Category: Economics

All Startups need Capital – but what’s most Cost Effective?

Startup founders need capital – to pay salaries, to pay for marketing, to pay for everything that goes into building a business from the ground up. Bootstrappers may differ and say “I don’t need capital, I’m not raising” – but here (and I’m a 4x bootstrapper) I beg to differ. You are always using capital in a business – it just comes from different sources. There are tons of lists of capital sources out there, but here’s my attempt to provide some guidance on the pros and cons of different capital sources, along with ways to think about the cost of capital:

Customer Capital – I love this term. Customer Capital, aka revenue, is both the cheapest and highest impact form of capital. Since it’s coming from your customers, getting more of this capital is directly aligned with growing your business – success in sales begets more growth and cash flow which can be reinvested in the business.

Cost: This is the cheapest form of capital – from a “fundraising” perspective the cost of capital is actually negative, since free cash flow parked on your balance sheet can earn non-zero interest these days!

Pros/Cons: Not much to say here… there’s no better way to finance your company than through reinvesting sales! Bootstrappers beware – if you run a profitable firm, you’ll have to decide how much to reinvest versus how much to take home. I regret not reinvesting more in the past – when you’re paid many times revenue at acquisition, it’s more profitable to raise growth than to take excessive short term profits.

Sweat Equity – this is what bootstrappers think of when they say they don’t need to raise, but there’s an opportunity cost to your time dependent on your highest alternative salary. In my own case, I took a look at the years invested in HiddenLevers with a below opportunity-cost salary, and calculated that my sweat equity investment had actually been around 500k!

Cost: Calculate your after tax salary at the best job you could get right now, and compare that to your current startup salary. That delta is a simple approximation of the amount of capital cost you are borrowing from yourself via sweat equity. But what is the cost of that capital, the effective interest rate that you are paying? Well, since the alternative investment for this capital is likely other public market investments, we can pencil in around 10% here, since that’s what the S&P 500 has achieved over long timeframes since its inception.

Pros/Cons: Don’t be frightened by opportunity cost, as it’s still cheaper than outside investment – but use it as a yardstick to measure what a successful exit needs to be. Sweat equity may also be inadequate to start certain firms, and usually lead to a longer journey.

Revenue Based Financing + Venture Debt: Historically debt financing was not available to startups, as most are asset-light, meaning they don’t have anything to repossess if business goes south. And many a founder is familiar with using credit cards, home equity loans, and duct tape to hold their startup together. But newer sources have emerged, with revenue + invoice-based financing, working capital financing, and traditional debt becoming more common.

Cost: From an interest rate perspective, most of these will have a treasury spread of 500-1000bp – sorry for the finance gobbledygook – the rate will be 5-10% higher than the equivalent length US Treasury rate. That means a rate of 10-15% will be normal in this market!

Pros/Cons: A rate of 12 or 15% interest sounds crazy right? Well, if you’re growing your business at a fast rate like 40% per year, it might be totally acceptable, and cheaper than equity finance (because selling stock would be selling that 40%/yr growth to someone else). A major caveat – lenders will want to see some tenure (ie you’ve been around more than a few months) and positive unit economics, as per unit losses indicate that they may never get their money back! But that’s good discipline, we are no longer in a free money world, and all startups should be aiming for positive unit economics.

Friends + Family: The age-old equity investment!

Cost: Many founders now use standardized SAFEs or convertible notes for these rounds, but you may have more control over valuation cap and other terms, and generally won’t need to give up a board seat or other control. In terms of cost, see the VC section below, it’s higher than it seems at first glance!

Pros/Cons: Don’t mix work + family if you can avoid it! Think of it as diversification – if you tie work and family together with your startup, you’re putting it all on the line in one big bet. And this isn’t a source available to founders without some degree of affluence in their circles.

Angel Investors / Venture Capital / Private Equity: Ahh, the professional investors. I empathize with them, it’s not an easy job, particularly for early stage investors who are really investing in founders (as people) more than anything else. Many startups no longer need substantial capital to get started, but those attempting to conquer b2c or large-scale b2b verticals have substantial marketing needs.

