Nice Test Scores, Can I Buy You?; The Future of Financing Talent
In the United States, we love our professional sports*. The pageantry of Augusta National, the primal grunting at Arthur Ashe Stadium, the uninhibited manliness of the NHL playoff beard (or a 2013 Fenway Park resident), the mindboggling athleticism occupying the NBA - all can captivate an audience of millions. And then there is the NFL. Americans simply cannot get enough of their NFL. Superbowl, playoffs, regular season, preseason, highlights, lowlights, the draft, 24/7 analysis - heck, even the NFL Draft combine gets full coverage and screen time on the NFL Network. That's where college kids, many of whom with a slim chance of ever sniffing an NFL network, lift weights and run in straight lines. And we watch. In big numbers. Kids we have never heard of and will likely never hear of again doing little more than a light workout.
Simple fandom has never been enough. Some folks (including yours truly) need more consumption than simply rooting for one team to win or one team to lose. We need deep immersion into the experience, we need to make it feel like we have something at stake ourselves. Enter fantasy sports.
Fantasy football now represents a $70 Billion-with-a-B market, putting it ahead of the GDPs of entire nations such as Belarus, Luxembourg, and Croatia. Companies like Yahoo!, Disney (ESPN), and CBS have long profited from this societal thirst to both live vicariously through the successes of others and prove superior comprehension of the game itself; and recently a company called FanDuel has continued the evolution of this market at a granular, game-to-game deployment, breaking legal borders along the way. Some websites have even attempted to create a marketplace for "shares" of certain athletes. WallStreetSports was the first effort I can recall deploying a free version with leaderboards of the best accounts, and then OneSeason.com took it to an entirely new level introducing real cash to the equation - a ponzi scheme in the truest sense. The day of the Yao Ming IPO nearly prompted a riot on the Duke University campus.
It seems pretty clear that this trend isn't reverting anytime soon. We fanatics only want more exposure to, more ownership of, the athletes we so giddily worship, a fire on which Twitter, Et al has dropped a gasoline monsoon.
But we can't actually own these athletes... Right?
To quote Dr. Lee Corso, "not so fast, my friend."
Enter Arian Foster and a company called Fantex, Inc. (John Elway happens to be on the board of Fantex Holdings). Fantex has made headlines this past week with the announcement that it will be selling stock in all future football-related earnings by Mr. Foster. For a $10 million upfront sum, Arian Foster will be chipping off 20% of his personal revenue to be repaid to owners of his stock. This essentially values Foster's future earnings at $50 million, forgetting about pesky things like inflation. For further details, you can check out the S-1 filed to the Securities and Exchange Commission here.
Here's what the Company has to say on its website:
WHAT IS FANTEX, INC.? Fantex, Inc. creates a unique brand building platform for athletes to increase the reach and engagement of their brand. Fantex, Inc. signs a contract with an athlete to acquire a minority interest in their brand and builds a plan with a goal to increase its value, leveraging Fantex, Inc.'s marketing expertise.
IS IT REAL STOCK? Yes, this is a tracking stock being offered pursuant to a registration statement that has been filed with the Securities and Exchange Commission (SEC). Every share you buy on Fantex represents ownership in the series of common stock of Fantex, Inc. that is linked to the economic performance and value of the brand of a professional athlete - such as income earned from contracts, endorsements and appearance fees.
Let me be clear: investing in Arian Foster, a star football player who has already made more money than he will spend, who has little incentive to continue playing a dangerous position in a dangerous sport with much ferocity for all that much longer, is an insanely stupid proposition**. Investing in a cash-strapped 18-year old with gobs of potential and many a paycheck to come? Potentially rewarding, assuming the kid has a decent head on his shoulders (a huge risk, of course). Imagine investing in a teenage Lebron James with the promise of 20% of future earnings? Andreessen-esque.
You have to imagine that the legal floodgates will burst at the seems, and soon. Roger Goodell is maniacal in his control of the NFL's image and brand: I find it hard to believe he will let this simply enter the norm unimpeded (though the presence of Elway, a highly-respected executive in the league, further complicates the matter). But then again, never doubt the ability of lawyers to make the impossible possible. Reeetaaaiiiiinerrrr.
