Students in Harvard Business School’s 2+2 deferred admission program are expected to use the years between acceptance and enrollment to accrue work experience. Tess Michaels has shown just how much a driven entrepreneur can accomplish in that time.
Michaels, admitted to HBS after graduating from Wharton in 2015, spent two years at Goldman Sachs and another year in private equity before starting her MBA in fall 2018. But that doesn’t even begin to capture all the things she used her time outside academia to accomplish. Michaels also sold a startup, a software analytics firm that manages companies’ corporate philanthropy and volunteerism programs, to a bigger player in the space; and then, even as she arrived at Cambridge, she launched a second company. And it’s that company, Stride Funding, that has dominated Michaels’ time at HBS and determined what her immediate post-MBA future will look like.
Stride, in fact, has the potential to change thousands of students’ post-MBA lives for the better. It offers “a friendlier form of student financing” that “puts students and their funders on the same page” — funding student debt to $25,000 (and sometimes more) with income share agreements spread over five to 10 years, a much shorter repayment schedule than banks typically offer. Stride arranges payments based on student income, so MBAs don’t have to pay more than they can afford.
“I knew I was accepted into HBS for a few years, and I knew a lot of my peers were thinking about going back to grad school,” says Michaels, who graduates from HBS this spring. “This is especially relevant for MBAs, where a lot of times the tough decision is, is it worth the cost to go back to school? There’s a real opportunity cost there — it’s really expensive. And for a lot of students who have loans from undergrad, you go back to school and you’re deferring those loans so that interest keeps accruing. So there’s added costs on top of the tuition itself, right? And so I kept hearing over and over again, ‘I really want to go but it’s so expensive, and I don’t want to take out more loans.’ And I thought something should be done about that.”
DOWNSIDE PROTECTION IF B-SCHOOL DOESN’T LEAD TO HIGH PAY RIGHT AWAY
Think of Stride as an equity investor in a student’s education, getting paid from the profits of that education. The essential component of its business model is the income share agreement, in which a student receives an up-front payment for tuition and agrees to pay the company a percentage of their income for a set number of payments. On its website, Stride illustrates how ISAs work with the example of student Kaya, who needs $10,000 to go to grad school for nursing. Stride funds Kaya’s tuition and in exchange she agrees to pay back 3% of her income — whatever that amount may be — for six to eight years.
Stride’s ISAs offer flexibility and low, fixed payments and they don’t require a co-signer — all advantages over typical bank loans. Stride clients are getting not just funding but insurance that if their first job out of school doesn’t meet salary expectations, loan payments aren’t going to break their backs.
“Basically what we created with Stride was a product where we offer students income share agreements that are only five to 10 years of duration, so way shorter than a traditional loan,” Michaels tells Poets&Quants. “They are a fixed percentage of your income over that five or 10 years, and so it’s usually a single-digit percentage of income, let’s say 3% or 4%, and it’s very flexible. So if you’re ever unemployed or you go on maternity leave or you take a gap year, it holds the contract and you don’t owe anything during those periods.
“And the last thing is, because it’s a percentage of income, there’s no interest — so while you’re in school, nothing accrues. So the expense is never increased. So you know exactly what you’re getting into.”
Stride is such a good idea — meeting an important need for so many people — that Michaels’ father, Max, left his job with IBM to become the company’s chief investment officer.
“A good analog as I looked at every other financing product was a mortgage,” Tess says. “A mortgage is a mix of debt and equity — that’s how most people pay for their mortgage. And for some reason education has always been just a debt product. And so the ISA is essentially the equity piece of this, to give people a bit more lift in their financing structure. The whole idea of an income share agreement is to put your money where its mouth is and say, ‘Look, you will only pay as a proportion to your earnings.’ So if everything goes as planned and going back to school was worth it, then great — and if not, then you kind of have that downside protection, right?”
A GROWING CLIENTELE & A FULL TEAM
Stride could never have happened without Michaels’ first startup experience, SOCEANA, a result of her catching the “entrepreneurial bug” as an undergrad at Penn. SOCEANA sought to “generate social good by bridging the $330 billion market for philanthropy with the $180 billion market for volunteering”; it was acquired by Encast in 2018 as Michaels was preparing for Harvard.
“SOCEANA is a software company that helps companies manage their CSR program,” Michaels says. “They do all the analytics around corporate philanthropy and volunteerism programs, which is, as you can imagine, a big marketing tool for organizations now. And so we grew that business. We ended up selling it to a larger player in the space. And it was just, for me, an amazing experience — a really sharp learning curve, understanding how to build a team and how to think through the right models.”
While running SOCEANA, Michaels, a Texas native, also worked at Goldman Sachs before moving to an Austin, Texas-based private equity firm, Vista Equity Partners. Both employers gave her invaluable finance experience — but they also provided the insight that finance might not be the best fit for her. “While I was in finance I loved it, but I just really missed the operational side of things,” she says. “And so I found my way into founding Stride, out of a lot of personal experiences and talking to friends about their school funding process.”
In less than two years Stride has accumulated a student clientele that spans many different institutions — mostly grad schools — across the U.S. “We’ve had thousands of students apply. We’ve accepted a bunch,” she says. “We have students at schools like Carnegie Mellon, UPenn, Northeastern, Texas schools, all of that. We have students across different grad programs: MBAs and students in other master’s programs, engineers, computer science students, etc.”
And they have a full team, led by Chief Revenue Officer Patrick Conner, a student financing veteran with about 25 years’ experience. Michaels and her “partner in crime” met in early 2019 when she was building the company and had just won the MIT Fintech Conference competition. After reading an article about Stride, Conner reached out, briefly became an adviser, then quit his job and joined the company full time. “And then we have a whole team around us. Our head of business development and operations graduated from Harvard Law School, worked at JPMorgan Investment Bank. And then our senior guy in marketing worked in the same lending space his whole career — he was formerly a student loan genius, helping employers think through student loan benefits.” Max Michaels, Tess’ father, is a former investment banker at Morgan Stanley and strategist with McKinsey, Cisco, and AT&T.
Which is not to overlook that Stride was started by, and for, grad students. “It’s really been an amazing set of students that really have helped drive Stride’s growth,” Tess Michaels says. “We have students from UPenn, Harvard, all kinds of schools who are completely dedicated to growing the product, talking to students, and making this real.
“I’m all in on this. We’ve funded lots of students through Stride, I couldn’t be a bigger believer. We have teams in both Dallas, where I grew up, and New York now, and I’ll be working on this nonstop.”