Cost: Equity-based may be necessary for many founders, but it’s something of a necessary evil. If you fail, it’s all worthless anyway, so we don’t need to worry about that case. But if you succeed, and you get to the exit, you’ll realize just how much you paid for those first capital investments. If your startup manages a CAGR of 60%, that means that the cost of equity financing was at 60% interest, compounding annually!

Pros/Cons: I’ll say it again – there’s no more expensive source of capital than early stage professional investors. They are taking tremendous risks, and will ask tremendous compensation in return. But for the successful founder looking back, it may feel as if they’ve been eaten by a loan shark. What’s the old Kanye line? “Win the Super Bowl, drive off in a Hyundai…” For those playing in narrower markets (which are a great place to start), using any other capital source may be a good place to start. By maintaining a focus on unit economics, founders may be able to get to positive free cash flow, thereby unlocking Customer Capital on the road to success.

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Successful Exits: Real, Fake, and How to tell the Difference

For those of us in the startup world, the term exit has a specific meaning. It’s the endpoint of a founder’s involvement with a startup. A successful exit means that the founder made a bunch of money right? The old adage on startup exits used to be that exits were measured this way:

Small: You made enough to change you car
Medium: You made enough to change your house
Large: You made enough to change your life

In public, we see exits measured by total deal value, and we celebrate the unicorns, and the 9-figure exits – but how often are we able to see what really happened from a founder perspective? Actual founder outcomes are important to understand for those in this business – and it’s important to understand opportunity cost and how to calculate Return on Investment for a founder. Here’s a rundown on “fake” exits, secretly unsuccessful exits, and a take on how to measure a founder’s actual ROI in an exit.

Fake Exits

1. Private Equity majority ownership stakes: You see the press release, the shining coverage – xyz startup sells for $300 million, or $1.2 billion! Dig deeper, and it turns out that a PE firm has purchased majority ownership from the VCs backing a startup. While founders may receive some cash liquidity, they have to stay on to deliver the next phase of growth. Founders “exiting” in this way in 2021 may find that their stake is now worth much less than the announcement price tag, as late-stage startup valuations have shrunk dramatically.

2. Stock acquisition by a larger private company: everyone gets stock in the rocket ship right? I founded a company in 1999 that was acquired by a pre-IPO Intralinks for $1.2M on paper in 2000 – my shares were worth $350 after the crash (I was 22 and it was a great education). This kind of exit could go really well too – but it’s not technically an exit, as you are just trading one illiquid asset for another, and you must keep up the fight until a future exit event.

3. Down Exit (below VC preference): When VCs and other early investors invest in your company, they often buy preferred shares, which come with a liquidation preference. If the company is acquired for less than this valuation, then the investors receive everything. Companies that raised at extremely high valuations in 2021 may find themselves in this situation. Consider a company that raises $300M on a 1.2B valuation in 2021, and then falls 80% in value in 2022 (in line with its public saas peers). If the company is forced to exit at the lower valuation, founders could end up with nothing despite having built a one-time unicorn!

This has happened before.

How to Calculate Founder ROI

Let’s say you get past all the traps, and you’re on your way to a successful exit. What was the return on investment of all the blood, sweat, and tears in the end?

Consider my situation. I was saving $150k per year (working FT + fractionally) prior to starting HiddenLevers. It took 3.5 years for my income from the business to equal this opportunity cost. It took almost a decade to build HL and sell from there, a time in which the S&P 500 roughly tripled in value. If I had kept working corporate jobs, I would have invested 525k, and that might have tripled to around $1.6M by the time of the HL exit. So I can compare that amount against my exit as one reference point – if I hadn’t exceeded that amount, I would have been better off keeping my day job! [1]

You can calculate your rate of return by dividing total exit by the initial sweat equity investment amount (in this case 525k), and then annualizing the result. If it’s greater than 10% you beat the long term performance of the equity markets.

