Student Debt and Starting a Business: How To Launch Even If You're in Debt (or Better Yet, How To Avoid Debt)

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Student Debt and Starting a Business: How to Launch Even If You’re In Debt

Taking on Student Debt to Go to College

David: Let’s start by kinda setting the scene when it comes to student debt in the US. For our listeners outside the US, this will be good, good context. And for those inside the US, it can be a sort of therapy, through the idea that misery loves company. So, the 30,000-ft view of student debt in the US, what’s the situation and how did we get there? 

Sergei: The number that you hear in the news is about $1.5 trillion of student debt. It’s actually I think… Some sources and some folks that we talk to say it’s as high as $1.7 trillion, which is… Which is, I think half a trillion more than credit card debt. And it’s just something that is prevalent across the population, with more than 70 percent of students with a substantial student debt of about $29,000 in debt when they graduate. And so, this is something that has been so accepted by society that people don’t even think about it.

I mean, yes, it’s in the zeitgeist now. But when kids are making these decisions when they’re applying to schools and their parents are influencing them to make these decisions, debt is still a part of our lives, and something that folks assume that you need to take on in order to go to a good school, in order to get opportunities. And for Vadim and I, at least, that seems like this needs to change, and it sounds like it’s something that will, eventually.

Do You Even Need to Take On Student Debt For School?

David: You said that there’s an assumption that they need to take on this student debt. Are you insinuating there that you think that this is incorrect logic, that you can actually do just fine without taking on boatloads of student debt? 

Sergei: Yeah, absolutely. I just remember our situation when we were deciding to go to college. We wanted to go to the best school and we talked to a lot of our friends who also made a choice to go to the best school. Sometimes, even if that meant that you didn’t get a good financial package, but you’re gonna have that logo on your resume once you graduate.

But we have so many outcomes even just among our friend group, let alone the extended network that we have, of folks that went to colleges that weren’t necessarily name brands, or didn’t even graduate college, that had really strong career outcomes, that didn’t quite depend on that degree and that logo.

Vadim: Yeah, I mean, look, there’s still a lot of value in getting an undergraduate degree. It is something that employers look for. There’s probably no way around it, for a lot of people. Obviously, there are alternative education models. 

Now, you can just go to coding boot camp and probably get a coding job, for example. So if you’re getting a specific skill, you can probably avoid the standard four-year university route. But that said, a lot of people still feel like that’s the right way to go.

There are other options. For example, for us, after high school, our guidance counselor should have been pushing us towards state schools, towards options that were cheaper, where we were able to get other scholarship options. And it really wasn’t the case for us, and I believe it still isn’t the case. 

People are okay if they’re getting into a school of their choice, of private institutions here in the States, of getting into a lot of debt, then they’re able… They’re justifying the fact that it’s gonna pay back later on. But because tuition has risen so high, that’s less and less the case.

Effect Student Debt Has On Entrepreneurship

David: Talk, if you would, about the knock-on effects that leaving college with massive student debt has on entrepreneurship, and how debt changes the calculus for, you know, John Q, 22-year-old, who’s tens of thousands in the hole. 

What does this student debt mean, in terms of how urgently a graduate needs to get a job, and what doesn’t mean for how picky they can be with the way that they wanna enter the workforce? I’m not sure this is super quantifiable, but with you both having worked around college students a bunch, what can you say about the impact that this has on how people evaluate post-college life and the way that they evaluate their ability to take calculated risks? 

Vadim: I mean, look, quite frankly, what happens is your risk profile quickly changes when you realize, you have to pay your student debt and make these monthly payments, after college. So, in college, it’s, there’s kinda like a curtain in front of it, and maybe some people have part-time jobs or internships. A lot of times, folks here have help from their parents. 

But you’re living on campus, in many cases, you’re insulated from these different problems. When you graduate into the real world, you realize you have to pay bills, you have to pay rent every single month, and then you also realize you have this other payment, your student debt, that’s actually pretty big, and in some cases very big… Like half your rent, that you have to make as well. 

And then, you quickly start making different decisions based on these financial obligations. The thing is they say that when you… Sergei actually recently talked to me about this, that when you’re unemployed, sometimes it could be the happiest time in your life, because you don’t have a job that you hate, and if you have money in the bank, you feel okay.

But if you’re unemployed and you don’t have money in the bank, it’s the most stressful time in your life, and you’re literally working with blinders. All you can think about is what you don’t have.

