The student loan debt crisis is a problem that affects 44 million Americans. Collectively, Americans hold more than $1.6 trillion dollars in student debt, and those numbers are growing every year. An ambitious startup named Defynance aims to address this problem by providing a revolutionary debt-free solution.
“The way everything is set up, the cost of education keeps going up, so this is not getting better. The student debt is growing 10% annually. In a couple of years, it’s going to be over $2 trillion. It’s already the second-largest consumer debt, after mortgages. More than auto loans, and more than credit cards. 90% of people have suffered severe anxiety because of student debt. More than 50% experience depression. When you look at these statistics, and you talk with people, and you hear the stories, it just became a passion. We have to solve this,” said Farrukh Siddiqui, Founder and CEO of Defynance .
Defynance is tackling the student debt crisis by offering debt-free refinancing solutions in the form of Income Share Agreements (ISAs). The company also provides investment opportunities through its ISA refinancing fund, which allows investors to earn perpetual returns while investing in the earning power of America’s educated workforce.
“The investment side is our ISA refinancing fund, open to accredited investors, where they can invest, and get a fixed income type of a return with lower risk, but with returns that are closer to equities. We also have a career resources marketplace because we invest in people, invest in their earning potential. We always want to make sure they are doing well and they are optimizing their income so they can use those resources to find a job if they lose their job, or even for career guidance, and other things like mental health counseling, wellness resources, credit, and finances,” said Siddiqui.
Until this point, Defynance has been internally funded. Saddiqui put in a good deal of capital, along with family, friends, and mini-angels who have supported Defynance from the beginning. Now, for the first time, Defynance is raising a seed round. They partnered with Netcapital to launch an Equity crowdfunding campaign, which closes on December 11. For a $99.00 minimum investment, shareholders can help solve the student debt crisis, and can begin earning dividends when Defynance becomes profitable.
“It’s a minimal investment that allows people to buy shares in Defynance. Student debt is a middle-class problem, and we are middle-class folks solving it, so I felt it was very important to get middle-class support,” said Siddiqui. “We’re also talking about angel investors and some early stage VCs. A combination of those two things, hopefully, should finish our round.”
To qualify for Defynance’s ISA, an applicant must be an employed United States citizen or permanent resident with a degree or certification from an accredited institution. Defynance uses a proprietary algorithm that considers various factors to determine whether or not an applicant would be a good fit.
Saddiqui said, “We don’t use a credit score to make a decision, because it’s not fair for younger people. Credit scores are skewed for people with more credit and more credit history, but we still look at credit factors like late payments to adjust for risk. The algorithm looks at that, and other factors such as income, unemployment potential, and different professional industries. The algorithm then predicts an income share percentage that we hope should be competitive for our customer, but also should give a return to our fund investors. We try to find a good balance between the two for both sides.”
Defynance offers qualified applicants a smart Defynance ISA. The income share percent is customized for each applicant based on the amount of financing they need, their income, and the length of the agreement. Defynance offers multiple income share percent and payment term options for applicants to choose from with built-in protections for hardship. For example, if someone loses their job, or their income falls below a certain threshold, the ISA payments pause.
Defynance’s investment opportunity, the ISA refinancing fund, diversifies risk since all loan refinancing applicants are screened using Defynance’s proprietary algorithm to mitigate risk. The ISA refinancing fund returns boast an ideal profile of low volatility and targeted returns in the 7-10% range. Since ISA investment gains are not realized until the initial capital is recouped, this allows investors to leverage the power of tax deferral benefits.
“Investors can actually make a social impact, by helping solve the student debt crisis, while also getting a return on their investment. ISAs offer a different type of investment vehicle in the sense of recession hedging properties, because it’s like a fixed income with lower risk and higher return potential than they would find in fixed income because interest rates are so low right now.”
Siddiqui has spent the past 15-20 years focused on social entrepreneurship, in socially responsible finance. He was inspired to start Defynance when he realized how pervasive student loan debt was, and how it was affecting people close to him.
“In 2018, I really started to look at some of the pain points in the financial services industry, different areas that we could tackle from a problem perspective, and the student debt just screamed, in terms of the problem that it had become. Student debt has been around forever, but even I was surprised at how bad it had gotten. Then you find out how many people that are even close to you, dealing with this issue. Family members, co-workers, close friends, kids, my kids were starting college as well, so it resonated with me.”
Defynance started in Tampa in 2018, but is in the process of transitioning to Atlanta. The company was accepted for an incubator program with Advanced Technology Development Center (ATDC) in early 2020. Although Siddiqui has relocated to Atlanta, the COVID pandemic delayed the transition for the rest of the team, who are still located in Florida. They have been working virtually, and plan to make the move once things have normalized with COVID.
“Atlanta has been amazing, I mean, we’re a small eight-person shop, and it feels like we got the red carpet treatment. Everybody in Atlanta, from ATDC to Georgia Economic Development, Metro Chamber of Commerce, even Georgia Power, Fintech Atlanta, Invest Atlanta, all these different support organizations and the great people there, and so many opportunities. Everybody’s willing to help, and support your goals, and so on. I got connected with WeWork labs on Marietta Street with Joey Womack, he’s been a mentor.”
“Tampa was great. I loved the weather, loved the community there too, but as we were growing and evolving, it became apparent that we needed more Fintech expertise. Then I was looking around, and ATDC stood out, it’s an incubator that’s been around for years. Kristin at ATDC is amazing to work with. She’s a great facilitator who has made so many great introductions and helped us find advisors. It’s been great working with her, and being a part of some of these conferences, even though they were virtual.”
Siddiqui said the focus for Defynance right now is product-market fit.
“Ultimately, it’s really about building the company now. That’s why being in Atlanta is cool as well, because there’s a lot of talent here that’s more Fintech specific. Building our team in Atlanta is going to be a big thing for us too.”