It’s also worth noting that had I kept my day job, I’m sure that my career would have advanced, further increasing my opportunity cost. Now, none of this matters if you weren’t saving a dime to begin with, or if your quality of life doesn’t suffer as a result of starting a company. But most founders have other options, so it’s worth making the comparison to understand whether the numbers add up. And of course, this also provides insight into another thing – just how much you value being able to leave the grind and build something for yourself!

[1] We use net savings and not top line income, because we need to know how much capital you would have been able to invest in the alternate case, where you never left your day job. Net savings is a reasonable approximation of that – but if you’re the sort of person whose lifestyle expands to absorb additional income, then a comparison of after-tax salaries in both cases might be more relevant.

[2] To really calculate this accurately, you could create a spreadsheet that calculates opportunity cost year by year, but here I’ve just used rough averages to illustrate the point.

P.S. If you got this far – one way I got to my exit was by running super efficiently, and I’m proud of HiddenLevers’ 53% EBITDA margin at exit. Fractional developers helped me to get to that level of profitability – see how I can help you do the same via fraction.work.

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Embodied Time

The New Year makes many of us think about time. I got to thinking today about embodied time, human time encapsulated into physical form. What is embodied time?

We call it money. We use money to buy things that we don’t have the time (or ability) to produce ourselves. Given infinite time, even I could learn how to grow cotton, harvest it, gin it, and weave it into shorts – the shorts I needed for a run today because I forgot to pack them!

If I had endless time, perhaps I too would follow the Gandhian tradition of making my own clothes. But I don’t, and I chose to use embodied time, aka money, to buy those shorts from someone else – in this case a large corporation. At the end of the day that corporation applied human time and effort to the creation of those shorts.

We apply modern technology to amplify human productivity, and the linkage between money, time, and the economy can be seen in the concept of Productivity. In economics it’s measured as $ of GDP per hour of labor – it quite literally expresses to us that money is embodied time! Perhaps AI and robots will free us from this linkage, but recent advances show us just how far we still have to go.

The economy today is constrained by a lack of time. Not enough humans are able or interested in investing their time in production, and this is the chief obstacle in bringing inflation to heel [1]. If the economy is constrained by time, that’s because we as humans feel constrained ourselves. Retirees cannot and do not want to spend their remaining years working, and core population growth has gone negative across the developed world – there just aren’t enough new kids on the block.

What’s to be done? We need to find more human time, more work hours. It turns out that capacity is right under our noses! An increasing percentage of working-age folks aren’t working, but it’s not at all uniform. A substantial percentage of full-time workers want MORE work – these are the workaholics that want 60 hours a week long term. Hey that’s me too, and I recognize them because I’m part of that crew. I’ve averaged 60 hours a week for most of my career, and many startup founders and employees are quite familiar with these sorts of hours. And medical residents would scoff at how easy a schedule that is!

When I started fraction, it was based on a core hypothesis: that 10% of the US professional work force both WANTS and is able to work 60 hours per week. This hypothesis has proven out – about 40% of developers, designers, and product managers that we’ve spoken to (a thousand and counting) are interested in taking on extra work, and roughly one-fourth of those have the capacity and ability to do so. 10% of the 80M US workers able to work remotely is 8M part-time workers, or 4M FTEs. When I validated this, I felt like a gold miner sitting atop a massive gold seam – in an economy desperate for workers’ time, we’ve got labor time enough to close the entire US labor shortage!

I’d like to take those workers’ time and embody it, turning it into money (and economic benefit) for US workers and companies alike. A lot of folks I know wonder why, after a successful saas software exit, why on Earth would I get into a services-oriented business? My answer: I feel I’m on a quest to supply the resource the country needs most today – skilled labor. More knowledge work getting done means more solutions to every problem today, from climate change to health care to Americans’ top current priority, inflation. I’ll plow all of 2023 into that, and hopefully in the process help a lot more people embody a lot more time.