Similarly, when you graduate, and if you don’t have a job yet and you have a bunch of student debt, and those monthly payments start coming, that creates a lot of stress. And the options that you have available to you start getting less and less. 

And you probably stop even thinking as creatively about the different ways that you could potentially make money and make ends meet, because you are a lot more risk-averse now, and you’re really thinking about, “Well, what’s the sure thing? What’s the most ‘secure thing’ that can get me to pay off all these expenses that I now have?”

Should Students Invest In Their Education or a Business?

David: It seems like one of the ironies about student debt preventing people from starting businesses or kind of crippling their risk profile is that you could make a pretty compelling case around the idea that, you know, “Okay, instead of spending $50, or $100, or $200, or whatever thousand on a college degree, I’m gonna spend like $10,000 or $20,000, to start a business.” And this would seem to be especially reasonable, given that it’s never been easier to start a business, online at least.

But that doesn’t seem to be happening. You guys mentioned at the outset there’s this mindset that it’s just kind of cooked into the equation, that parents and counselors that you mentioned, and students, high school students, that there’s just kind of a willingness, for whatever reason, to absorb this debt. Any theories on why people would not be gun-shy about taking out a crazy amount of loans, but they would be gun-shy about popping down $10,000 on something of their own? 

Vadim: I mean, I think we’re just going, right now through a transitional period, where over the last, I would say, 20 years or so, getting secondary or post-secondary education has become sort of the norm, the status quo, the minimum requirement you need for a good job. That really wasn’t the case before, roughly saying, the ’90s. 

But now we have a much more educated population than we ever had, and so the minimum requirement is you need to get that education. And so people are trying to somehow differentiate, and so now they’re trying to get into the best schools, and they don’t really care what the debt amount is because they think they’re gonna get jobs. 

The thing is, over time, as more and more people are getting that minimum of that college education, it’s getting more and more competitive to get some of those top jobs, and now getting a job, or a well-paying job or something that’s commensurate with your level of intelligence, expertise hard work, etcetera, is not necessarily guaranteed.

So I think my theory is just that we’re in a transitionary period, it became something that’s a requirement, and I think it’s gonna take a little bit of time where the infrastructure catches up to the point where that’s not the case. 

Already some employers are not requiring that college degree, especially for hard disciplines, if somebody can prove that they’ve learned that discipline on their own, but we’re only seeing a fraction of that happening right now.

Student Debt Vs. Business Debt: Which Is Riskier?

Sergei: But the reason that people are not used to the idea of really investing in themselves by way of starting a business is that there’s still a lot more inherent risk associated with trying to build something of your own. The thing is, our whole education system positions us to, optimizes us, I should say, to get a job after college, to work for somebody else, to have no ownership. Some of us realize early on that that’s important to us.

Ideally, if that’s the case, you’re starting to build businesses in college, you start understanding what skills you need to have in order to have ownership or in order to generate revenue for yourself. But if you’re graduating out of college, you’ve never had the idea to do that, you still believe that it’s very, very risky to start a business, that if you spend $10,000 or $20,000 on starting a business that you will probably lose all of it. 

Whereas for some reason, people still believe that if you spend $40,000 a year in a college education, you’ll make that back in spades through a guaranteed salary.

As more people are awakening to the fact that that salary is no longer guaranteed, as more people are starting to get educated by themselves about the entrepreneurial option and the fact that having ownership can have much bigger upside, and as people start to actually acquire the skills that they need to generate revenue, in other words, not start a failing business, they’ll become more comfortable with the idea of investing in themselves in another way other than just an education.

Should More People Go Against the Grain?

David: Do you think in some weird way that entrepreneurship is, sort of, I don’t know if this is exactly the right term, but like a “market inefficiency” at this point? You mentioned that everybody is playing the same game with trying to get into these best colleges, and then they are all competing for the same jobs, and I just wonder if it might make extra sense at this point to zig when everybody’s zagging. 

Now I’m thinking about it kind of like in a sports context where if an entire basketball league gets really tall, then maybe it’s smart to go get the quick guys because everyone else is thinking differently.

Is there some added benefit? I know that there is a risk inherent in starting your own business, but I’m just trying to work through the logic of perhaps now is exactly the right time as… Even as this logic that you were talking about takes hold. Is there any… Does that hold any water to you guys?

