ERIKA KULLBERG did everything right.
In 2015, during her third year at Georgetown Law, she and classmate Jimmy McNamara founded ReferU, which added a social dimension to the referral of new tenants for apartment buildings. The partners made their way around a conference for the apartment-management industry, memorizing the names and faces of big players they wanted to approach. There, they scored meetings that produced verbal commitments from three property-management businesses.
Wanting a mentor, they reached celebrity VC Chris Sacca by trying multiple permutations of his Gmail address, and landed a Skype session. Interns came on board. Angels began to circle.
In February 2016, Kullberg assessed her situation, weighing the potential of ReferU against a lucrative offer from international law firm Morrison & Foerster. The deciding factor in favor of the legal job: her $200,000 in student-loan debt. In April, a month shy of graduation, she and her similarly indebted co-founder reluctantly shuttered their fledgling business.
“I really wanted to pursue the startup,” says Kullberg. “But student loans are handcuffs.”
After the pandemic knocked the wind out of our economy, recovery plans focused mainly on saving existing small businesses rather than breathing life into new ones. Yet entrepreneurship is critical to emerging from the Covidinduced recession. Startups drive almost all net new-job creation. They contribute disproportionately to innovation, breaking new ground while also spurring midsize and large companies to follow suit. And perhaps most important in the current climate, startups are well-positioned to respond to drastic changes in consumer and business behavior, recognizing and acting on opportunities born of adversity.
All of these factors would seem to bode well for entrepreneurs. But the long-term trend for new businesses hasn’t been quite so rosy. Some of the negative factors—including market dominance of large, established companies and insufficient early-stage funding—are well-documented. But as Kullberg’s experience indicates, student debt also is a major culprit. In the U.S., it now stands at around $1.7 trillion, up from $521 billion at the end of 2006, according to the Federal Reserve. That burden is spread across close to 45 million adults, with three-fourths of the graduates from private, nonprofit schools holding an average debt of more than $32,000.
For aspiring entrepreneurs, student debt reduces the amount of cash available for startups and affects their credit score, making business loans tough to secure. It also renders more daunting the prospect of failure, which increases risk aversion.
The impact of debt may show up as well in the share of new entrepreneurs between the ages of 20 and 34, which fell to 27 percent in 2019, from 34 percent in 1996, according to a recent Ewing Marion Kauffman Foundation study. In a 2019 survey of college students planning to graduate within 12 months, 47 percent of those interested in entrepreneurship cited student loans as the single greatest deterrent to starting a business after earning a degree, according to Value- Penguin, a personal finance website owned by LendingTree.
“The assumption historically was that the best time to take this sort of risk and do a startup was right after school,” says Senator Maggie Hassan (D-N.H.), who in 2017 introduced a bill to offer student-debt relief for qualified founders and their employees. As governor of New Hampshire and later as a senator, Hassan repeatedly heard from college students “who thought they had good ideas [but] weren’t going to pursue them after they graduated because of student debt,” she says. (Hassan is preparing this year to introduce a rebooted version of the bill, which was not put to a vote previously.)
The problem isn’t just that young people are postponing their big dreams. Sixty percent of student borrowers expect debt to linger into their 40s, Citizens Bank found in 2016. Given that the average age of founders in high-growth industries is about 40 at launch, that expectation could represent a significant drag on people imagining startups as their second or third acts.
Debt stops startups like Kullberg’s ReferU before they really get going. It also has a detrimental effect on businesses that do manage to launch, slowing their growth and blunting their ambition. It’s a cruel paradox that the rocket fuel of the startup economy— education—can also prevent liftoff, because of the enormous investment it demands. What follows is a look at how fledgling entrepreneurs are bearing up under the often crushing burden.
Closed for Business
A six-figure debt from law school forced Erika Kullberg to shutter her startup, ReferU, just as it was starting to gain traction.
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