[1] I’m generally optimistic on inflation given the trends seen in the energy, food, home, and goods sectors – the Fed’s moves are working. But they seem determined to keep the heat on to corral wage inflation as well, I wouldn’t be surprised if we see some negative prints in the coming year.

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Where Have All the Workers Gone?

The October employment report was released last Friday, and it told a familiar story: the US economy is still suffering from labor supply issues, even with the pandemic (mostly) in the rear-view mirror and the Fed trying to apply the brakes via rapid rate hikes. As I noted in a fraction blog post last week, the professional workforce of the future is actually shrinking, hit by declines in college enrollment and legal immigration. Let’s dive a little deeper into the present situation – how many workers should we expect the US workforce to have right now, where are the missing workers, and what’s to be done about it?

The BLS October 2022 data showed a labor force participation rate still 1.2% below February 2020 levels. Population growth since that time implies a labor force that should be at least 3.2M workers larger than it is today – so what happened?

Early Retirements – Departure of the Boomers: -2.4M workers

The St. Louis Federal Reserve estimated that 2.4M additional workers retired early from the start of the pandemic through Q2 2021. Subsequent analysis by the Washington Post indicates that retirees are returning to work – but only at levels found in 2019, so this doesn’t make up for the pandemic era losses.

COVID Deaths and Long COVID: -2M Workers

Per Statista, just over a quarter million working age Americans have died of COVID since the start of the pandemic, further reducing the workforce.

COVID’s larger impact is through the impacts of long COVID – the Minneapolis Fed and Brookings estimate that 1.8M FTEs worth of work have been lost due to long COVID job loss and work hours reductions.

Lack of Immigration – Trump + COVID: -1M workers

This Census chart tells the story – changes in federal immigration policy and the closing of borders during the pandemic led to a huge loss in immigration. 1.5M less immigrants, with a 65% labor force participation rate, equates to a loss of roughly 1M workers due to changes in immigration flows.

The US added 1.5M less immigrants over the five year period from 2017-2021 than it over the previous five years (2012-2016)

Summing It All Up: 5.4M Workers Missing

The latest JOLTs report shows 10.7M job openings – 5.4M more available workers, when added to current unemployed (6.1M) would make for more available workers than jobs. That’s the opposite of the current 2:1 ratio of jobs to workers!

Alas, we can’t wave a wand and undo the damage of the pandemic, and many early retirees are happy with their new lives. Immigration is beginning to rebound, and will make a long term difference.

Short-term, we’ve got to make do with the workers we have – and that’s why I believe that fractional work is the future. Fully utilizing the surplus capacity of the existing professional workforce in America would add 4M FTEs to the labor market, almost fully replacing the 5.4M lost. In the coming weeks I’ll delve deeper into the fractional workforce and how it can help.

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The Future of Work is Here!

I’m excited to announce the launch of fraction.work on ProductHunt – upvote fraction.work there to help us gain exposure and change the future of work!

Readers of this blog know that I like to focus on big macro trends. The macro trend here is incontrovertible – working age populations are flat or dropping in every developed country on Earth. We keep hearing that the robots are coming, and that automation will take all the jobs – meanwhile US unemployment is back near all-time lows, despite a Federal Reserve moving rapidly to force a recession.

There’s only one solution: expand the labor supply. And the fastest way to do that is to tap into the millions of American workers willing to work more, or to keep working part-time.

At fraction.work it’s early days, as we are focused for the moment on fractional software developers. But in the software field alone, I estimate that there are 500,000 additional workers available on a fractional basis. McKinsey’s research shows that over half of all jobs can be done in a remote or hybrid fashion – fractional work opens the door to millions more employees filling open positions we can’t otherwise seem to fill.

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The Great Labor Shortage – A Problem Worth Solving

Originally posted on the halftimer blog here.

The US needs workers. Millions of workers. The need existed pre-pandemic, but has reached a crescendo now, with a record number of job openings (11.5M vs 7M pre-pandemic) and almost 2 jobs available for every unemployed worker. The roots of this problem run deep – contrary to the typical media narrative, pandemic-era retirements and immigration shutdowns have created much of the current situation. But some industries were near shortage in 2019, before the pandemic turned life upside down.

