A Slice of the World's Income - Transcend Newsletter XI ✂️

Income-sharing agreements, YC Demo Day startups and transformative learning experiences.

Morning! We are back another week - today we’ll focus on Income-Sharing Agreements: since everyone seems to be talking about them this year, we want to contextualize them and give you our analysis as to how they fit within the larger macro trends of the future of learning and work.

Transcend Chats - last Monday we had a chat with James Kim (Reach Capital) - check out the recording of our conversation here and keep an eye out for more speakers! Who should we bring onboard for the next one? Let us know here!

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What are ISAs?

ISAs are a funding mechanism that provides an education for free upfront, in exchange for a percentage of future incomes from the student for a few years (once they pass a certain minimum threshold).

ISAs are not entirely new, we can find them in German vocational schools, Milton Friedman’s writing, in trade union training programs, and in failed Yale experiments in the 1970s (here are some introductory resources).

So what made ISAs finally get into mainstream education conversations this year? The key here is understanding the global issue of hiring in a time of a massive skills gap, which has employers rushing to recruit technical talent as fast and effectively as possible. Universities failing to provide the talent required by employers in the last decade paved the way for coding bootcamps to start offering this funding instrument around 2013.

Fast forward to 2019 to find an explosion of applications of ISAs to different industries: “Income Share Agreements Dominate Y Combinator’s Latest Education Graduates”. From coding, to sales and higher education, ISA seem to have advocates in most sectors.

Why should we care about ISAs?

ISAs work in a context of high demand for talent that is not matched by supply of candidates from training pipelines: they serve fundamentally as a mechanism to better align the economic incentives of those providing the training and those of the students, a promise long awaited by many in education. Thus, education/training providers can be held accountable to the student outcomes and will be incentivized to improve these to maximize their gains, as opposed to maximizing for enrollment and student spending. Pretty neat!

Summarizing, ISAs are fundamentally solving a current incentive misalignment issue by providing faster training in order to keep up with the increasing demand for talent.

This is what the skills gap looks like in a graph - and what the opportunity looks like for ISAs to fulfill that need:

Using basic economic thinking, a fulfillment of the skills gap through new supply of talent would decrease the size of the economic opportunity and lower salaries as it approaches an equilibrium, but given the ever-growing size of the skills gap, there would be a shift in the demand curve that would create new opportunities every year.

Now back to the real world: Where will ISAs make an impact?

The question depends greatly on how you think the world at large works! Nonetheless, here is our thinking about the key sectors that will be empowered by this new business model:

🛠️ 1. New Vocational Pathways

  • We think of new schools preparing students for technical positions in a bootcamp-like structure as “new vocational training” - they combine some of the elements of vocational schools with others of universities: however, the main focus is on employability. We believe these will continue to grow in size, forms and applications.

  • E.g. coding bootcamps, Nova Semita (career accelerator for Indian engineering students), Leif (ISA platform and finance provider) or Flockjay (sales)

🌍2. Outsourcing/Remote work

  • The speed of change in global access to technical tools and training spreads much faster than macroeconomic changes like cost of living or salaries, which presents an opportunity for economic arbitrage that ISAs can navigate well.

  • E.g. Microverse (remote-first coding school), Pesto (tech accelerator for Indian engineers).

🌱3. Communities

  • ISAs can be an empowering tool for communities of practice, whose only business model used to be centralizing membership fees. Now they could potentially use ISAs as a new business model: imagine communities that can be decentralized in their structure and funded through the income-increasing effects of their membership?

  • E.g. ISAs for members of communities like Bravado (sales community), Demand Curve (growth hackers), HireClub (community for those looking for jobs and coaches), which could be reinvested into the program.

🎓4. Higher Ed?

  • We are not fully convinced ISAs will fundamentally change Higher Ed, other than providing an alternative to college for students struggling with the current options. Higher education has traditionally suffered when success is only measured through one metric (e.g. standardized testing), and focusing on income as the sole definition of success would push out valuable parts of a college education that don’t necessarily lead to short-term increases in income post-graduation. Startups like Avenify, Blair or Vemo Education are more bullish on this view than we are.

A Framework to assess ISAs

Lastly, a micro-level framework to assess whether Income-Sharing Agreements can be a viable solution for a problem. We look for 3 variables:

1) a program that will have a clear treatment effect on income,

2) a system in which there is clear data on outcomes, and

3) a provider who can align its economic incentives with students.

Using this framework, we are bullish on our opportunities #1-#3. For example, we see startups like Nova Semita or Microverse as great applications of the business model, given

1) there are clear positive income effects (particularly strong when remote work opportunities are guaranteed as incomes can be multiplied by 2-8x),

2) can be transparent when it comes to analyzing the data from employers, and

3) a push to find lean operational models (using tools like as remote instruction or peer to peer learning) and build a team to manage the employer partnerships.

We are not so confident about the effect of ISAs on higher education: 1) the income treatment effect is not always clear across all universities in different countries when you exclude the top performing schools and degrees, 2) there aren’t always clear ways to gain data on post-graduation student outcomes and 3) the universities’ business model make them highly unlikely to change their operations to maximize for students’ success.

There are numerous challenges for ISAs to gain mainstream adoption: from the regulatory changes to predatory behavior or misused ISAs that can harm students (as in the failed Yale experiment). However, we are confident the application of this new business model to new vocational training, outsourcing talent and communities will yield great results for students, employers and investors.

What do you think? We’d love to get your thoughts, please leave a comment at the bottom of the newsletter!

Other news and exciting projects

🖥️Our featured company last week Microverse presented at Y Combinator Demo Day this week. Here is a webinar they organized on launching a career in software engineering.

✳️At YC, they were joined by other projects in the space like Hatchways (employability assessments and matching) or Prenda Schools (in-home micro schools).

🗳️What makes educational experiences transformative? Our friends Lucy Chen and James Genone (Minerva Schools) are proposing this panel for SXSW 2020 and they need our vote!

👐Looking to fight for inclusion in your campus? Why not do it with a community of peers supporting you? This is your last chance to apply for the Inclusive Excellence Fellowship, led by our friend Felicia Reich.

🎥If you missed our chat with James Kim, from Reach Capital, you can see the recording here.

Gadi Borovich - “I'm currently studying at Minerva Schools and working for Wefunder building a program to help more founders all across the United States. Hit me up if you are interested in becoming (or are) a founder. Let's talk about each other's dreams. Maybe I can help out!”

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Alberto (alberto@transcend-network.comMichael (michael@transcend-network.com)