Raising Seed Funding: Tech Entrepreneur Making College More Accessible

AB:
As a financial investor by trade, you have a fascinating journey to become an entrepreneur. Please tell our listeners a little bit about your personal story that led to founding of YELO.

DR:
Yes, sure. I moved to New York in early 2000. As you can hear from my accent, I'm French. I was born and raised in Paris, and I moved here 23 years ago to live the American dream, like any European. Started my career in accounting, in public accounting, and then got my MB at NYU Stern. For me, it was very important to, if I wanted to make it here in New York, to have a US education.

And after my MB at NYU, I worked 20, 25 years on Wall Street. I was an investment banker at Leman Brothers. I worked in a few private equity firm. I was private equity investor at a real estate investment firm. And then in 2017, I'm in my early forties and felt that it was for me, it was the right time personally to strike on my own. And I started an asset management firm with a friend of mine to invest in private credit opportunities. We've been doing that for the past six years. And then around 2020, so three years ago, as I was putting my kid to college, my first one, I realized how expensive and outrageous college education was and college financing. And this is when YELO became an idea and how I got to start YELO.

AB:
Well, Dan, I can vouch for this. Every immigrant has a fascinating story. You can probably tell from my accent as well that I'm not a native. Obviously now I am, but I have a journey of my own. I started back in India. I've lived and worked in four different countries, seven different cities. And it's always fascinating to hear from a fellow immigrant, so, glad to have you here.

But tell me, as you are putting your own kids through college, you are seeing an opportunity to help others also get access to higher education. I applaud your compassion and admire your innovative approach. It's clear that there is opportunity to be had. However, succinctly, can you articulate the exact problems you are trying to solve?

DR:
Yeah, sure. So there are actually two issues today as it relates to higher education. First, as you know and you read everywhere, college has become an unaffordable luxury product. It's akin to buying an expensive car every year for the next four years and for each of your kids. And as price of education continue to skyrocket, the student loans have become commonplace for college student trying to cover these tuition costs. But the problem is that most graduate struggle to repay that debt and they are often burdened by it for decades. One very interesting statistic is 23% of the outstanding student loan, the $1.7 trillion student loan that we talk about, 23% is owed by people over the age of 50. And the reason why we have described is there is a disconnect between the salary and the cost of education. And in other words, many students, they borrowed too much compared to the expected salary when they started college. And bottom line is that not all majors, not all programs are created equal, yet they all cost the same thing.

The second issue that's worse is that the conventional loans, the federal direct subsidized and unsubsidized loans, they are limited to an annual cap and they only cover roughly a quarter of the cost of attendance. And these force students and their parents into costly gap financing, what we call the private loans, which can go up to 23% APR, and the parent plus loan, which are also very expensive, like 8% a year. And these loans are, generally, they are not accessible to social or economically disadvantaged students, and especially the one without strong credit score or co-signer. And that's, when I saw that, that's why I started YELO. I wanted to tackle this problem. The way we do it at YELO, we finance college expense in exchange for a portion of the student's future salary. So we really invest in the student's future. We don't look at their parents' past or their family past. It's really about partnering with the student. And we feel it's a more equitable way, a more affordable way for students to finance their education. And that's the problem we are trying to tackle today.

AB:
Well, very interesting. My next question, I'm just going to go on, how to fund a funder, right? So I understand YELO is in the middle of raising its seed round from investors. I'm curious, how are you approaching funding and what are you finding to be most successful?

DR:
Yeah, so we raised the pre-seed round last year from friends and family to build our company and our MVP. And right now, as you mentioned, we raising our seed round to build a team and our go-to market strategy.

To go back to your question, the way I approach fundraising and when I pitch investor, I don't just talk about the financial investment opportunity. I also invite them to join our mission. Yes, we are creating a new asset class with good return, but it's also a social impact investment. We focus on fixing a broken system. And there is a growing student debt crisis in America, and we are here to try to solve that issue.
So even if we're not running a non-for-profit and we are here to make money, today, ESG is really at the forefront of investment decision. For a lot of investors, it's not just about profiting now, it's about the mission. And I constantly emphasize that and the mission and what we are trying to do.

The other thing also what I find successful is to tell my story. When you are in fundraising, you have to be good at storytelling and you have to demonstrate passion. For me, like I said, this is personal. YELO was born out of my frustration to having three kids in college all at the same time. I can do the quick math of how much it's costing me on an annual basis, and I realized that education was expensive and discriminatory. And so I always try to really bring this personal story because behind every institutional investor, every fund, there are individuals with kids that have kids that are about to go to college or are in college, and so they can relate to that issue. And that's a big first step. I read somewhere, and that's true, people don't buy what you do, they buy why you do it. And so to show that, it's really critical.