Software is one of those industries – in recent months recruiters have resorted to more and more desperate measures to acquire talent. The industry lately feels a bit like a merry-go-round for HR departments, as they push harder and harder, only to find they are just spinning in place as one developer joins and another one goes. This zero-sum recruitment game can’t be fixed with better recruiting practices, or better HR platforms, or better retention strategies. Just like the housing market, supply is the only fix! Enter gig platforms like TopTal and remote work platforms to encourage offshore team building. Those help, but each comes with its own set of challenges – how do you continue to build your core US team when there just aren’t enough workers?

When I built HiddenLevers, I made a pointed decision to bootstrap – so we had no room to waste capital. We began hiring developers on a half-time basis, while letting them retain their full-time jobs (prior to HL I did side contracts as a developer for years, so this was a natural step for me). This turned into a huge win-win: we got access to senior developers with capacity, and they monetized their free time without the hassle of constantly switching gigs. About a third of our development team was halftime over a decade, with a zero turnover rate (several of them switched their day jobs but stuck with us throughout).

Fast-forward to the present – as an entrepreneur considering what’s next, it occurred to me that this model could work at scale. Based on our research, half a million developers could take on halftime work [1]. Adding the equivalent of 250k developers to the US workforce would fill 60% of expected demand [2]. And of course this doesn’t just apply to developers – millions of Americans in other professional jobs could participate, filling huge gaps in the US workforce. I’m excited to start down this road, with a mission of normalizing the idea of working 0.5, 1, or 1.5 jobs in the professional world. This kind of flexibility will empower the workforce and help solve labor shortages in the years ahead. Hit me on LinkedIn, at praveen at halftimer.co, or via our site to learn more!

[1] There are almost 5M Americans employed in “Computer and Mathematical” positions, with adjacent fields like UI/UX design and product management swelling the numbers further. In interviews with hundreds of developers, we’ve found that almost 40% are interested in halftime positions (in addition to full-time work). Our screening and interview process has shown that about 1/3 of interested developers have the combination of technical and self-management skills needed to be effective as a halftimer. Based on these metrics, there may be a qualified pool of 500,000 halftimers across the United States.

[2] According the the Bureau of Labor Statistics, over 400,000 additional software developers will be needed by 2030 – 60% of this could be covered by tapping the spare capacity of the existing workforce via halftimers!

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Bootstrapping vs VC – a Founder’s Comparison

How does a bootstrapped exit compare to a VC exit, from a founder’s perspective?

TL;DR A VC-backed company will have to exit for 4-10x the valuation of a bootstrapped company, if the founders are to have an equivalent payout.

The above infographic (click to see the full version) does an excellent job illustrating the general stages of the startup company life cycle, except that most end in failure or acquisition rather than IPO. The percentages on the original graphic are dated and I’ve updated them above. The general point remains – each capital raise reduces founder equity in return for powering future growth. But the actual math matters – let’s take a look at some sharper numbers:

  • A typical VC-backed startup goes through four rounds prior to exit, where founders’ equity is reduced by 15, 25, 25, and 25%, with another 5 points lost to the options pool shuffle, advisors, board members, and other hangers-on. The four rounds are the seed round, Series A, B, and C.
  • The options pool shuffle is a clever trick VCs employ to capture a bit more equity. Advisors and board members often command 0.5 to 1% of the company each as well.
  • The compound impact of this at exit: founders’ + employees’ equity at exit totals 30% (a range of 20-40%). If we assume 2% in exit transaction fees and 8% fully diluted to employees, that’s 20% to the founders at exit.
  • Using the same assumptions, a 100% bootstrapped company has only the final 10% in exit transaction fees and employee compensation, leaving 90% to the founders.
  • The math above is daunting: 90% vs 20%! This tells us that founders should go the traditional VC route if they believe that it will enable them to exit at least 4-5x larger than the size of a bootstrapped exit. I’ve validated these basic numbers in conversations with a number of founders, and while the particulars will vary, the general guidance holds. Many founders give up too much, and end up as low as 5% at exit.
  • This assumes that your company can get somewhere without funding, which may not be realistic.
  • Bootstrappers trade time for money to an extent, if growth is ever constrained by lack of funding.
  • When choosing whether (or how much) to raise, consider your total addressable market. If you’re in a profitable niche, bootstrapping may be optimal. If your TAM is greater than $10B, go raise money.
  • There’s an intermediate option – raise, but raise wisely. Bootstrap your MVP, raise after you’ve got something repeatable, and raise all you can that one time. If (and when) I do it again, I’ll strongly consider this option.

