Startups Unpacked | Income Share Agreements for Healthcare Jobs, & 'Dear Founder'

ISAs - the best thing to happen to front-line healthcare workers since masks.

Welcome to Startups Unpacked!

This week, I’m sharing an investor deal memo from a startup I’m investing in.

For entrepreneurs, deal memos offer behind-the-scenes insights into what investors are looking for, & should help you develop/sharpen your startup ideas.

For angel investors, Startups Unpacked keeps you informed of trends & investment theses.

What’s a deal memo? They aren’t usually public info. VC’s write them for their investors (LPs) to help them decide if they’re going to invest in a startup.

Where do I get the deal memos? I invest in startups, so I write them! Then I ask permission from the founder to share them with you (some info is redacted).

Disclaimer: this email is not an opportunity to invest in this startup. It is shared for educational purposes only.

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What’s Inside

  • Deal Memo- Avenify.com

  • Learn- The history of Income Share Agreements (ISAs)

  • Recommended Reading- Recent long-form content from startup/VC land

  • “Dear Founder”- a venture-backed founder answers a question from an entrepreneur


Deal Memo

Avenify.com

CONFIDENTIAL

I'm thrilled to share a true innovation aimed at the healthcare jobs shortage. This is one of those startups I personally wish existed 10 years ago. As a physician assistant, I had to give the Army 4 years of my life to avoid onerous student loans, and I personally know dozens of healthcare providers who are strapped with student loan debt that continually forces them into less than ideal career decisions.

TL;DR Avenify is a replacement to student loans, enabling healthcare students to finance their education with income share agreements. With only $XXXk raised previously, they've originated $XXM in student loans and are poised to scale to $XXXM in origination volume.

After some chasing, Avenify has agreed to give us a $XXXk allocation! My excitement has only grown during diligence—they've gone from $XXXk to $XM in loan origination volume in the last week.

We're co-investing with Barclay’s Ventures, Techstars, and a Kleiner Perkins scout into this fast-moving deal. 

They're starting with nursing, the cornerstone of healthcare delivery. Then, they will expand into other healthcare career fields. By focusing on a single vertical, healthcare, Avenify is able to tackle a huge market ($2B+ in annual origination volume opportunity), leverage predictable job market outcomes to build a stronger alternative underwriting model than horizontal ISA solutions, and solve the growing shortage in one of the nation’s most important and fastest-growing job fields. Avenify will expand beyond nursing to other healthcare fields in order to become for healthcare employees, and their families, what USAA is for military members and theirs.

AKA: “Income share agreements (ISA) for Healthcare,” or "The Lambda School of Healthcare” (just minus the online school part, to be clear). 

Any questions? The deck may answer them; please have a look. If you still have any questions, please send them directly to us and not the founder; we will try to streamline communication for all LPs.

Highlights

  • $2B nursing education SOM with strong expansion opportunities in other healthcare jobs

  • ISAs are an exploding space. For example, in Aug 2020, Lambda School (ISAs for coders) raised $74M in equity in a Series C round led by Gigafund, with participation from GV (formerly Google Ventures), GGV, and Stripe

  • Founded by prior marketing and community lead at Product Hunt and Republic.co

  • With just two team members, they have already scaled to $XM in loan originations.

  • Now, with a $XXM in debt backing, they’re poised to grow fast in 2021

  • Projected $X,XXX LTV (minus the debt principle repayment) for a YYx LTV:CAC

  • Defensible, with multiple moats (vertical-specific data play, partnership potentials, and the potential for healthcare-specific career placement services that will attract future students)

  • Huge upside potential to expand into other healthcare jobs and offer career services/placement

  • Job category accelerated by COVID, highly relevant post-COVID

Problem

School is becoming increasingly unaffordable

  • More than 70% of nursing students borrow between $40k and $54,999 to pay for their education, based on data from the National Student Nurses' Association

  • Federal loans only cover about $20k

Student loans are inaccessible, predatory, and burdensome

  • 50% of dropouts are due to not being able to secure financing

  • 95% of private student loans require a credit score or cosigner, despite only 20% of young people having one

