I’ve finally gotten around to reading the May 2010 issue of Inc. Magazine. I couldn’t believe what I was reading the other night when I read the article Is This a Smart Way to Get Funding?. Essentially three kids out of college are selling a percentage of their future earnings for cash now:
Erickson and two other young social entrepreneurs recently made the decision to, in effect, take themselves public. Through an online marketplace called the Thrust Fund, the three have offered up a percentage of their future lifetime earnings in exchange for upfront, undesignated venture funding. Erickson is willing to swap 6 percent of her future lifetime earnings for $600,000. The other two entrepreneurs, Saul Garlick and Jon Gosier, are each offering 3 percent of future earnings for $300,000. Despite the fact that her plans remain vague — she is writing a book and has ideas for nonprofit and commercial ventures — Erickson says the response from investors has been positive.
Let’s stop right there. She doesn’t even know what she’ll be doing with her life. And she wants funding? Because she’s smart? Or because she’s a nice person? I don’t get it. It’s akin to selling an idea because you think it has value. What value are these investors getting. If you really need funding, why not start a venture that will actually produce a return and then sell a percentage of that?
This might actually make sense from an investors standpoint if she had a job. A promising young doctor or lawyer or engineer, or a professional athlete. Then again, a promising young professional doesn’t need an investment because they’re already earning money.
Also, I’m not so sure this type of “salary prostitution” is legal (what if she “fails” and has a normal job and needs every penny she makes?), but I suppose that’s beside the point.
Then there’s the factor of motivation. At least when someone takes VC they’ve done something. They’ve created a demo. They’ve started working on a product, or maybe even released it. How many people just out of college would be motivated with $600k in their pocket that they don’t have to use for any particular purpose to return on the investment?
In sum, I think this is a bad idea for the kids and for the investors, and I agree with the quote from Neil Patel later in the article.
Neil Patel, a Seattle-based angel investor and co-founder of the Internet analytics company Crazy Egg, says it doesn’t work that way in the real world. “Hunger, in my opinion, is what makes most entrepreneurs successful,” he says. “Give a young entrepreneur a big check, and that takes away a lot of their drive, because they don’t necessarily have to make money that month or even that year to survive. Without that lump sum, you’re going to figure out a way to make money.”