Should the UK government convert student debt into startup equity?

If much higher-than-expected numbers of students join the ranks of the long-term unemployed, most student loans are going to remain unpaid indefinitely. Is the risk of student unemployment higher than the risk of failure for a startup accelerator-boosted founder?

Startup accelerators are becoming an ever-more-widely recognised means of reliably boosting (although obviously not guaranteeing) the prospects for the success of the startups that they nurture.

Should we think differently about student loans?

The taxpayer is taking a serious gamble betting upon the success of student loans.

Some of the odds on that bet come from the belief that even if much of student debt is never repaid, the long-term benefits to the economy and culture of a better educated next generation will ultimately outweigh any losses from a speculative (but nonetheless very substantial) financing flutter.

So any thoughts given over to ways to reduce those anticipated losses would also need to take into consideration the ‘aspirational’ aspect of the rationale behind the intention to fund higher education, rather than focussing exclusively upon purely financial objectives.

In light of this requirement to combine fiscal prudence concerning fees and loans with farsightedness regarding the broader benefits of higher education, it would be reasonable to consider the possibility of expanding the range of anticipated ways in which students will be able to make valuable contributions to the future prosperity of the UK economy.

In the past, practical considerations of ‘deriving value from increasing the numbers in higher education’ involved concerns regarding ‘the workforce of tomorrow’.

Today, as a result of the tumultuous changes brought on by technology and globalisation’ as well as increasing economic and environmental uncertainties, we are beginning to acknowledge that we can no longer predict with any great confidence the capabilities required for the workforce of tomorrow.

Nonetheless, there is a new realisation that whatever workforce is required, a different set of skills will need to be cultivated in order to create the enterprises of tomorrow.

Those skills will include whatever it takes to discover and to respond imaginatively to opportunities to satisfy new requirements as they inevitably emerge from consumers, industry, and government, both at home and abroad.

These skills of market discovery and creative solution development and deployment are the capabilities of the innovative startup founder.

Startup founders, if they have an idea about a business that they want to start, don’t typically seek or obtain loans in order to fund their startups, but instead, they typically trade equity for seed capital with angel investors (‘friends, family and fools’ who they successfully persuade to give them money in exchange for a stake in the success of the venture).

If they are university students, they will be ‘theoretically encumbered’ by a student loan (which, despite fees increasing significantly, they won’t need to  pay off until they are earning a wage ‘way above welfare’ and at least more than roughly double the legal minimum wage) but the extent to which the need or desire for loan repayment constitutes a significant contribution to student motivation towards employment (by comparison with other incentives) is questionable (and potentially non-existent).

So, if students are not actually worried about paying off their student loan and they have other, more pressing incentives to seek employment, what relevance would incentives to repay student loans have to students who were considering becoming startup founders?

Also, are student loan repayment issues different for startup founders?

Would the early days of a startup typically involve incomes for the founders (even if the founders have obtained investment and even if the startup is in profit) which would make loan repayments possible or relevant?

At first glance, these considerations all seem to render the loan repayment issue irrelevant to the kinds of things that students would be considering when contemplating founding a startup.

But from a public policy perspective, there are some relevant issues which have a bearing upon government policy regarding the encouragement of startups which both include and exclude the student loans issues:

  • how do you encourage students to become startup founders?
  • how do you encourage prospective students to consider becoming startup founders before during and/or after their degree course?
  • how do you ensure startup founders have the very best possible prospects of being able to repay their loans?
  • how do you encourage startups to employ as many UK citizens as possible in a way which is not inconsistent with the prospects for success of their startup?
  • how do you ensure that startups ‘exit’ in a way which is most beneficial to the UK economy?
  • how do you ensure that startups are encouraged to address requirements in sectors which are relevant to particular UK economic priorities?
  • how do you encourage startups to focus upon addressing requirements which result in increasing UK exports or result in bringing overseas inward investment into UK industry and which create UK jobs?

The primary difficulty in addressing these issues by dealing directly with startup founders is essentially a ‘herding cats problem’, because startups tend to be, by their nature, very individualistic and independent, both in terms of the character of the founders and the diversity of the nature of the ventures that they want to undertake.

In practice however, the reality which makes a coherent government policy process in this area tractable, is the phenomenon of startup accelerators.

Not only do startup accelerators act as ‘centres of excellence’ in terms of propagating best practice as far as:

  • identifying potential startup capability
  • acting as an interface between founders and prospective investors
  • facilitating the deployment of mentoring for the startup founders, enabling them to get the necessary encouragement, advice, guidance and support from experienced entrepreneurs
  • supporting ‘alumni networks’ which successfully maintain a culture which nurtures each new intake and offers to provides support for the founders and their startups ‘in perpetuity’

But if a government wanted to develop policies which were aimed at encouraging startups, facilitating startup success and increasing the number of startups which best served the interests of the economy, then offering startup accelerators the kinds of incentives and input which would help them do their job (and at the same time benefit from the kinds of deeper insights into the broader economic context that a government would be in a position to offer) would be a good place to start.

So how do student loans and equity fit into the relationship between the government, prospective startup founders and startup accelerators?

Typically, startup accelerators do get involved in equity by taking a stake in the startups that join their programs (Y Combinator takes 6%).

There have already been instances where investors have calculated, based upon the extraordinarily successful track record of the acceleration programs, that ‘co-investment’ in accelerator startups is a winning bet (for instance billionaire investor Yuri Milner rocked the startup world when he offered to back every single startup that joined the Y Combinator program).

Government-backed co-investment in accelerator startups (rather than in the accelerators themselves) certainly needs to be considered.

It would certainly be likely to increase the number of accelerators, the number and quality of startups and the attractiveness of the startups to prospective investors, whilst at the same time giving the government the opportunity to encourage startups in sectors sorely in need of innovation.

It would relieve the government of the need to actually take responsibility for running the acceleration operations themselves, whilst still providing them with the benefits of practical involvement.

Who knows, the government may wish to encourage any politicians and civil servants who might be unfamiliar with the exciting world of startups to enrol in the accelerator programs in order to brush up on some of the latest entrepreneurial innovation skills!

Tying the co-investment in accelerated startup founders with their student loan repayment appears to offer a convenient ‘quid pro quo’ opportunity for the government and offers the potential to generate significantly more revenue for the taxpayer (in terms of return on investment from successful startups) than all those almost inevitably written-off student loans.