  • Half of low-income consumers are not accurately scored

There's a huge shortage of talent in healthcare

  • The US Bureau of Labor Statistics projects that 11M additional nurses are needed to offset job sector leakage and therefore avoid further shortage

  • The credit score requirements, interest rates, and unforgiving payment schedules are strangling the supply of healthcare workers in the US. Coupled with a job category that is high-stress by definition, it’s easy to see how the entire job market would welcome a better solution

  • Hospitals are clamoring for ways to solve their labor shortages to meet national demand. It’s such a dire need that the nation’s largest hospital system, HCA, with 2.2k care locations, acquired a majority stake in a multistate nursing school to corner the supply of nurses because the shortage is a major business exposure for all providers.

The healthcare industry needs solutions that can increase the supply of nurses, and I believe Avenify can do that by making nursing school more financially accessible and manageable. 

Solution 

Avenify is a replacement to private student loans, enabling healthcare students to finance their education with income share agreements (ISAs). They pair this fairer, more accessible financing with career services like placement support to empower upward mobility. 

How do ISAs work?

ISAs are exploding in popularity thanks to companies like Lambda School. Students receive funding upfront in exchange for a percentage of their future income. Once the student graduates and lands a job earning more than $30k, they'll begin making payments based on a percentage of their income. 

Their payment obligation ends after they make 60 payments, or when they hit the payment cap, which is 2.5x the funding amount. If the student returns to school, loses their job, or earns less than the minimum income threshold, their payments will be paused, or drop to $0.

Here’s an Avenify ISA overview video:

Avenify’s ISAs are priced at a XX% risk-adjusted IRR, which accounts for defaults, non-graduation, non-placement, willingness to pay, and investor fees for their capital partner. The effective APR to students is in the high teens, low XXs. These rates will decrease with more repayment data and more origination volume. 

Avenify prices in loan risk when they set the terms. To approve students, they look at:

  1. Individual factors, including their academic performance and previous student loan history

  2. Program factors, including graduation rates, job placement rates, NCLEX pass rates, alumni distributions and earning data

  3. Macro factors, including unemployment rates, job growth rates, and earnings by region (and employer type)

Business Model Efficiencies

Stage 1 (today)

From today until XXXX, Avenify’s revenue model will be based on loan placement agreements with their partner banks.

So, Avenify does not hold the risk on its balance sheet today. These placement agreements generate two payment streams. First, they get paid a XX% (of the loan) origination fee by the financier for placing the loan. Then, Avenify makes a XX% repayment fee when the student makes payments.

Stage 2

In XXXX, Avenify will raise its own $XXXM debt facility, unlocking tremendous upside revenue by taking on balance sheet risk and capturing all of the payments and interest. 

They could make the transition sooner if they grow faster and acquire the data needed to prove out their underwriting model faster. 

As they scale and collect more data, their rates will drop to XX% with their debt facility and down to X% in the long run.

What’s in-house today, and what do they rely on partners for?

Avenify has built out a full end-to-end product for the student application experience, which is responsible for acquisition, applications, underwriting, and contracts.

They have a partnership with X for the current debt facility; Y, who is responsible for disbursing funding to the school; and Z, who is responsible for income/employment verification and payment collection. They expect to bring servicing in-house in the next X yrs and estimate they need just a X% improvement in payment behavior to offset the cost (which excludes up-selling and cross-selling opportunities).

Market

Why Healthcare-Specific ISAs?

There are 20.4M healthcare provider jobs today. It’s the largest employment category, with projected growth of 15% by 2029. This projected growth is mainly due to an aging population, leading to greater demand for healthcare services.

Building underwriting models is hard. Building them for 300 majors is even harder. By focusing on healthcare (and nursing, more specifically), they're able to take advantage of the predictability and consistency in outcomes to build a robust, scalable underwriting model that can be easily translated to similar healthcare vocations. Job placement and graduation rates are high, even for small schools and local community colleges. Salaries are fairly standard by region and employer type, and they have data on alumni distribution we can use to model a weighted average of where we expect the student to move after graduation. Nursing (like similar healthcare vocations) thrives in a recession (and pandemics), making it more stable than less-predictable fields like engineering or business.