Sergei: I think so. And I think the strategy, or at least the smart strategy, in my opinion, is to figure out and learn those business skills that Vadim is talking about, on someone else’s dime, while you’re working. You may have to take a job, let’s say, right after college, because hey, six months after graduating, that three-day $100 monthly bill that’s not going away, that you can’t even file for bankruptcy for, is going to be there, unless you have some extenuating circumstances that you can defer it.

And so you may have to take that job, but you can spend nights and weekends. For most of us, we have that ability, let’s say, that to figure out how to learn those entrepreneurial skills to launch small projects, in our experience at least, starting businesses but also the entrepreneurs that we advise, it oftentimes takes several tries at it, two, three, four, sometimes up to ten tries of trying different business ideas before you actually figure out how to generate income. 

And so working on it on the side is a great way because then you know that, for example, if that job becomes not available or if you hit a point where the job is draining you so much that you absolutely have to leave it, at least you have something to fall back on.

Vadim: And to add to that, obviously you can learn on the job by picking jobs that you think will give you the skills that you need to be successful. So for example, earlier on in my career, I wanted to learn how to manage engineers so that if I needed to build my own software product, I knew how to do that. And so I got jobs where I had to interface with engineers, where I had cross-functional roles and I learned how to do that on that job over the course of a couple of years.

So, you could absolutely do that on the job. The one thing I will say is, the idea of entrepreneurship and being a self-starter, it has already permeated our culture. If you see shows like Silicon Valley, I think people already have the nugget of an idea in their mind that it is an option that they can take. 

So plenty of people, I think about 60 percent of people, consider themselves entrepreneurs when only three to four percent of the population of the United States actually is an entrepreneur, in other words, people that are starting businesses.

Using Entrepreneurship to Develop The Right Skills

What that means is that people have an idea of what entrepreneurship is. But they’re not actually starting businesses. So you still need those skills in order to get some kind of revenue-generating company off the ground. And the reason why I say that is because, of course, you can start a business that is positioned for growth, for example, that might go the venture financing route, that might not focus on generating revenue right away, might look at some other KPI or metric.

But for most people, that’s not an option. Less than one percent of companies ever raise money from investors. And so you need to get to revenue much quicker, which means you need to have a different set of skills.

David: I love this idea of accumulating business skills along the way, maybe even doing it while you’re collecting a paycheck from a “steady” employer. What are a couple of skills, if somebody wanted to embrace that and live it, what are a couple of skills that would be good to go ahead and put in your back pocket while you’re doing that, thinking long-term about launching a business? 

Sergei: We usually talk about it in one of two ways. I mean as far as the type of skills that you can acquire that are valuable for launching a business in the first couple of years, they really fall into two buckets. 

One is building the product or service offering, and two is selling it. And there’s obviously a ton of different disciplines that fall under those two buckets. But you could think about it in those two ways, and then you can start compartmentalizing and figuring out, “What am I good at, and which of these buckets does it fall under?”

The reason why building or selling is the most important: If you look at any jobs for startups or early-stage companies that are hiring, you’ll see that they fall under those two buckets because either creating the product that you’re gonna sell or actually delivering it and selling it to customers are the only two things that matter for survival. 

So for the selling side, you could learn digital marketing, customer acquisition, lead generation, you could learn sales, enterprise sales, B2B, B2C, there’s a ton of different types of sales that you could learn. How to write effective emails, for example, is a… Copywriting is a really important skill for both sales and marketing.

On the flip side, for building skills, if you’re thinking about building technology, it’s important to learn some sort of fundamental skills around coding, whether you’re learning how to code yourself, or you’re just learning product management skills so you can manage engineers. 

And then design is another skill that’s really important to building, no matter what kind of product you might wanna create. So it doesn’t matter which of these that you choose, as long as they fall in those two buckets, and then you just try to figure out by experimenting, “What am I good at, and what can I spend a little bit of time on to get better at?”

The Difference Between Good and Bad Debt

David: I wanted to ask you about good debt, versus bad debt. And I’m curious if there are some rules of thumb that people should keep in mind when they think about red ink. Because having worked with entrepreneurs for years and years, as you have, I’m sure you’ve seen lots of people who go into the red very deliberately and they come out the other side with viable businesses that wouldn’t have worked if they didn’t take that risk and didn’t take on a little bit of debt. 