Which brings me to my next point: if I can invest in Arian Foster, collecting 20% of his future earnings, why can't I invest in 20% of the future earnings of a first-year Harvard Law student? After all, that student is likely to be in debt up to their eyeballs, perhaps working part-time negatively impacting their education and ultimately decreasing the value of their three years of learning consumption. And even once they have graduated, they may have years of hundred-hour weeks before that debt is cleared. By the time they are 30, they have worked tirelessly for a decade and still yet to have a real dime to show for it. But they also have tremendous future earnings potential. This Harvard Law 1L is obviously smart as a whip and of suitable competence to handle the adult decision of sacrificing lifetime earnings for the prospect of a better decade in their youth: and it is probably a decent bet for an investor to make if they can wrangle a suitable valuation and have a palate for highly illiquid, long-term investments.
If banks can rake in earnings on the interest imposed on the $1 Trillion-with-a-T student loan market, why can't I, the individual investor?
Now what about the high school junior from Hunts Point that works two jobs to help pay rent that just got an 800 on her Math SAT? Does she deserve a chance at selling equity in herself? Would somebody find enough value to justify the risk on the other end?
And the nine-year old from Odessa that just aced the State of Texas Assessments of Academic Readiness (STAAR®) Reading section?
You get the point.
People are already testing the waters of such a bet/insurance policy in the real world. A group called Lumni (whose Board includes a mix of investment professionals and philanthropic specialists) describes itself as a pioneer in the field of human capital financing. The company designs and manages social-investment funds that invest in the education of diversified pools of students. In exchange, each student commits to pay a fixed percentage of income for 120 months after graduation. The student's obligation is complete at the end of that period regardless of the sum paid to date. According to its website, Lumni currently operates both for-profit and non-profit funds in Chile, Colombia, Mexico and the United States, where it has raised and obtained commitments of more than $15 million from over 100 investors, and has financed nearly 2,000 students.
The start-up world has seen various players trying to take on the student debt market, including a company called SoFi (Social Finance) that has raised over $80mm in venture equity and hundreds of millions more in debt financing. SoFi is trying to flip the student loan game on its head by connecting a school's alumni base to its current students. Not only does this yield lower rates, but the Company further seeks to create value to both student and lender by constructing relationships driving things like mentorship and help with job searches. After all, the alums theoretically would like to do what they can to increase the potential value of their investment.
Additionally, universities like Stanford, ever the trailblazer of higher education, are investing not in their students directly, but in their ultimate work product. The school has committed to directing in its students' start-up ventures, including a $3.6 million grant to StartX, a non-profit startup accelerator for Stanford-affiliated entrepreneurs.
With efforts like these gaining traction, and the enormous public attention being heaped on Fandex and its initial spokesman Arian Foster, it seems only a matter of time before we are buying and selling Kindergarten futures like they are frozen concentrated orange juice.
I do not mean to condone this particular trend or evolution in the way we deploy our brand of capitalism - the training and ultimate production of a workforce theoretically directly compensated for the quality of its work. But I also don't mean to condemn it. I am simply observing. At its core, this trend is really just a hybrid, new school insurance policy. If both parties are consenting, it is difficult to argue against such a transaction. The vulnerable should obviously be protected, but when the line gets gray it become tough to determine just who the vulnerable party is: the buyer or the seller?
*I suppose this sentiment holds true for most nations across the globe, but few with the diversity of palate of the USofA
*Good news for the folks at Fantex - America is chalk full of insanely stupid people with money to spend. The novelty alone of such a purchase will probably drive oodles of transactional volume. At least this stock has real equity attached to it - I'm pretty confident Arian Foster will cash at least¬ a few football-related checks in the months and years to come - the Green Bay Packers have made millions selling "common stock" in their franchise for years that equate to little more than a $250 piece of paper. But that's fandom for you.