Why Nursing?

Nursing is a massive market. 300k students study nursing every year. 70% of nursing students are taking out student loans, averaging $40k in debt — $20k of that being private student loans.

Demand for talent is outpacing supply. Hiring partners like hospitals are willing to pay thousands of dollars per successful referral. Because Avenify’s revenue is contingent upon the success of its members, Avenify is incentivized to place them in high-paying jobs. Avenify can play a valuable role as the middleman, creating a win-win-win scenario across the board. 

This is a huge pain point today. Hospitals are hurting for nurses so badly that the nation’s largest hospital system, HCA, with 2.2k care locations, acquired a majority stake in a multi-state nursing school to essentially attempt to corner the supply of nurses because the shortage is a major business exposure for all providers. 

Other Players in the Serviceable Addressable Market:

Avenify is the only direct-to-consumer ISA company focused specifically on healthcare. Their main competitor is Stride, who funds students across nursing and MBAs. Others, like TradeUp and Dreambound are focused on vocational education, and Lambda School and similar programs require that you attend their specific school, while Avenify can be used at any approved school.

For larger incumbents like Wells Fargo or Discover, it's unlikely they'll launch ISAs in the near term — not without a radical shift in their product philosophy at least. With loans, the upside is locked in — principal plus interest, and they'll get their money one way or the other. ISAs are far more variable. Without playing an active role in helping the participant increase their earnings or job security, the less and less upside potential there is. For ISAs to work, the company has to play an active role in upside creation, which big banks almost certainly don't have an interest in doing.

As ISAs continue to gain traction and market share, it is likely big banks will want a slice of the pie, but it will come from an acquisition — not from Wall Street.

The ISA Landscape:

  • Direct-to-consumer: Avenify, Stride, and TradeUP

  • Servicing: Vemo, Leif

  • Capital markets: Edly, philanthropic investors, HNWIs

  • Bootcamps: Lambda, General Assembly, Holberton

  • Universities: Purdue University, University of Utah

Road Past $100M ARR:

All of Avenify’s acquisition to date has been direct-to-consumer, though they’re exploring partnerships with a healthcare-focused school in XXXXX — a $XXM annual origination volume opportunity — and a confidential nursing education company that manages some of the top-25 programs across the US — a $XXXM annual origination volume opportunity.

[REDACTED GROWTH STRATEGY]

[REDACTED B2B REVENUE STRATEGY]

The Vision

Avenify will be the place people in healthcare go for personal finance and career success. While their competitors are expanding horizontally, Avenify is expanding vertically to become for healthcare employees and their families what USAA is for military members and theirs (or to expand the analogy and differentiation, like SoFi is for HENRYs and Chime is for young/low-income consumers).

Their goal is to play an enduring role in the long-term success of their members, with additional product lines including niche credit opportunities, career services, and traditional banking and investing products.

For most of their members, Avenify is the first private financial institution (outside of their primary bank) they're interacting with. Avenify can take advantage of this pivotal moment in their lives to capture them at the beginning of a pivotal journey into adulthood and grow their product alongside them.

Traction & Roadmap

With less than $XXXk raised to date, Avenify has:

  • Launched a full-service portal for students to apply to pay for nursing school with an ISA

  • Originated $XXM in loans — XXXk% YoY growth

  • Processed over XXXk applications for funding

  • Graduated their first students with a 100% completion rate

  • Signed purchase agreement for $XXM in origination volume, worth $X in revenue

Roadmap

After providing its customers ISAs, Avenify will launch [REDACTED ROADMAP STRATEGY] 

In the long run, understanding their customer’s credit by underwriting and servicing their school ISAs will enable Avenify to layer on additional products: career services, credit lines, banking, refinancing, insurance, rent-to-own, mortgages.

Unit Economics

Stage 1 (today- placement fees)

Today, Avenify acquires customers online ($X CAC) through school partnerships ($X CAC) and through referrals ($X CAC) for a blended $X CAC. LTV is $X for a YYYx LTV:CAC. 

Stage 2 (debt facility)

As soon as they have their own debt facility (XXXX), LTV (minus the debt principle repayment) will be $XXXXX for a YYYx LTV:CAC. 

