Minneapolis venture capitalists zero in on ways to solve massive student debt

Sen. Bernie Sanders seems completely serious about the proposal he offered this week to wipe out all the debt of student loan borrowers, and if nothing else this seems to confirm that the collective weight of student debt is a problem that has the nation's attention.

The partners of Minneapolis-based Loup Ventures have been thinking about the student loan problem, too, having just written about it in the first of a planned series of research notes that will outline 99 big problems for entrepreneurs and innovators to go after.

No one should get too much credit for recognizing that student loans might be a burden, as total loans amount to about $1.5 trillion spread among roughly 45 million borrowers. Total student debt shot past total credit card debt nearly 10 years ago and is now inching up on double that of credit cards.

About 11% of student loans were more than 90 days delinquent or in default as of the first quarter, according to the New York Federal Reserve Bank. One think-tank analysis from last year suggested that up to 40 percent of borrowers could end up defaulting on their loans.

But the thing to remember is that if there's this much pain, there's also got to be a lot of opportunity for businesses to find solutions that ease some of that pain.

That's the basic point of Loup Ventures' recent research note, that it takes a big problem to solve to get a great idea for a startup and, of course, a great venture capital investment.

That might seem like it should be obvious. But from experience I know you are likely to hear from entrepreneurs all about cool products or even features more than the pain of potential users. Even for those founders who are thinking clearly, figuring out whether something really solves the right problem isn't easy.

One of the things that's refreshing about the approach Loup Ventures' partners outline is that as former analysts at an investment bank, they didn't go into the venture business with the same understanding of problems that they have now.

As they got their start investing, Loup co-founder Doug Clinton wrote, they understood the job as finding great company founders and managers who were going after large market opportunities with products many times better than anything else in the market.

They soon learned they had not thought clearly enough about people's problems.

In a short essay Clinton just published, they advise not to overthink this and sorted problems into just three buckets.

The first problem is simply cost. So Elon Musk's SpaceX rocket startup, Clinton wrote, simply hopes to provide cheaper space travel. Building a cheaper solution without the benefit of scale isn't easy, of course, which is why cost might be the right problem to attack, yet the successful startup still might not try to attract customers solely on the basis of a lower price.

Another major problem is inconvenience, the things we encounter that are just a hassle to do or to use. This is a tougher call, as unlike price per unit or other measures of cost, there may be no easy way to quantify the problem. Yet Uber recognized that hailing a car needed to be easier and came up with a way to do it by pressing a button on a smartphone.

The last category of problem is moral. For consumers who are concerned about the damage conventional fossil fuel vehicles cause to the environment, Clinton wrote, there are electric vehicle producers like Tesla offering a solution. One challenge for the entrepreneur is that the solution still has to meet the standard of performance customers have come to expect, so a Tesla model has to work as well as a gasoline-powered Audi or Lexus.

It's clearly possible to come up with a product that's both more convenient and cheaper for the user, but it's far better just to focus on one problem.

And it's common for an entrepreneur to not quite get it, for example putting a lot of time into solving a convenience problem when it's high cost that's actually painful.

As Clinton and colleague Steve Van Sloun described the problem with student loans, they didn't characterize it as only one problem — loan repayments too burdensome for borrowers — but several.

There's also a convenience problem, as it's painful right now for borrowers to try to work with loan servicing companies to create a payment plan flexible enough for the ups and downs of young borrowers' lives.

In a follow-up exchange through e-mail, Clinton explained the mission of what he called "intelligent plan management" companies, with tools like Piecewise and Pillar. Using technology to analyze spending and flows in and out of a bank account, they help customers come up with optimal repayment schedules.

Employers wanting to help younger staff pay back loans have a convenience problem, too, and so there are startups like Tuition.io and Peanut Butter Inc. — and yes, Peanut Butter is what this company is really called. It helps employers tailor repayment plans as an employee benefit and incentive, to help attract and keep good workers.

Borrowers obviously have a cost problem, paying relatively expensive rates of interest on their loans, particularly given a generally low interest rate environment. For upstarts helping borrowers refinance into lower-cost loans, Clinton noted, "the key to winning is offering an easy process for millennials to get approved without going through a long series of paperwork."

They have also thought through how expensive it is to continue your education after high school, another big cost problem to solve. Among the companies focused on that one is Indianapolis-based Kenzie Academy, offering accelerated programs for aspiring technology workers that won't take nearly as long as a four-year degree.

"Of all the opportunities," Clinton added, "I'm starting to think this might be the biggest."

lee.schafer@startribune.com 612-673-4302