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How To Start Solving The Student Debt Crisis, With David Chang Of Gradifi

One of the biggest issues permeating the business and political landscape in America today is that of student debt. More than 44 million Americans collectively have over $1.5 trillion in student debt, $521 billion more than total credit card debt. We recently wrote about this issue on Harvard Business Review, and today we had a chance to talk to David Chang, the CEO of Gradifi, one of the companies that’s actively working to reduce that massive number.

David has an impressive background. He’s been a leader at Goldman Sachs, Paypal, TripAdvisor, and several other enterprises. He’s also invested in over 40 companies, and has worked with student entrepreneurs at some of the top business programs in the world – Harvard Business School and Babson College. This work lead him to realize that students and recent graduates today are at an unfair disadvantage, and when the opportunity to lead Gradifi (a First Republic company) came he decided to stop all of his other projects to focus on the opportunity help remove this unfair disadvantage.

In our episode we talk through David’s dynamic career and what he’s learned from being part of 5 acquisitions. We also dig into what affects someone’s decision to start a company, and what angel investors look for in startup founders before deciding to give them money. Finally, we attempt to breakdown how the problem of rising student debt can be curbed, and what options are currently available for those that need debt relief.

Show Notes

2:42 It’s interesting how we met. We care about making entrepreneurship more accessible to people, and we had written an article on Harvard Business Review about how student debt is hurting entrepreneurship. And your PR agency reached out to us because we mentioned the company you’re running now, Gradifi.

4:00 It turns out we had very similar paths, you ended up in Boston where we’re from, and we ended up in New York, where you’re from. Were you born here?

4:30 David: No, I was born in Taiwan and my first memory is our family being in Flushing, Queens.

5:11 Vadim: You even started off in securities lending like we did (which no one will know about). But you ended up on the tech side of things. You’ve been an Entrepreneur in Residence at Harvard, you’ve angel invested in 40+ companies, but now you’re back being an operator trying to tackle one problem. Did you think you were going to develop the passion for this student debt problem?

5:24 David: I didn’t. I think it’s the long path of going back to where you heart is. I spent the last few years working with students and seeing the challenges they have and choices they make coming out of school. Joining Gradifi just made sense from the mission perspective, and it was a good fit personally because of the intersection of finance and tech both of which I’ve worked extensively in.

6:30 Sergei: The student debt issue is so big, $1.5 Trillion, and we’re seeing now that it’s taking private institutions to fix this problem. Even this week a billionaire said they will wipe out college debt to the graduating class of one school. Yet, you’re supporting graduating student entrepreneurs who are starting companies. What is it that’s getting some of these folks to start businesses? What separates those who do from those who don’t?

7:17 David: I haven’t done a formal cohort analysis, but if I were to try and stick this into a 2×2, on one axis it’s people who don’t have significant debt that change their choices, and other axis it’s people who want to start a company right this moment. Ideal is, you have no debt, and you want to start a company now. Regardless of where things are in the industry, those people will start businesses.

7:40 The toughest group is the people who have debt, and think they may start a business at some point. They almost always end up joining a big company. Like my first job out of college was at Goldman Sachs.

8:15 The interesting group I see all the time are the people who have debt, but are super driven to start a company, and they’re trying to figure out how to make it work. Whether to start it while working on the side or something else.

8:27 Knowing which category the student or recent grad falls into does inform how you help advise them.

8:55 Vadim: Entrepreneurship is never easy, let’s face it, but we kind of get the sentiment that it’s harder now for some reason. It just feels riskier for many people.

9:22 David: it is a massive problem. 7/10 graduates have debt and nearly 30,000 on average. We work with 750 clients now, which is twice as many as last year, who are offering debt repayment to their employees as a benefit.

10:05 Although in many of the ecosystems like ours, NYC and Boston, there is more support for founders than there has ever been, some people who have the crushing student debt, have to make suboptimal choices for themselves.

11:00 Vadim: I’m curious, when you got your job out of school, did you think you would be an entrepreneur?

11:18 David: Not at all. I mean I ran a little consulting business building software when I was in college, but I never thought I would be a full-time entrepreneur. When I graduated I wanted a big name brand and pay check from a brand name company, so that was my intent at the time.

12:18 Sergei: I’ve heard you say that you’re an “accidental entrepreneur” but you actually started your own business the weekend your child was born. What did it take for you personally to be comfortable starting a business at that point?

12:40 David: I was at a company that had just been acquired, and I ended up quitting and the next day we had our daughter. It wasn’t planned that way and I’m not sure why we did it that day.

13:40 For me the reason I did it is the timing for the idea felt right. I was doing interesting work at Verisign, and I met someone who was creating a content directory for mobile ringtones, wallpapers etc., and we thought it was going to be huge. It was before the app store. It was this natural combination of things I knew, and things I learned at TripAdvisor.

14:24 And I was also able to derisk it quite a bit, because we got a little bit of funding in. There was a few hundred thousand in the company to be able to pay one of the founders.

14:30 Sergei: From angel investors?

14:40 David: From a venture fund called Northbridge Ventures

14:45 Sergei: Got it, so there was a network there where they trusted the founders with just an idea.

