Lambda School & Income Share Agreements
Lambda School just raised a $74 million Series C.
The coding bootcamp, founded by Austen Allred, trains people for lucrative careers in software engineering. Austen often tweets screenshots of graduated students accepting roles at blue-chip tech companies with starting six-figure salaries.
Lambda is a perfect darling of Silicon Valley hype, which revels in its rejection of old world institutions that have lived well past the peak of efficacy.
They offer either 9-month (full-time) or 18-month (part-time) training focused on data science and full-stack web development.
Like many of the modern era’s ‘disruptive’ business models, Lambda packages training in starkly modern skillset (coding) with a very old model for financing that goes back centuries.
Income Share Agreements
One of the primary selling points of a Lambda School education is the fact that payment is conditional upon landing a job in tech paying $50k or more.
This financial model is called an Income Share Agreement and differs in an important way from a traditional student loan.
Conventional universities collect tuition upfront, before classes have begun. Most students need to take loans out, either government-backed or private, to pay.
Considering the astronomical rate of inflation for college tuition, this is no small obligation.
Lambda School inverts the model by requiring payment only once the student has been educated and landed a job.
Nobly, this aligns the school’s incentives with the students. Lambda cannot afford to waste time on irrelevant electives or slow-moving intro courses that don’t require a full semester.
Further, Lambda caps the upside on their fee by guaranteeing that students will never pay more than $30,000 total.
Compare that to this heartbreaking account of a woman that’s paid $120k on her loans and still owes $76k.
US student loan debt has surpassed $1.5 trillion and hangs like a noose around the neck of an entire generation that has put off buying their first home, getting married, and potentially starting a family.
ISAs as an Investment
ISAs would not be my preferred investment vehicle. An investor is looking at debt-style returns, with equity-style risk.
Debt is usually less risky because you’re the first entity to be paid back if things go south. Bankrupt companies let their shares fall to $0 while paying back their debts.
ISAs take the worst of each asset class and package it together.
Every student is incentivized to underreport their income if possible. Most established companies won’t skirt reporting on employee salaries, but if a student parlays their Lambda education into a role at a small startup, chicanery is highly possible.
Enforcement looks downright Orwellian.
Instead of owing your lender a monthly check, imagine the collector is granted access to your account via an API to make sure you aren’t fraudulently underreporting your income to reduce your payback obligation.
Further, what happens if the economy tanks?
Mass unemployment means the totality of the fees you are due will either be delayed or never materialize.
Lots of risk for investors. Not much of a reward.
Lambda’s Results and Critiques
Lambda has a laundry list of positive reviews and, as I wrote at the beginning, positive PR from having successfully landed a spot on the Silicon Valley hype train.
The Verge and NY Mag have both written exposes about it and a collection of Reddit posts have ‘outed’ it for failing to live up to its promises, and the hype surrounding it.
Their claims:
Lambda’s curriculum and teaching environment is not up to the high caliber that students believed they were paying for.
The lessons were barely beyond a MOOC (Massive open online course) which are free to anyone with an internet connection.
The data that they share publicly about job placement is inflated. Many students fail to receive offers and Lambda hires recent grads in order to inflate their job placement claims.
Lambda does not hold the counterparty risk in the ISAs, meaning they sell the debt their students owe to third parties for an upfront fee (for less than the full value of the $30k obligation) in order to pull cash flow forward from the future into the present.
Allred has explicitly denied #3. He’s defended himself against #1 and #2 by talking about the iterative improvements that the four-year-old startup has made to its teaching over the years.
Undoubtedly, you’d expect that the company would be better at job placement in year 4 vs. year 1-2 if that is the very skill on which the company’s survival depends.
Analysis
You have a choice. Evaluate Lambda against the ideal of a perfect education environment, or against the current status quo.
Are there free MOOCs all over the internet that can teach anyone almost anything? Yes. Particularly if you’re lucky enough to know English.
So why do average completion rates for free courses fall somewhere between 5% and 15%?
Because students have zero skin in the game and no community surrounding them with whom to study.
Lambda, in addition to providing a live tutor, is creating both of those things with their fee.
The exact same complaint can be levied against university general education classes, too. I’ve watched a dozen professors completely mail it in.
The claims about Lambda School inflating their placement numbers are depressing, if true. I was not able to come to a conclusion on their validity from the reading of the article or Austen’s response.
If their claims are false, then they cannot possibly withstand consistent misreporting over the next few years. Sunlight is the best antiseptic and Lambda School is significantly more transparent about their numbers than my alma mater.
For an education that costs 4x Lambda’s (and take 4 times as long to complete), the University of Pittsburgh achieves about the same job placement results.
That’s woefully inefficient.
What about college students that drop out after a year and a half?
Since 2005, with the passage of the Bankruptcy Abuse Prevention and Consumer Protection Act, student loan debt cannot be discharged via bankruptcy.
McConnell, Biden, McCain all voted yea on its passage. Hilary Clinton abstained. Neither top Republicans, nor top Democrats stood in the way of shackling millennials with decades of debt
Takeaways
So you’ve gotten to the bottom of this and are looking for the right conclusion to draw, just like two weeks ago with TikTok, I don’t have a neat little bow to wrap this up with.
If you’ve allowed yourself to be swept up in the hype and promise of a new model that can deliver better earning power for all, I hope this post has allowed some of the excess veneer to be chipped off.
If you still believe the conventional narrative that a college education is the key to a successful life, you’ve had your head buried in the ground for the last decade and missed the boat.
Ultimately, my bias is to believe that a nimble startup with incentives that are strongly aligned with its students has a better chance of improving its curriculum and relationship with employers, than to buy the idea that a slow-moving institution is capable of reforming its fundamental business model.