the way they'd want to.

I appreciate the sentiment, but I think there are a lot of better ways that
you could reach "ordinary people" (aka, folks who don't know what Y Combinator
is and would never care) without offering them high interest loans.

The barriers to entry to capital are high and programs that say "forget
business plans that no one reads, lemme see what you can create in a short
period of time," are the right model, but there are status quo ways to do that
and the pitch of "we can create millionaires" isn't going to do much for the
ones you're asking to pony up the cash.

------
thedob
You can finance yourself with credit cards for a far lower interest rate than
this. If you're betting on your ability to pay back debt, and there's no value
add for taking the money (such as an investor with connections), then you go
with the cheapest cash available.

~~~
cool-RR
The two credit cards I have will give me a maximum loan of $3,000 if combined.
If a credit card gave me $100,000, I'd take it.

------
jk4930
Your a priori success-rate of 85% is hard to manage and 5-10% annually in
return is too low for that risk. I can invest in opportunities with a higher
return on equity and have things better under control.

But your scheme is flawed in just another way: You invest in the entrepreneur,
but you don't profit from his success. You're just granting a credit (% on
capital), not making an investment (% on performance).

And there alread _are_ such schemes, where investors can give money to high
potentials and profit from their later income. These high potentials have to
take a life insurance for the case they die in the meantime...

------
DenisM
You will have a bunch of free-loaders taking the money and then declaring
bankputcy or otherwise weaseling out. YC does not give that much money so it's
not a problem for them (they also make you go over there so it's actually
easier to ge a job for any would-be free-loader).

The big problem to solve is reputation - if you can reliably figure out who is
trustworthy then you might be onto something.

Also, debt is a lousy choice - investor upside is limited and not
proportionate to the amount of the value they bring to the table. Equity will
make a much better choice. I don't think it should be hard to draft up a
contract that says "I will give up 10% of my earnings over 100k/year up to the
maximum of $1m total in exchange for $100k investment". Talk to a lawyer about
this. But once again, anyone can simply declare bankputcy and get rid of this
contract.

Your problem is about finding a) honest and b) resourceful people to invest
into.

------
jasonkester
I think you're missing two key points about YCombinator:

    
    
      - YCombinator doesn't make you give the money back if your thing doesn't take off.
      
      - YCombinator's isn't really giving you money.  They're giving you influence and contacts.  That's *huge* in this industry.  The money is not really a factor.
    

All your program seems to offer would be a loan with a bad interest rate. As
others in this thread have noted, that sounds like a bad investment from both
sides.

Now if you could come up with something that actually modeled what YC does,
but for individuals instead of companies, then that might be a good idea.
"Here's 20k and a pile of help. Knock yourself out, but we get 6% of anything
big that you do".

------
alain94040
The only part I agree with is investing in the entrepreneur. Check out
<http://www.entrepreneurcommons.org/>

Your major flaw is that you assume 85% success. The truth is that for $100,000
loans, most entrepreneurs will spend it and then default on the loan.

Entrepreneurs will invest the money you give them: hire people, hire
contractors, build stuff, etc. Once their venture fails, they come back to you
and apologize, but the money is gone.

To use your words, your plan is great for the entrepreneurs, and very lousy
for the investors.

------
gcheong
"...the total interest generated by the fund will be 5% per year. " "...the
fund interest could exceed 10% per year."

I can buy MO right now at a dividend yield of 7+% and have equity in the
company. Assuming zero change in the dividend payout or stock price over the
next 5 years - which I don't think is any more unlikely than your assumed 85%
required success rate, the 5%-10%/year (with no equity) from your assumptions
doesn't seem quite so attractive.

------
bonerlikestorub
Won't work, here's why: As an average schmo, I can access (via credit cards)
just as cash at a similar rate. And if I fail, I can walk away from it with no
danger to my reputation. Credit report, yes, but who cares about that? You are
a sucker waiting to get milked.

------
joshwa
This sounds a lot like a student loan, except with a much shorter term and
higher interest rate.

------
yokumtaku
There will likely be problems with usury laws in various states that regulate
the maximum amount of interest charged on a loan.

------
Allocator2008
Short of a DNA scan, it is hard to see how one could select the best
individuals. If one could show that one's parents were big business people,
that lends confidence, but there is always a chance someone is on the short
end of the gene pool. Would not it be great if we could predict the winners
from the losers in society ahead of time, based on some selection criteria.
But this is difficult. A DNA scan (expensive in itself) could show health and
even cognitive fitness, and that could be augmented by IQ tests, etc., but
there is not a sure way to do this. Only markets can determine fitness, and
that is in retrospect. Ahead of time, I do not see how we can predict the
fittest members of society, which is what this scheme would demand, the ones
"most likely to become millionaires". Performance picks the smart from the
dumb, but predicting this ahead of time is dubious. A DNA scan is as close as
you could get I suppose, to weed out people with a likelihood of developing
mental problems later on in life, etc., but still, there is error here. You
want to find the Over-Man of Nietzsche. In my opinion the only Over-Man is
that what the market determines. And you can't ever know that ahead of time,
even with DNA sequencing. That helps your probabilities but you are still
playing dice. Frankly I feel there is no such thing as the "Over-Man", there
is only people whom markets favor over others, and knowing which ones those
are going to be is rather hopeless.

~~~
cool-RR
Forget DNA and the over-man. For starters I would take the 200 best rejected
candidates from Y Combinator.

