Neil Patel

I hope you enjoy reading this blog post.

If you want help with your fundraising or acquisition, just book a call click here.

Tess Michaels has found her way to have a big impact on the world around her by creating new financing solutions for students. The venture, Stride Funding, has acquired $170 million in debt and equity financing from top-tier investors like Graham Holdings, Slow Ventures, GSV Ventures, and Juvo Ventures.

In this episode, you will learn:

  • Focusing versus thinking along with your product expansion plans
  • How fast Stride Funding is growing
  • New ways to fund your own education


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About Tess Michaels:

Tess Michaels is a serial entrepreneur with experiences from Goldman Sachs and Vista Equity. She is a recipient of the Wharton Deans Award for Innovation and the Penn Alumni Award of Merit. At Harvard Business School, she served as a trustee of the Harbus Foundation and as a Senator. Tess was named a Woman to Watch by the UN Foundation in 2015; she won the Grand Prize at MIT FinTech Competition in 2019 and was honored as a Forbes 30 Under 30 in 2020.

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Connect with Tess Michaels:

Read the Full Transcription of the Interview:

Alejandro Cremades: Alright, hello everyone and welcome to the dealmakerr show. So very excited with the guests that we have today. We’re gonna be talking a lot about you know building scaling all the good stuff that we love to hear also raising money while still you know going after your study so you name it so without further ado. Let’s welcome. Our guests today Ted Michaels welcome to the show. So originally you were born in Philadelphia but obviously you spent some time in Texas too so give us a little of a walkthrough memory lane. How was life growing up.

Tess Michaels: Thank you so much for having me.

Tess Michaels: Yeah, life growing up. So um, you know was in Philadelphia my um, you know mother was in residency at the time and after that we spent about a decade in New York um you know and. At some point somehow worked our way over to Plano Texas the beautiful burbs of Dallas which was you know a great place to just grow up. Um, you know have a ton of space to stretch out and for me to be at the time a total science fair nerd I was actually spending. Most of my time growing up traveling um doing research on alzheimer’s spent my summers doing research in Italy Korea really incredible childhood but made quite the pivot when I headed to undergrad right back to Philadelphia. Um, to to take my next big step and.

Alejandro Cremades: Now when you when you did the underground I mean that was a quite ah, an interesting mix because you did biology management I mean you also did impact investing So so many different things at the same time. So I mean that that’s kind of random. So how did that combo. You know come about.

Tess Michaels: And.

Tess Michaels: Um, yeah, totally. So Um I know it. It definitely seems like a mix so I went to you Penn to do a dual degree program. So as you said did impact investing and operations management in Warden and then did biology in the college. And I think it was really a fusion of oftentimes. It’s what you have exposure to right I grew up in a family where you know half my family was in Health care hence the interest in biology and the interest in science fairs and then my father was in business right? and. I Really always believed in the power of understanding how you apply technical skills or um, you know in in my case science and so being able to really understand you know how to be a good manager. Um, and how to really think about you know fusing impact. Even when I think about um, you know finance had always been something that was exciting for me but I will say you know going from an accounting class to an organic chemistry class was quite the switch where you’re just turning you know wearing one hat and then switching very quickly to the next. And in a lot of ways it was like speaking different languages right? so.

Alejandro Cremades: Now Now your case after graduating I mean you you definitely were on the other side of the table I mean now you say you’re a founder but you tried investment banking. You also did private equity.

Tess Michaels: Yeah.

Alejandro Cremades: So what did you learn from? Perhaps you know on the investment banking site like seeing like all these different companies and seeing the deal making and then also on the private equity side which is more like the pattern recognition for like identifying the good investments right.

Tess Michaels: Yeah, it’s a great way of framing it. So right out of undergrad I worked in New York at Goldman Sachs doing investment banking and candidly I really thought about my early career as a way to expose myself to you know an industry where or. You know a a field where you just had really sharp learning curves. Um, and that’s exactly how I felt in investment banking. You learn a lot of skills very quickly. Um, you’re around really smart people and I just saw it as a really good foundation for whatever else I wanted to do next. As I then thought about where my career was evolving I was increasingly fascinated by really interesting software companies. Um, you know vertical software companies that were able to be really sticky with their um you know customer segments and. And so I then transitioned to vista equity partners doing saas investing and to me that was just such a great experience of getting to see top tier companies that were finding ways to you know. Disrupt different industries but do so in a way that is thoughtful right? recurring business models. Um, you know, high degrees of retention and really figuring out. How do you tackle? you know a part of a any given customer solution suite in a way. That’s very very ah you know.