How can someone tell the difference between the sort of student debt that we’ve been talking about earlier, which limits choice and which traps people, versus the sort of debt that lots of good businesses have absorbed before going on to bigger and better things? 

Vadim: The way that I would look at it is essentially starting to operate from the idea that you have very limited resources, and getting creative with how you use whatever resources that you have. So if you’re going to go into debt, you should almost assume as if you have no money, that you have very little to invest, and if you had the smallest amount possible to invest, what would you do with that money? 

Well, most likely you would put that money to work, working capital, and you would try to make sure that you have a plan for making that money back as quickly as possible.

For example, when you’re starting a software business, you could invest years into building a product, and hundreds of thousands of dollars into building software, hiring engineers, contractors and the like. I’ve seen countless people do that without ever talking to a single customer, without doing customer discovery, without figuring out a repeatable sales process. That is not a good reason to get into debt. 

But if you need to spend $5,000 to $10,000 to build an MVP and doing a minimum viable product, and during that time you’re talking to customers, you’re figuring out how you’re getting people through the marketing funnel, how you’re communicating the value proposition so that you can actually start generating revenue, and quickly reinvesting that revenue continuously into the building, that is a smarter investment because you’re again, de-risking the whole situation.

So if you’re more likely to make that money back and you have a clear path to making that money back, then it’s a smarter investment that is more justifiable.

Sergei: And things like obviously credit card debt is one of the worst forms of debt that you could have because the interest is so high. Now you can, for example, if you have decent credit, you can usually qualify for zero-interest credit card, zero interest for one year, and if you’ve proven off, proven your business enough where you can see there’s demand for your product, maybe let’s say if it’s a simple consumer product business that you’re importing goods, let’s say from China or India, and you’re selling them in America, you have done pre-sales to prove that there’s demand.

You have an email marketing list, you have, let’s say maybe a social media following that proves that people want what it is that you’re selling, getting into a little bit of credit card debt in a zero-interest or low-interest loan that you might get, or credit card loan that you might get in order to finance a purchase order to get your initial order of items that you can then sell, is a better form of debt because it’s hedged a little bit.

You’ve proven that you have a high likelihood of returning that capital and being able to pay off that debt in short order before those interest payments start piling on. 

Vadim: Any amount of debt is going to be risky. It’s just what assets are you creating with that debt to reduce the risk as much as possible? 

Is a Recession a Good Time To Start a Business?

David: Now, there will be another recession at some point. The global economy has basically been roaring for a decade or so, and history suggests that that’s not indefinitely sustainable. So whether it’s from something really specific, like a housing downturn, or we don’t know exactly how the coronavirus stuff is gonna play out, maybe the economy in China slows down enough that everything as a whole lags, whatever the case is, there will be a recession at some point. 

And I’m curious, what should entrepreneurs keep in mind when that happens? How do recessions affect entrepreneurs differently than someone with a more normal job? 

Sergei: Well, recessions oftentimes can actually provide opportunities for entrepreneurs, because let’s say not… There’s less, a little bit less competition, your competitors or larger companies are spending a little less money because they’re more risk-averse, and oftentimes it does provide more opportunity and ability to launch things. But only for people that have a little bit of a cushion. 

So if you have a bit of a cushion that you can at least save some money so that, let’s say, if you lose the job that’s your primary income, then you can have something to fall back on, or if you invest in the business and something doesn’t work out, your business doesn’t die just because you’re not making as much money for three to six months because the recession just started happening.

That’s what you wanna do, and even with fundraising, with venture funding right now, what’s happening a lot is investors are telling their founders to raise as much as possible now so that they have a little bit of money in the bank, that when they’re hiring people they still have money left over to actually operate if they’re not yet profitable, because a lot of venture-funded businesses are not profitable in the near term. So having a cushion is really important, I think and… You were gonna add something, Vadim?

Vadim: Yeah, and I would also say remember other benefits when there’s a recession, economists try to stimulate it, so interest rates are lower, so debt becomes cheaper as well. But the other thing that recessions force you to do is they force you to think about value. Because people are a little bit more risk-averse because there’s a little bit less spending, nice-to-haves start fading away and people only continue to spend money on must-haves.

They always say this, that liquor sales, for example, even during a recession, stay basically flat and/or go up, right? There are certain products out there that will continue to be in demand. So if you’re forced to be more resourceful, you’re going to have to think about the value that you’re creating even deeper. 

