A new company is investing in the future value of students.

Funding the Future

A business that needs capital in order to generate future revenue has two main alternatives. It can borrow from a bank and repay the loan plus interest over time. Or it can sell equity on the stock market that enables investors to share in the future success or failure of the firm. Each has positives and negatives. A bank loan presents lower risk and lower return (on average) to investors than shares. Alternatively, shares offer no guarantee of return to the investor, but if the firm does well, the investors that took the risk reap the reward.

Grants for Granted

But you already knew that. Firms have been borrowing money since there were firms and money. And firms have been selling stock since the early 17th century on the Amsterdam Stock Exchange ? a model replicated and refined the world over. It is today so commonplace we literally take it for granted. But are firms unique in the need for funding alternatives now in order to finance future value?

Singular Scholar

Felipe Vergara was a unique student. Not a lot of people born in Barranquilla, Columbia wind up studying management at the University of Pennsylvania’s prestigious Wharton School of Business Administration. Vergara’s path was one of education and entrepreneurship. From an early age, he tutored others in math, science and languages, and after completing his university studies in Bogota, he founded a firm providing strategic and financial planning services to small businesses. Mixing education and business with his firsthand understanding of the financial difficulties of attending Wharton, Vergara sharpened the question. Why, if someone could invest in the future value of a firm, could they not invest in the future value of me?

Equities Are Us

Governments and banks already offered student loans. But loans came with borrowing limits, fixed payments, and often had to be backed by parents’ assets or income, all of which challenged applicants from Barranquilla, Columbia to Columbia, North Carolina. Students’ need for broader access to capital was only increasing. The cost of education has outpaced the cost of living in the United States over the past 20 years, and today, a year of undergraduate tuition and room and board at a private college averages $26,273 (incidentally, Wharton’s MBA tuition, fees, and living expenses this year are $84,700). When Vergara met Miguel Palacios from the Darden School, the answer came in the form of Lumni, a firm that pays a student’s current tuition bills in exchange for a percent of future earnings. Just like a share of stock, only its stock in you and me; and the future is our careers.

Markets in Tomorrow

The marketplace is the foundation of exchange. In its earliest form, it’s a farmer with too many carrots wanting to trade some for a chicken. More recently, it’s someone willing to pay money in return for getting a hair cut or a lawn mowed. Today markets enable us not only to trade what exists on the shelves, but to buy and sell future values of everything imaginable, from orange juice to the right to pollute. Markets deliver humanitarian aid, witness UNHCR’s Kashmir Relief Note, which provides a return on investments made to reconstruct Pakistan-administered Kashmir following the 2005 earthquake. Markets enabled David Bowie to sell the future value of his song royalties. And with Lumni, that same alternative is open to individual students.

The Circle of Light

To date, Lumni has worked with over 1,000 students and appears to be on its way to attaining the goal of 3,500 students by the end of 2010. Vergara reports attracting a total of $12 million under management and in forthcoming commitments. And though he has more than 100 individual and corporate investors, he is already thinking bigger. He is in talks with investment banks in anticipation of creating a securitized portfolio of investments and earnings streams, so that he can fund even more of the best and the brightest. But when his investees turn into his investors is when the future will indeed be bright ? for Lumni and the rest of us.

Written by Stuart Read, professor of marketing at IMD and Saras Sarasvathy, associate professor of business administration at the University of Virgina’s Darden School and is also available at Business Life.

British Airways Business Life
Stuart Read
Saras D. Sarasvathy
Relevant Principles:
Affordable Loss
Pilot-in-the-Plane (Control vs. Predict)
pdfBABL Lumni