Tess Michaels: Virtual and so again, really amazing way to just see a lot of great companies and have pattern recognition as you alluded to.

Alejandro Cremades: Now they say that once a founder always a founder and you know one thing that really stood out for me here. Is you know? Yeah when you graduated you went right into investment banking on private equity. And 1 thing that is really important here to mention is that while you were in school. You also had your own venture and in fact, you raised money for this venture. You know it was a software analytics platform. But why didn’t you go at it as an entrepreneur. What happened.

Tess Michaels: Yeah, yeah, absolutely so your you’re spot on so I actually built my first business in undergrad I was nineteen years old and it happened very organically I was actually doing research with a number of professors at warden. And it was on. You know these hybrid organizations these companies that you know were for profit but had a mission vent right? Whether it’s the warby parkers in the tops of the world or companies that are just in industries like health care or education. And I became fascinated by the fact that so many large companies were supplementing their businesses with philanthropy employee volunteerism to just create employee retention I thought that was fascinating I built a business organically and candidly I did a lot of things as a first timer that. You know, looking back and like why did I spend so long on building a product in a vacuum right? and bringing that out to market and then realizing wait a second. The customer has all of these nuances of what they need what they want or thinking about. You know what our go-to market strategy was or how our business model worked and so you know we got early traction. It was something I was very passionate about conceptually um you know having businesses that have it impact Ben is something that will always be poor to me but candidly we didn’t get the lift.

Tess Michaels: That I had expected and momentum is half the battle right? as a startup being a b company isn’t sufficient right? You really need to always raise the bar for your peer set and always think about you know how are you able to to hit that j curve and so um. I recognized that while conceptually it was great and we had early traction. We ended up doing a you know we ended up doing an asset acquisition with another larger player in the space and they were able to take our assets and do something bigger and better with it and I was able to then say let me learn some core skills. That will apply so my next go around I really do it right? So yeah.

Alejandro Cremades: Wow So you were always looking at investment banking or private equity as perhaps the bridge that would get you to where you want it to be. Yeah.

Tess Michaels: Yes, yeah I look I loved my experiences in finance. No doubt about it. Um, and the peer set there but I was itching to create to build again. And to really get a second crack at that Apple.

Alejandro Cremades: Now it didn’t take long because you were in vista equity and and basically what you decided to do was to hit reset and what a lot of people do when what what that means is essentially going into business school so you ended up going to Harvard. So why why was

Tess Michaels: Yeah.

Alejandro Cremades: You know that call. Why did you make that call of perhaps going into business school you know versus maybe like just like going at it and building your own business I mean why why going into business school.

Tess Michaels: Um, yeah, yeah, great question so candidly I actually I was part of a program at Harvard called 2 plus 2 where you apply to business school while you’re still in undergrad. So I had been accepted to Harvard my senior year at penn. And then they give you you know a few years to work in industry and then to go back to school and so I always knew that was on the map and the way that I thought through it was I wanted to really think about business school as an accelerant right? There is some something special about. You know the the level of of access that you get from ecosystems like that so to be clear I’ve spent the months leading up to this in school walking around and asking anyone and everyone if you could change 1 thing in your life. What would it be right? and I’m talking about I asked friends I asked you know. Folks from work I asked and you know to even uber drivers every single uber that I would sit in and I kept hearing this recurring theme of I want to go back to school but it is so expensive I don’t know what to do about it and I had the luxury of being very just moments away from. Being on a campus in Boston which let’s be clear Boston has you know the highest concentration of universities in a very small setting and I said this go at building a business right? Even for myself I was like this sticker price is hefty I feel this firsthand I know there’s a better way to finance. 1 ne’s education.

Tess Michaels: And so I spent the first couple months of business school popping around from campus to campus asking students hey how are you paying for school and what do you wish could be different right? and um and so I really saw a business school as an accelerant and I’m happy to share kind of. How I threw myself in and and what were the tools that kind of helped me get there. So.

Alejandro Cremades: So then let’s talk about that because obviously the um, the ideation you know is kind of like the um, the part that is essential I mean on the first business that you that you did you learned the importance of listening to customers. So that lesson that you learned you know that you implemented as part of that ideation of really you know, thinking through something and that process of bringing something to life. How did you implement that lesson so that you knew or or that or or perhaps to get you in that path to really get it right.