Team

Co-founder/CEO Justin Potts led social media marketing at Product Hunt and led marketing at Republic.co, where he was responsible for maintaining and growing audiences of over 250k. He’s a self-taught developer and has previously built products piloted at companies, including HQ Trivia and Coffee Meets Bagel. After graduating high school, he became a software engineering intern at Mozilla — the youngest student to have ever been offered an internship.

Co-founder/CTO Timo Sheridan was previously an engineer at Payload. He studied math, economics, and computer science at the University of Oklahoma and graduated with Honors after receiving a full-ride as a National Merit Scholar. While at OU, Timo led various projects for the Center for the Creation of Economic Wealth, a student consultancy that partners with local small businesses and startups, including go-to-market strategies, technical development, and financial modeling.

Advisors & Board Members

Justin and the team are actively supported by a top team of experts in fields relevant to Avenify:

  • [REDACTED]

Defensibility

  • Vertical-specific ISAs will underwrite more effectively than horizontal solutions.

  • Exclusive partnerships with educators and hiring partners (hospitals) can be used to block followers.

  • Economies of scale exist as origination volume increases.

  • A network effect is already showing signs of life. XX% of recent customers came via unpaid referrals from friends, with plenty of room to grow — SoFi's most recent referral rate topped XX%. I think this network effect will grow a community of healthcare professionals that leverage Avenify’s ISAs and follow-on to use other products and in turn refer new customers.

  • The founding team is experienced in building huge online communities, which are the new moat for consumer startup opportunities.

Current Round

Avenify is raising a $XM seed round to grow the team, scale to $XXXM in origination volume, and prepare to raise a $XXXM debt facility in XXXX.

$XXXk of the round has been allocated so far. Current investors include Barclay's, Techstars, the Kleiner Perkins Scout Fund, & [REDACTED ANGELS].

Avenify is in conversations with a number of well known VCs that indicated interest to take the rest and maybe some more. We can't promise our allocation at that point, so we need to move now.

Use of Funds

  • Scale to $XXXM in origination volume

  • Prove the repayment/placement data model (so far, with $XXM originated, 100% of students have graduated and found jobs)

  • Refine the customer acquisition pipeline

  • Prepare to raise a Series A and a $XXXM debt facility in mid-XXXX

Summary of Deal Positives

  • Massive industry with big pain point

  • Strong vertical-specific advantages

  • Multiple moats

  • Upside opportunities

  • Other ISAs like Lambda School have paved the way

  • Industry infrastructure

  • Banks trust ISA models

  • Clear path to USAA-like market opportunity

  • Clear path to acquisition by big banks


Learn

The History of ISAs

Until now, there has never been an ecosystem with everything needed to support ISAs.

ISAs are not a new idea — they've been around since Milton Friedman first proposed them in 1955. Yale experimented with a program in the 70s, which failed due to poor program design, and Upstart brought them back in 2012, though the company has since pivoted to consumer lending and credit scoring.

Since 2012, there's been a reemergence. App Academy and Lambda School popularized them as an alternative form of tuition. Since the bootcamps never charged actual tuition, they didn't need capital markets to support early adoption. Servicing companies like Leif and Vemo emerged to provide the infrastructure required to support them.

With the infrastructure in place and growing consumer awareness, Purdue University launched their Back-a-Boiler ISA program, becoming the first major university to offer ISAs, with the University of Utah following a couple of years later.

Repayment data from bootcamps and early validation from university programs, mirroring private student loans more than tuition credits at bootcamps, paved the way for early capital markets adoption from players like Edly and small private credit funds.

All the pieces — consumer awareness and demand, servicing infrastructure, and capital markets — were in play. The only thing missing required for mass adoption was a broad consumer solution, not limited by school or institution type.

Avenify became the first direct-to-consumer ISA company focused on healthcare on the market (Lambda pairs it with a required bootcamp, and other schools require you to attend their school), launching to their first students in Fall 2019. Since then, others like Stride and Blair (which has since had to pivot) emerged, helping increase publicity and consumer awareness, driving even more adoption for ISAs.