14:50 David: Yes, they were series A investors, but from their perspective they were paying for the business plan. Basically to have us flush out this idea and have an option to invest later.

15:15 Vadim: From their perspective they were investing in two people who were deep domain experts, so it was worth the risk.

15:24 David: Yes, the idea was taking mobile content and user generated content that we had learned how to manage at TripAdvisor, and combining them.

15:43 But with the iPhone coming, and all free media, we realized there’s nothing behind the idea, so we had to pivot a month later.

15:50 Vadim: What did the investors think of that? Were they supportive?

15:53 David: They did. We were going to create a directory, but when we saw people were taking photos and sharing, using free media, we changed the model to a mobile photo sharing site.

16:30 We ended up raising about $7.5M. We did this before Instagram, and us and our competitors were all trying to figure out how to monetize it. Even though we had users in 190 countries, we couldn’t make it work, and ended up having to sell the business for pennies on the dollar. But you’re going to have some failures.

17:00 Vadim: Yes, we recently had an episode where we talk about how to capitalize on your failures where we talk about the advertising startup we sold our car to start. Made a ton of mistakes there.

17:30 David: What did you learn from that?

17:35 Vadim: Talk to customers early, and get pre-sales.

18:00 David: We also made the mistake of pivoting back and forth several times from a private photo sharing app to a public one, that it definitely hurt the business.

18:10 Vadim: Do you think that those mistakes made you a better investor?

18:15 David: I do, because I see some of the chasing a shiny object with founders. It is more of an art to know when to pivot and when to focus.

19:00 Sergei: Given that unlike venture capital investing, which is usually thesis driven, angel investing is more emotionally driven where you want to be helpful to a founder. What gives you that feeling in your gut that makes you want to financially back someone?

19:17 David: there’s a spectrum where a handful of angels invest almost professionally, and others do so almost philanthropically, and most investors that I know are neither of those two. They usually invest either in an industry where they have some knowledge and they want to dig deeper and see it as a way to get closer to it, and the other is having some expertise where you can really help the founder.

20:50 For me, if it falls under either of those two areas, and the founders and idea are compelling, that usually pushes me to invest.

21:07 Vadim: What gets me excited are founders who you meet week after week, and you see them listening and making adjustments, and actually moving the needle. Too many people talk and actually don’t do the work.

21:33 David: When you have a founder that says something and is able to deliver on it, it shows a few things. It shows that they’re following through, it shows iteration velocity, and it shows that they know how to set expectations. As an investor, you need those data points.

22:00 That’s the advice I give to founders. Don’t just go out and fundraise. Go in knowing that you have to give the investor those data points of traction and showing how you act so that when you come in for the ask, they’ll be ready to invest.

22:30 Sergei: That makes sense. I think everyone’s trajectory is different and people start companies if and when they’re ready, but by businesses, like the ones who use Gradifi, working to pay off student debt, they’re actually creating more optionality for people to pursue the things they care about. But I’m curious, why do your clients care about this? How do you get them to use your service to relieve their employee’s college debt?

22:55 David: For Gradifi, when we talk to employers, they’re looking for one of two things. Either for a way to attract great employees, or retain the ones they have. If you ask a millennial what they value out of a job beyond income and work/life balance, college debt burden is a top concern for them. So, for employers this is a real differentiator.

23:51 We’re seeing that once a company uses our product, like a law firm, their competitor wants it too because otherwise they’re not very differentiated.

24:04 Other employers, like say hospitals, may have employees who have massive debt, and if they want to retain them, they need to offer this benefit. So they set this up where the longer you stay the more of a benefit you get.

25:58 David: We think that because employers are the biggest beneficiary of an educated workforce, they’re the ones who should pay. Most of the customers that we’re talking to are really excited to offer this as a benefit. Many of them really believe it’s the right thing to do.

27:37 David: We’ve grown from 20 people when First Republic Bank acquired Gradifi, and we’re 65 people now, and First Republic has been an awesome partner. I’ve been part of 5 different acquisitions, and they all go very differently, where sometimes they really absorb you and in rare times they keep you completely independent.

28:26 As an acquirer they really believe in the mission and let us do our work while supporting us.

28:50 Vadim: How hands on is First Republic. Give us an idea of what actually happens when a company gets acquired?

29:05 David: Well, we have very different core competencies. So First Republic has amazing client service, comparable to tech companies like Apple. Typical banking NPS is half of that.

30:00 For Gradifi, our core competency is building stuff that scales. So we have the commonality of solving the problem of helping people get out of debt. For us, since we’re innovating for the employer, we’re pretty contained in the software building piece of it.

30:50 Vadim: But what about decision making. How does it work when someone like First Republic Bank acquires you.

31:00 David: Sometimes it’s super hands off, sometimes it’s super deeply integrated. Because we have such different core competencies, our relationship with our acquirer is really more complimentary. And I wouldn’t have believed it before joining, but the culture there is very entrepreneurial.

32:00 Sergei: It sounds like an entrepreneurial place, and the right company to be tackling this issue of student debt, but can it really be just up to private enterprise to solve this problem?

33:00 David: There’s actually bipartisan legislation that we think is likely to pass that provides a tax incentive for organizations to offer student debt relief. So government is trying to do something too. This is going to end up becoming the 401k for millennials.

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