Here’s a sample of Real-Life Exits:

  • GrubHub founders Mike Evans and Matt Maloney each held about 2.6% of GRUB at IPO – this degree of dilution is unfortunately common.
  • At the other extreme, David Barrett owned 47.7% of Expensify at IPO – proving that with judicious use of capital, dilution doesn’t have to be extreme.
  • The founders of Toast (TOST) collectively owned about 17% of the company at IPO. This was worth $5.1B at IPO, but has fallen 70% since, with share lockups preventing a true exit.
  • Mailchimp was the king of bootstrapped startups, going from 0 to $12.3B at acquisition, and succeeding in a space while competing against startups equipped with $100M+ in funding. Had the Mailchimp founders’ ownership been similar to Toast, Mailchimp would have had to sell for $74B to net the same founder outcome!
  • Private exit data is harder to come by, but Riskalyze saw the founder and CEO holding roughly 16% at exit to private equity (this was not a complete exit, as the PE firm bought a majority stake but kept the team onboard).


Why HiddenLevers Never Raised Capital

When I started HiddenLevers and roped in my cofounder Raj in late 2009, we talked about what success looked like. We thought success would be running the company for a year and selling it for … two million. We thought we could demo our cool new portfolio stress testing technology to major brokerages and just have one of them snap it up! Naive – but also a comical underestimate of the value we could create.

It took us about a year to reach a semblance of product market fit, which occurred when we found the RIA space – independent financial advisors understood the value of using HiddenLevers for their end clients. Over the course of 2010 we had been researching addressable markets, and one thing I’m proud of is the quality of the TAM modeling we did at that time. A decade later it was still essentially accurate – we were in a highly profitable niche space, with several hundred million in total addressable market for the financial advisory space. Here’s the spreadsheet from September 2010 – row 12 is where the business ended up thriving.

We looked at that TAM and worked top down and bottom up – from the bottoms-up perspective, we set a make or break goal of 100 clients by July 4th 2011 or we would fail fast and shut down. From the top down perspective, I calculated – what kind of business value results from capturing one percent of this audience?

Looking at the business from both perspectives, a few things became clear:

  1. We were able to use trade shows, email marketing, adwords, and press coverage to grow profitably, and it wasn’t clear that investor capital solved a problem – we had free cash flow to reinvest.
  2. If we did raise capital, the scale of our addressable market damaged our chances of a successful founder exit – diluting your stake works if it’s in pursuit of a massive market, but poorly in a niche.
  3. Successful expansion outside our niche might require capital, but growth within it did not.

In 2020 we reached an inflection point – to sustain our growth, perhaps it was time to finally raise a round so that we could expand upmarket, build out an enterprise sales team, etc? It was this inflection point that caused us to reach out to the M+A market – the early growth phase of the company was complete, and we felt that it was better to join forces with a more mature organization than to try to build that organization ourselves.

For a business like HiddenLevers, bootstrapping fit perfectly. The math I outlined up top held up well, and it’s quite possible that taking capital would have actually hurt our exit outcome. But if I ever try to build something to conquer a big market (over $10B TAM), I’ll do it the “normal” way – with investors.

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Could The Fed replace QE with a Basic Income?

Should the Federal Reserve provide liquidity via bank deposits for all Americans instead QE?