Tess Michaels: Yeah, absolutely so there was a number of things I did differently this go around first is I spent as I mentioned multiple months on campuses talking to the end consumer who’s the student on top of that. Through my networks I spoke with investors the capital markets folks to say what would it take from a scale perspective from a structuring perspective to be able to offer a competitive product in market and then on top of that I really talked to a number of folks. Were other fellow entrepreneurs in the fintech space to say what did you do right? What did you not do right? because I don’t need to make the mistakes you did I just need to learn what to avoid visco around right and that really helped and then after we launched the business. Let me be clear. So. We’re in the outcomes based financing space so we offer products where we can underwrite students using alternative credit based on their future outcomes right? So you know a nurse is going to have the ability to repay you and they don’t need a wealthy parent or co-signer to be able to. Support me being able to finance them that was the underlying thesis and I spent the you know early months of stride’s launch speaking with every single potential customer that called stride I mean I was the customer service team right? And after you speak to a few hundred students.

Tess Michaels: You have a pretty good sense of their priorities and how you design a product that you know is going to work.

Alejandro Cremades: So then once you knew you had it right? What was the next step.

Tess Michaels: Yeah, so first of all I think when you say have it right? 1 of the things you learn in in a startup culture is first of all every it’s like dog years right? Every day is like a week every year is like 7 years and you’re learning iterations or as quick as as the. As the time flies by and so in a lot of ways we’ve evolved a lot as a business but always kept the mission really core for me some of the key lessons were first being really thoughtful on who we partnered with on the capital front. How do you create a product that is very competitive right out of the gate. You don’t create adverse selection second was really around our go-to-market strategy and the evolutions that we’ve had there to drive scale and efficiency of customer adoption and then the last was really around. You know how do we build the right executive team that can scale with the business. Right? Because what you do from 0 to 20 as a company is very different from 20 to to a hundred.

Alejandro Cremades: And and for the people that are listening. You know to really get it. What ended up being the business model of strie. How do you guys make money. So.

Tess Michaels: Yeah, absolutely so I actually took a lot of the early learnings that I got from looking at companies at vista and thinking about how do we build a platform based business where schools and investors pay us recurring fees that includes. Management fees servicing fees, you know, etc and how do we build a business that’s resilient and not cyclical as we think about the evolution. So let me give you a few examples here. Um, first was you know from a go-to market perspective. We initially had a b to c business right? Students could find us directly on the site see if they’re eligible for funding for their education and apply directly for that funding that is great but you know from my perspective it created a lot of access but at the cost of you know limitations on your. Ability to scale very quickly right? because you’re going student by student and also um, you know predictability limitations so that was the first thing was being able to migrate over and say wait a second. What if we could partner directly with the institutions. The schools second was thinking about how we don’t have a. Ah, revenue model or business model. That’s very cyclical so we expanded from just degree programs for traditional undergrad and graduate programs to also include non-degree programs which let me tell you covid has accelerated the demand for non-degree boot camp programs certificate programs suddenly we had enrollments throughout the year

Tess Michaels: Instead of just during the summer months and so we were able to kind of streamline our business model as well and then lastly you know as we thought about market changes like the market has evolved today. We wanted to make sure that we. Did not take on the balance sheet risk where the capital markets risk so we don’t fund off a balance sheet. We raise capital from venture investors for our business. That’s our people in our platform and we raise separate capital from banks and credit investors to fund students that is. Put into special purpose vehicles. Yeah yeah, so we’ve raised a little over $20,000,000 on the equity side. So that’s just to fund our hiring and then we’ve raised.

Alejandro Cremades: Because how much capital have you guys raised to date on the equity side and then on also on the deb side.

Tess Michaels: Ah, hundred and fifty million dollars on the debt side to fund students.

Alejandro Cremades: And how is it different from the equity side to the Dev side I mean how how do you go about it and and yeah, how do you make that happen.

Tess Michaels: Yeah, so first of all the mindset of a venture investor is very different than the mindset of a credit investor so you wear 2 very different hats as a business venture investor is saying how am I going to get outsized returns. How am I thinking about a company that has incredible growth momentum. Um, you know differentiated Ip in a you know a plus team and we were very fortunate. We have incredible you know venture partners and each of our venture rounds have been preempted and so before even formally taking off the process for our seed round for our series. A round. Had a term sheet from investors and we’re able to you know, kind of raise very quickly which I’m very grateful for with partners that we felt very aligned with our capital markets fundraises have been quite a bit different there. We’ve really raised from scalable. Banks like Silicon Valley bank large you know multibillion dollar credit funds and then impacts investors and those investors are focused on how do I make sure I make my money back and that we’re mitigating any risks here and that’s where it really comes to. Our thoughtfulness on our underwriting our segmentation and making sure that they are working with you know folks like ourselves who came from backgrounds in finance and understand the space and.

