I read an interesting Inc. article recently on some budding entrepreneurs who were looking for funding a new startup but didn’t have the means to raise cash in a conventional manner. So, they basically sold a percentage of their future earnings for upfront cash now. This is a really interesting concept. Businesses do this all the time when they think about present value and future cash flows, but here’s a situation where you’re treating a human as a business. In the example here, these people took either $600,000 for 6% of future lifetime earnings or $300,000 for 3% of future lifetime earnings. Perhaps they need seed capital or in their personal lives, they just want to pay off a student loan!
Alternative Asset Class – And a New Industry Was Born
Investors are constantly seeking non-correlated alternative income streams. Imagine if, similar to how investors now diversify their portfolios with peer lending income, real estate, commodities, and now, future income streams from portfolios of young workers? Imagine if you could “spread your risk” of loaning to a turkey by scooping up future income streams from dozens of college grads (or even high school grads with trade skills)? Considering that their earnings are likely to increase substantially, especially early in their career, you might be able to reasonably achieve double digit returns for decades that are completely non-correlated with stocks.
This all sounds great, but we’re not there yet. The legal ramifications of doing this on a broad scale are enormous. I can hear the politicians and activists now shouting about how people were taken advantage of, disenfranchised, treated as indentured servants, etc. when the youngsters that took the money initially decide they no longer want to pay it back. Presumably, the subjects in the article were locked into an airtight legal contract, but to do this on a large scale with routine retail investors scooping up lifetime earning potential from young workers is probably unrealistic. But it’s neat to imagine.
The article cited a rough approximation for what you would have made if you scooped up Bill Gates back in the day – $3.2 Billion !
Would You Take Cash Now for a Percentage of Future Earnings?
Would You Invest in Future Cash Flows of Young College Grads?