The purpose of quantitative easing is to lower interest rates, inject liquidity into the economy, and prevent the collapse of financial markets. It’s the ultimate top down approach to the problem – funnel money into too-big-to-fail financial institutions, and hope that this settles the market’s nerves and trickles down into the real economy.

In a sense, quantitative easing is the ultimate form of trickle down economics – inject money into the wealthiest parts of the  economy to keep them wealthy during a downturn, and hope that this trickles down to Main Street.

During the 2020 COVID19 pandemic the Fed has taken a broader view of its powers than ever before, instituting over a dozen new programs in record time. The Federal Reserve balance sheet hit $7 trillion in 2020, far exceeding total Fed intervention in the financial crisis, and unleashed at unprecedented speed. This has stabilized the stock market, with essentially zero downside for the year after a sharp tumble and equally sharp recovery from February to April. The Fed made this recovery possible by pledging to buy unlimited quantities of securities, and for the first time stepped into multiple new roles, buying individual bonds, buying ETFs, creating a Main Street lending program, and more.

All of this begs the question – why not dispense with all the hijinks and provide liquidity directly to the people, where it’s much more likely to be utilized within the real economy? Various proposals like Andrew Yang’s freedom dividend and others peg the cost of providing $1000/month to American adults at around $2T per year. If the Fed were to engage in such a program, how might it work, and what are the potential benefits and risks?

Potential Structure of a Federal Reserve-Funded Basic Income:

  • The Fed would offer funding for deposits at 0% interest to the banks.
  • Any bank that deposited these funds in equal amounts in every individual account at the bank would receive a 10bp servicing fee for providing this service. The bank would also not be required to repay these funds to the Federal Reserve.
  • The total amount offered to a bank would be dependent on the number of individual customers served by the bank.
  • Safeguards would have to be established to ensure that individuals with accounts at multiple banks only received funds once.

Potential Benefits of the Program

  • Given that individuals have a much higher marginal propensity to consume than banks or corporations, these funds would get spent, thus powering the real economy and GDP growth
  • Banks would be empowered to lend against the deposits on their balance sheet – this is the opposite of what’s happening with reserves that banks have parked at the Fed earning interest
  • The Federal Reserve would still have QE and control of the yield curve in its toolbox, but could use these tools much less, which would result in more normal interest rates across the yield curve.

Potential Risks and Downsides

  • Inflation is the principle risk of such a program – give the people money, and inflation will run wild – right? A basic income of about $500/month would cost $1T per year – this is the same rate of money supply expansion since 2008. The Fed could also use higher interest rates to keep overall money supply growth in check.
  • The Federal Reserve could simply swap this form of money supply expansion for its current use of QE. But individuals might expect this to be a stable, recurring payment – would this rob the Fed of flexibility?

Now that the Federal Reserve has opened Pandora’s box with numerous programs not codified within its charter, it’s time to reexamine a fundamental premise – are these the best ways to inject liquidity into banks? Or should the Fed put the reserves in checking deposits at banks? This serves a dual purpose of both capitalizing the bank and the public at the same time, and with a direct and dramatic impact on the economy. It may sound like heresy, but the ZIRP alternative was not exactly showing great economic growth prospects even prior to the pandemic.

The US is the world leader in innovation – can the Fed break out of the box and consider a program to help all Americans?

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Schools-Over.com – Find High Value College Programs and Escape the Debt Traps

I last posted about a business idea for an automated college counselor, one which would guide students to make better college and career choices. I can now announce that Schools-Over.com has launched in beta, and attempts to deliver on that goal!

School’s Over currently provides two core features: a search feature for high-value degree programs, and a comparison tool enabling students to enter their current admissions offers to see which offers the best lifetime value*.

Much of the data for School’s Over comes from the Department of Education’s College Scorecard program, which has built a solid application for exploring the DOE’s newly released data on graduate salaries by college program. School’s Over uses this data and extends it by projecting salaries for the 70% of programs lacking salary data. School’s Over also projects total Lifetime Value for each degree, so that students know at a glance whether a college program is worthwhile, or whether it’s a debt trap.