Because as long as you are creating that value, it really doesn’t matter unless you’re in a Great Depression and there’s hyperinflation and nobody has any money to spend, no disposable income, there’s still gonna be some markets that are spending money somewhere, and you’re just gonna have to figure out where that value is and how you are delivering it to your customers.

What Are The Positive Stereotypes of Young Entrepreneurs and University Students?

David: Alright, the last question for you guys, and then I’ll let you go. I assume that people have been talking trash about different generations, whether it’s older people bagging on younger people or vice-versa. This has probably been going on since we were living in caves, and it’s certainly going on today with millennials and Gen Z taking a bunch of flak for being lazy or entitled or irresponsible or whatever.

But I don’t wanna ask you about negative stereotypes. I wanted to ask you about positives, about anything that you see in your day-to-day interactions with young entrepreneurs and with university students. 

Is there anything that young potential entrepreneurs today have that is an advantage? Whether it’s the way that they communicate or how they were raised, whatever it is, are there ways in which they are actually better positioned to become entrepreneurs than previous generations? 

Sergei: Yeah. I mean, I would say what we’re observing is that young people, younger people, it’s almost part of their nature to have a bunch of side gigs happening at once. We’re talking about this ability to have something to fall back on if something else doesn’t work out. 

And even though it may seem like, let’s say younger people or Gen Z or millennials are a little bit flaky, it’s not that they’re flaky. It’s that they need to have a lot of coals in the fire, so to speak, to be able to make sure that there’s gonna be some opportunity on the other side if something else doesn’t work out, because there are no guarantees now.

Impact of Student Debt on a Successful Business

I’ll give you a perfect example that has to do with student debt. This founder that I started working with a couple of years ago started working on an ecommerce business, a relatively niche product, and they were working toward their MBA, finishing their MBA. And when it came time to finish the MBA, they found themselves about $100,000 in student debt. Now, they also had a business that was already at that point, had generated a couple of $100,000 in revenue.

And from the outside perspective, it looks like this person is a winner, right? They’ve won. They are about to finish their MBA. They have a business that’s generating in the six figures in revenue. They’re on their way to success. 

But I know as well that they came to my office right before graduating, so nervous because they didn’t know how they were gonna make their payments for student debt, because, yes, they have a lot of revenue. But they have a ton of expenses in the business, and at the same time, they were also supporting themselves by working a side hustle in a local gym, teaching classes in a gym. And also, they had another job where they were teaching another class in a school, just to make ends meet, aside from this business. 

So people have to be now a lot more resourceful because we’re talking about expenses that are higher than they used to be, and getting a business off the ground even if you’re generating revenue to get to a point where it’s self-sustaining, takes a lot of hard work. And I know especially young people that we interact with, they go through these ups and downs. But they’re really cut out for it, they’re figuring it out even when it seems like it’s impossible.

Challenging the Status Quo

Vadim: And also, I’ll just add that I feel that the younger generations are more comfortable now with challenging the status quo. And as an entrepreneur, you have to be comfortable with both that and entering uncharted territories. I always talk about in my classes that while people have always grown up to believe that they’re gonna have a certain job and wear a certain hat or set of hats and have a linear career path, that is starting to change more and more. 

There are new industries being created at a faster rate now than ever before, the knowledge doubling curve is a great sort of indicator of that. There are jobs that are coming onto the market that require skills that are relatively brand new. 

And so, even navigating your career now becomes an entrepreneurial endeavor. You may be doing a job in five years that requires completely different skills. Or even the day-to-day will be completely different than what you were used to.

That means you have to be comfortable with constantly changing environments, and obviously the younger generation is already more comfortable with that because they’re realizing that there’s no such thing as a sure thing, that you have to learn how to pave your own way, and that you have to learn how to identify opportunities that are likely to contribute to your own personal goal. And obviously, entrepreneurial opportunities fall into that realm as well.

David: Great, guys, we can leave it there. Thanks again so much for joining us to talk about student debt and entrepreneurship, Vadim and Sergei Revzin. You can check out their podcast called “The Mentors”, it’s available wherever you listen to podcasts, also thementors.co, lots of goodies over there. So guys, once again, really appreciate it, thanks so much for taking the time.

Vadim: Absolutely. Thanks so much, David.

Sergei: Thanks for having us.

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