Yesterday a new $10 million early stage seed investment fund called Gen Y Capital Partners launched out of its home base in New York City.
Its no coincidence that the White House’s announcement about easing student loan burdens for entrepreneurs came on the same day. After all part of Gen Y Capital’s business plan, which gets name-checked in the White House release, leverages the recently-reformed Income-Based Repayment plan to help startup founders pay off their student loans. Yup, you read that right. Pay off, not defer.
Betabeat talked to Gen Y founder Scott Gerber, author of Never Get a “Real” Job and founder of the non-profit Young Entrepreneur Council, about how student loans play into entrepreneurship and why Gen Y can help the 99 percent.
Mr. Gerber said the notion for the for-profit fund, which is financed by private and institutional investors, started a year ago. “The YEC and I have literally spoken to thousands of 20-something college students asking them what were the barriers to entries. The top three were: college student debt, the fact that they were being turned into boomerangs–ended up going home and living on their parents, which is very unsupportive and that they had no access to capital or real mentorship.” Removing those barriers, he reasoned, would make a capital infusion more effective.
Income-based Repayment, or IBR, is a federal program that anyone can apply to that defers or lessens student loans depending on income level. “So if the founders we select subscribe to IBR and still have student loan debt, we will basically pay down the remainder of the debts for three years until they hit zero. That way they remove them from the equation and they can fully concentrate,” said Mr. Gerber. “We’re actually making the payments. And that’s not part of the equity investment that we make, that’s a service we offer to our founders.”
It will likely take Gen Y three years to deploy the capital. Mr. Gerber said the average investment will be between $15,000 and $50,000, but “in very select opportunities,” the fund may invest up to $250,000. In addition, the founders selected by Gen Y will have access to YEC members, which includes the founders of Reddit, Mint, and Living Social, for mentorship and potential co-investment alongside Gen Y. Mentors are divided into verticals so it depends on the interest of the members as to whether they want to invest.
The association with President Obama started because for the past several months YEC has been championing something called the Youth Entrepreneurship Act on both the Hill and in White House meetings. “It would take IBR to a totally other level, which is student debt forgiveness and deferment, which would theoretically would be the absolute next step of how IBR would work if we had our way!,” Mr. Gerber enthused.
The public-private partnership only extends to IBR, there is no government money in Gen Y’s $10 million fund. The new IBR reforms let students making $20,000 or less defer payments until they get to a higher revenue grade. “So for startups that’s amazing because it allows them to have more operating and startup capital, because the money they do have is not just being dumped into loan repayments.” As your income rises, payments fluctuate up to a cap of 10 percent of income. The reform works by extending your federal student loan from 10 years to 20 years. Anything after that gets forgiven entirely, explained Mr. Gerber.
Where does the 99 percent come in? “We think that folks like Y Combinator and TechStars do an incredible job of getting the best most sophisticated tech elite out there. We don’t just want to do a third version of that. So instead we’re going after companies that are certainly enabled by tech or assisted by tech, but are not straight-up tech businesses,” he explained. Rather, Gen Y would look for businesses that are scaleable and provide value. “But they are companies that would be overlooked by incubators or startup accelerators.” As an example of a potential Gen Y contender, Mr. Gerber offered a customizable granola bar company where items would be ordered through a website using a process the founders built.
We’re not sure whether the Occupy Wall Street movement would be sold on Mr. Gerber’s “build a job to keep a job” motto. But long before protesters started camping out in Zuccotti Park, Mr. Gerber has been a talking head on cable news discussing unemployment and underemployment rates for young people in America.
“I believe personally that in this day and age the economy has fundamentally changed everything,” said Mr. Gerber. “We cannot go back to data of decades past because everything has changed—globalization, automation, recession—all these things have dramatically impacted to the point where we’re seeing Wall Street demonstrations. If we can begin to change the mindset and let this be less of a handout society and let this be less of thinking somebody owes you something and change the mindset so that young people feel engaged and ready to be activated that will enable them to not just take out their frustrations on the street, but take it out by doing something about it and building America themselves.”
Spoken like a serial entrepreneur. Now if only someone would address the ills of Generation Catalano.