With the beta launch we’ve taken an initial step toward providing automated guidance counseling – please try it out and give us your feedback (use the green feedback button onsite).

*Lifetime value for a college degree is defined as the NPV over a 45 year career, taking into account the cost of tuition, the opportunity cost of lost wages during college, and the net after-tax difference in wages realized by graduating from a particular college program versus simply going to work after high school. The discount rate used in the NPV calculations is the average federal student loan rate, currently just below 6%.

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Business Ideas VII: GuideMe

Idea: GuideMe – an automated guidance counselor that helps students make better college and career choices

MVP: Too many students in the US leave college with too much debt and no realistic career path – in part because guidance counseling is a luxury at many American high schools. GuideMe will help fill this void, using students’ interests and strengths to show each student the college or vocational programs that will help them achieve their goals. GuideMe will also help students evaluate admissions offers to determine the best choice in terms of career ROI, taking into account both costs and future income.

Market: US high schools average one guidance counselor per 500 students, leaving most students with no career guidance except what’s available via friends, family, and the internet. In this vacuum there’s a tremendous opportunity to help students and families make better choices, with better careers and less debt the end results.

From a business model perspective, students and high schools have limited resources, but employers have a substantial recruiting need, and a successful app could funnel qualified candidates into positions at a far lower cost than traditional means of recruiting. There are over 150M working Americans, 100M of whom lack a college degree. The vast majority of that 100M employees might benefit from vocational training and placement services – almost 50% of employees change jobs annually. If the value of placing an employee is conservatively estimated at $1000 (versus the 20-25% of salary typically paid in white-collar recruitment), this leads to a total addressable market as large as $50B. [1]

Idea Score (0-10 scale): 8 points

Feasibility of MVP / Market Entry (out of 2): 2

The GuideMe MVP would leverage data on salaries and tuition published by college programs in order to determine career ROI, adjusting each career path for projected future changes. Much of this data is either publicly available or can be licensed, but it may need to be refined newer or non-traditional careers.

GuideMe would then determine the highest ROI programs for a student, based on their GPA, test scores, and interests. Virtually all of the data needed for the MVP is publicly available, though career ROI estimation algorithms vary – given my experience building HiddenLevers, this should be a competitive advantage.

Revenue Market Size (out of 4): 4

As noted above, the total market opportunity in the HR recruitment space, taking into account only the under-served vocational market, is conservatively estimated at $50B  per year.

GuideMe’s principal issue is that the initial platform rollout is devoid of any revenue generation plan – users in the cost-conscious student market are unlikely to adopt a paid guidance product. GuideMe instead intends to roll out a full-featured free product, while developing a placement product for employers requiring specific skillsets. GuideMe will be well positioned to match capable students with employers, enabling higher volume placement at a lower cost to businesses.

The challenge in building a two-sided marketplace style product is well known, but the returns to success can also be extraordinary.

Difficulty, Barriers to Entry, and Competition  (out of 2): 1

Many sites and apps exist to provide guidance in aspects of the college decision process, but none  provide comprehensive career guidance, and none utilize the concept of career ROI.

Existing competitors like MyKlovr are attempting to solve aspects of this problem, but appear to be focused on paid software approaches, which will limit growth potential. There is substantial risk involved in building  a free guidance product, and then working to link it to employment placement, but this approach is likely to capture the largest number of users in a space where massive scale is possible.

Riding Hype or a Trend (out of 2): 1

At present there seems to be little focus on this market – but if scale can be achieved among the 20M students in US high schools, then building a funnel to employers should become relatively straightforward. Very little has been done to improve the functioning of the middle of the US job market in particular – the rewards are too small for traditional HR firms to work hard at placing a plumber. Automation is the key to unlocking the scale potential in this market – and early career guidance is the key to bringing large numbers of candidates to market.

 

[1] Public companies like Randstad, Adecco, Robert Half, and Manpower show that valuations in the $5-10B range are possible in this sector.

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