AB:
Well, it's truly incredible mission that you are set yourself on the path of. But along with that, what you are also creating is a new asset class in the market. Can you expand on this concept a little bit and including how much ROI a customer or a client could expect to get in return?

DR:
Yes. So this is a new asset class, but income share agreement, that's the name of the product, was popularized by Milton Friedman in the '50s. As I mentioned earlier, the core principle of an ISA revolve around a student repaying a fixed percentage of their earned income, in general above $30,000 a year, over a defined period. In general, it's 10 years. And up to a maximum amount, in general, between 1.7 times to 2 times the funding amount.

Now, the concept of ISA has gained significant attention in recent years, and not just for their student-centric approach, but also due to their attractiveness as an investment option. The gap financing market, which is what I mentioned earlier, the private loans and the parent plus loan, is a $350 billion market with $35 billion of annual origination. And this presents a golden opportunity for investor to tap into a previously untapped asset class. The potential return have attracted not only institutional investor, but also credit provider.

In terms of return, the way I look at it is in IR, an investor can expect 9 to 12% depending on when the student receive funding, junior or senior year, and how long it takes to repay that financing. Now, the other thing that's attractive for investor in this asset class is that there is a unique aspect of inflation protection investment, as opposed to other fixed income product, other bonds that have fixed payment. Here, the repayment, as I say, are tied to the salaries. And so this act as a safeguard against inflation. So it's another attractive aspect for investor. But look, at the end of the day, it all comes down to return. And this product, it's a high single-digit to low double-digit type of return.

AB:
So I'm going to shift the topic a little bit. Tell me, as a pre-seed startup, what kinds of business advisors or support teams are you putting in place as you look to move your startup to the next stage?

DR:
Yeah. So look, I'm smart enough to know what I don't know, and there are many things that I don't know. And when you take an idea from a concept to an idea to a business, you need to surround yourself with a great team. So as I was building this fintech, I quickly realized that the fin part, I could take care of it, 25 years on Wall Street, but then there was the tech part and other topics I had to take care of it.

So regarding the tech part, I needed to build a platform. I hired software engineer and most importantly a tech advisor to help me guide this engineer because they are speaking a language that I do not speak. And my tech advisor became an investor in the firm. He's a firm believer in what we are doing.

But then it's not just about when you build this startup, there was a very good statistic I read, which is that 82% of adults have never heard of income share argument, but 39% said that they would consider it if it was an option. So early on I realized that it was, if I wanted to succeed, it was all about educating people and marketing the product. And again, I'm a finance guy, I'm not a marketing guy. And so decided to hire as an advisor, a CMO in a fintech company and help me with my go-to market strategy and marketing the product.

And then the last thing that was important to me when you deal with this sort of industry in the fintech world is regulation, right? You have to be careful in what you do. Here, I say it's not a regulated, it's unregulated industry. That being said, from the beginning, I wanted to make sure that I would be compliant with what the CFPB would require, or Congress eventually, if they decide to regulate the industry. And so I hired very good lawyers and compliance advisor and policymaker advisor, and they helped me in that aspect. And then obviously you always need a good PR firm to get your name out there and promote your company. So that's how you take an idea from just a pitch book to a real thing.

AB:
Well, smart strategy. No wonder YELO is well on its way. So I always say my favorite question for last. Well, as you embark on this new journey as an entrepreneur, is there one conversation you have had that continues to resurface and accompany you on your journey?

DR:
Yes. Look, I'm a transactional person. I've done deals all my life, as an investment banker, a private equity investor, or a firm manager. And even now as an entrepreneur, I continue to do deals and negotiate deals. Early on in my private equity career, one of my boss told me something that stuck with me that he himself had learned from Lionel Pincus, one of the co-founder of Warburg Pincus. And that's when... and that was in the context of private equity, but when you acquire a company with management, always leave the last dollar on the table. For you as an investor, it's not going to change that much for you in terms of IR and the profitability of the deal. But for the management team, it's going to make a lot of difference. They're going to feel good about it. They're going to walk away positively and they're going to work hard.

And so for me, I always keep that in mind and I always apply it even now. When I negotiate fees with service providers or terms with investors or any type of deal that I do, I really feel that I don't need to have the last word. I can leave the last dollar on the table. For me, it's not going to change much, but I want to make sure that the other party feels good about the deal and we start the relationship in the most positive way. And that has worked for me so far.

AB:
Dan, that's a fantastic approach. Can't disagree with you or agree with you more on that. Taking the last dollar always creates an issue, and leaving that on the table, everybody walks feeling so nice about it. Dan, thank you for taking time to have a conversation with me today.

DR:
Thank you very much.

AB:
And thanks to our listeners to tuning into TechTalk. Subscribe to EisnerAmper podcasts to listen to more TechTalk episodes. Join us for our next podcast episode or visit eisneramper.com for more tech news you can use. Thank you.

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