In Avenify’s Fall 2019 cohort, none of the students knew about ISAs. In Spring 2020, a small percentage looked specifically for ISAs as a financing option. In Fall 2020, nearly XX% of the students we funded specifically sought out ISAs as a way to pay for school.


If you're an accredited investor and would like to invest in deals like this, apply to join our syndicate.


Recommended Reading

  • How Twitter Got Its Grove Back - Packy McCormick

    “So here’s a dumb bull case for Twitter: it has the lowest market cap of any public tech company that you use every day -- at $45 billion, Twitter’s market cap is just 2% of Apple’s and 5.9% of Facebook’s -- and that will change once the narrative around the company does.”

  • How to Eat an Elephant, One Atomic Concept at a Time - Kevin Kwok

    How Figma is taking on Adobe. “The best products map to how customers think about their workflow. They match the abstraction level of their customers: not too high that it’s unusable, but not too low that it’s hard to use easily or extend in more complex ways. They choose the right atomic concepts.”

  • The Best-Case Outcomes Are Statistical Outliers - Farnam Street

    “There’s nothing wrong with hoping for the best. But the best-case scenario is rarely the one that comes to pass. Being realistic about what is likely to happen positions you for a range of possible outcomes and gives you peace of mind.”

  • Stripe’s payments APIs: the first ten years - Michelle Bu

    Michelle, an engineer at Stripe, unpacks how Stripe has evolved from just 7 lines of code that produce a charge to the giant it is today.


Dear Founder

“Like Dear Abby, but for entrepreneurs & founders”

Question from Tanya T. Morris, The Mentor Mogul:

”Solo entrepreneurs in particular have challenges with building a team. Two reasons.

One: don’t know how or when to identify the need for staff because we’ve grown accustomed to doing everything by ourselves. And even when we do we are challenged by our ability or lack thereof to delegate. This is huge!

Two: Capital. The lack of capital to be able to pay a living wage.

So how can entrepreneurs address these two areas and build a team willing to grow with their company? “

Answer from Shannon Goggin (Co-Founder & CEO of Noyo):

Hi Tanya, 

Kudos to you for the important work you're doing. Building an organization as a solo founder is not easy. The right team can supercharge your impact and give you the space to accelerate your work in new and unexpected ways. Deciding when and how to build that team is something every founder has to navigate -- you're not alone. To figure out the right approach for building your team, I suggest a few exercises: 

Where do you want to go? Put aside what seems feasible today and think about where you want your business to be in 12 months if you had every resource available. What capabilities do you need to be successful in achieving that vision? Maybe you need to build a strong community of entrepreneurs or a network of mentors; maybe you need to refine a repeatable outreach process, or tighten up the onboarding experience for entrepreneurs you are working with. These are the drivers of your organization's success, and once you have them laid out, you can match them up against the skills you already have in house. 

What's working or not working now? Every entrepreneur has a long list of things they want to get to if only they could make the time - what is that for you? Ask yourself if this is something that you need to be working on, or if you could hire someone with relevant experience to get it moving quickly. When thinking about where to delegate, a great place to start is by looking at how much of your time is going to things that need to be managed on an ongoing basis. If you're spending multiple hours a week managing finances, writing content, doing outreach, or other things that just need to get done week after week, you can structure that into a role and hand it off to someone else. By giving this work to someone who can make it their main focus, they can come up with even better systems and you'll free yourself up to work on higher leverage activities that will move your organization to the next level. Everyone wins. 

If you've decided you're ready to take on outside capital to invest in your team, it can feel like a chicken or egg problem - it's tough to hire people without money, and tough to raise money without a team in motion. These things build on each other, so move them forward in parallel. You de-risk the investment by having a pipeline of great candidates you'll hire as soon as the wire hits, and you make it easier to attract talent with clearly scoped roles and momentum in the business. Post the roles now and start getting to know people. In parallel, set your investment targets and start having those conversations with a clear plan. Most importantly, don't be tentative ("we'll do this initiative if we hire the team...") - you're already moving the business forward every day. When you demonstrate continuous progress, you'll be surprised at how quickly people will back you up. 

Keep going! 

Shannon


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