Pave: Savior or a New Kind of Bondage?

This is the first in a new category of blog posts for The Crowdfundamentals in which we detail and review crowdfunding platforms.

When I first read about Pave.com, the site that pairs “prospects,” people usually fresh out of college and freighted with hefty students loans, with well-to-do “backers,” it did not sit well with me. Backers would provide monetary support in return for a percentage of prospects’ income. The contract would last 10 years.

Of some of the commentary I’ve read, “human capital” is probably the most benign descriptor. But terms like “indentured servitude” and “feudalism” have also been floated.

So I decided to contact the organization. I spoke with Sal Lahoud, Pave’s co-founder and CEO. Lahoud is an information engineer by background. The idea for Pave came to him, he says, when a good friend wanted to borrow money for a venture.“I told him this doesn’t work for me. Only bad things can come from a loan. If things are going badly I won’t feel like I can come and ask for the money back. If things are going well, because I’ve taken a risk I don’t think it’s a fair return for me. It’s more than a loan,” he decided. “It’s actually an investment.”Lahoud started thinking about patronage in the historical, artistic sense, remembering that as recently as the 1950’s Peggy Guggenheim supported artist Jackson Pollack’s work, and Pollack’s other issues aside, it worked out well for both parties. Lahoud proposed an agreed-up percentage and his friend’s immediate response was yes. “That stayed with me.”

Pave sees its role as an attempt to redress the fact that “student debt creates an unhealthy attitude that you have to take any job to pay off your loan,” Lahoud says. “We’re trying to build a democratic way for young people to build teams around their passions and raise funds from other people who could help them succeed.”

At Pave a contract lasts for ten years because that’s the length of a student loan, and it only kicks in if prospects earn above 150% of poverty level. At that point they owe backers a percentage of their annual income.

Lahoud makes clear Pave’s role is not to find alternatives to VC funding. “It’s an agreement as much social as financial,” and backing prospects often means mentoring and door-opening phone calls—what would have been called nepotism if your backer was your uncle, say. A backer, according to Pave is “an accomplished person with experience, connections, time, and the desire to put those resources to good use for the next generation.”

The model seems to be a hybrid, combining elements such as the use of intermediaries of peer-to-peer lending, the (platonic) passion-pairing of a match.com, and the tight curation of Kickstarter.

But unlike Kickstarter, or other traditional platforms (whatever that means given crowdfunding’s nascent state), which is project-based, the idea behind Pave is to allow backer the luxury to NOT know exactly what they want to do with the rest of their lives.

With the relative relief from financial constraints, backers’ creative imaginations are freed up to innovate, explore, be the person that college degree told them they could be.

Not that an Ivy League degree is a criterion for admission. It’s more important for a prospect to have a passion for what he or she is doing, or to have overcome an adversity. Compelling stories win the day.

“It’s not our role to judge what is or is not a good prospect,” Lahoud says. Though it should be said that like Kickstarter they do reserve the right not to show backers with less-than inspiring stories. “We don’t judge on the school you went to or how likely a prospect’s company will thrive, he says. “It’s about leveling the playing field, in an “interest-aligned way.”

So here’s how it works:

First Pave verifies that information backers provide is accurate—basic backgrounding such as age, credit history, and employment. Then in an interview process, prospects are questioned. Here’s a sampling:

How much are you looking to raise?
What is the average amount a person with your background is likely to earn?
Why do you feel you would do better or worse than that?
With analytics devised by their advisors (comprised of a Yale economics professor and their in-house consultant who used to work for General Accounting Office, which undertakes Congressional investigations) calculation of a prospect’s worth is set, though it’s ultimately up to the prospects what terms they want to offer backers. Pave then shows it to registered backers based on their passions and affiliations.

Backer-to-prospect pairings, however, are sometimes counterintuitive—at least they appear so at first glance. Lahoud tells a story about a backer who was involved in their pilot program. A litigation lawyer, he wasn’t interested in backing young lawyers. Instead, he wanted to bankroll someone interested in social justice or film, which are two of his passions his busy schedule doesn’t give him time to indulge in.Lahoud did over a year of due diligence with lawyers to ensure the contract was “pure” and “aligned” both sides. The company currently has eight teams fully funded, and their present goal is to pair up 100 teams. (They also have a goal to lighten up on the curation but only when they get the numbers up.)Unlike the Middle Ages, if prospects want to back out there is an escape route by going back to the analytics and doing reverse calculations—the details of which are unique to each case.It should also be noted that currently, per SEC rules, only accredited investors can be backers. There is a workaround, however, if the backer is not asking for a financial return but plans to reinvest his or her return to other prospects.The relationship worked out well between Lahoud and the good friend he loaned money to. His friend was successful and was able to quickly return the loan—without asking for a cut for being Lahoud’s inspiration!Which brings up some of the thornier patches Pave may be facing down the line. Humans, after all, can’t always be managed through analytics. Fortunately the people who work at Pave are very involved with each team. As they grow that might not be the case. That’s why if I were a human looking for some capital I’d check out Pave now.

This was reposted with permission from The CrowdFundamentals. Thanks to Rose Spinelli for contributing!

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