Alejandro Cremades: Now for you guys the um, the go-tomarket because 1 thing is to build something and the I mean but people don’t know about it. It makes no sense right? So obviously distribution is absolutely everything I know that for you guys the the process of.

Tess Michaels: Yes, yes.

Alejandro Cremades: Figuring out they go to market and and figuring out channels 2 that were effective was same ah pivotal moment. So how did that come about walk us through through the thought process behind you know, really figuring and the effectiveness behind the channels that you’re using.

Tess Michaels: Um, yeah, absolutely you know I think oftentimes some of this is initial iteration right? when we started again I had the benefit of being a student on campus saying wait a second I think outcomes based funding is going to be the next big wave. Ah, financing products right? if you look historically at almost all student lending products are principal and interest products 92% of them require a cosigner right? The whole point of going to education is to do better than your parents not to rely on them. So my initial aha was. Why aren’t there outcomes based funding products offered at scale and why can’t I as a consumer in a great program. Great school, get access to these products so we offered a direct tosumer model initially now I will say the benefit of starting Dtoc was we really got to. Design a product that fit like was purpose built for the end consumer right? because you’re understanding what features they want what experience they want? Um, but as we evolved we started shifting toward more and more of a b to b model. Where we would partner directly with these large boot camps and universities and the benefit of that is they were showcasing our product to their students directly which allowed us to just have first of all little to no cac right? as far as acquiring customers Second of all.

Tess Michaels: Really grand great brand association and affinity and third of all to increase our own economics and business model because we were able to get fees from the schools as we drove enrollment through our financing product and investors as we drove returns for them. So again. A lot of this was iterative. But now we are a primarily b two b business with multi-year exclusive contracts with our end you know with our schools and again a platform based model as far as our fees.

Alejandro Cremades: And part of the go to market too is understanding the products that you’re going to be using or or or putting in front of these people and you also don’t want to spread yourself too thin. So.

Tess Michaels: Casts.

Alejandro Cremades: In the case of Stryd How have you guys also thought about product expansion. Okay.

Tess Michaels: Totally so you’re so right I think half of the battle is especially as a founder is staying focused in the early days there’s so many interesting ideas out there that you want to test but I think it’s staying focused on your core with thoughtful tests around potential expansion areas. So for us. We looked at first and foremost education is a wedge market for us right? So we wanted to enter in with high quality education um products that we could offer obviously via financing. And then really think about what is that end consumer need next on their own. You know, financial journey that Stryd could offer. But first again is really nailing your ability to acquire customers at scale for our existing ah you know education financing products. We started with product one. Which was an income share agreement where students would pay a percentage of their income over a set number of years to really align the incentives around the cost of education with the value received that was probably the most innovative when it comes to the education financing space then we offered. Our second product which was a retail installment contract with an income trigger think of it as a bnpl product with an income trigger where you essentially offer the income protection. You only pay when you’re earning but when you pay it’s a fixed dollar amount and now we’ve expanded into.

Tess Michaels: More traditional loan products that are Principal and interest bearing but the beauty of that is we have menu options for our customers. We can maximize our ability to attract customers and have you know real growth from that basis and now the next step we’ll be thinking about expansions outside of education financing. To support those very same consumers.

Alejandro Cremades: So we’re thinking about you know what? that could look like what future. What the future could look like if you were to go to sleep tonight and you wake up in a world where the vision of stride is fully realized what does that world look like.

Tess Michaels: Yeah, yeah.

Tess Michaels: Yeah, yeah, so you know it’s interesting because in a lot of ways education financing is the first big purchase that these consumers make right? It is the biggest purchase you make at that point in your life and so if we can nail. Student experience. The customer experience now we will have loyal customers as we think about the full evolution of our products and that is thinking about what are their next set of big purchases. How do we underwrite these students differently. Let me let me give you an example, a traditional private lender. All they really know about their customer is did they make their interest payment. Yes, or no, what we collected stride is we have all sorts of income and employment verification tools. So I know is the individual employed yes or no, how much are they earning how fast is that income changing over time. How quickly were they promoted what was their prior educational background imagine thinking about subsegmenting which products these consumers will need based on their earnings. Their position in life. You know their situation and being able to customize for them. We really want to be there 1 stop shop when we think about their financial literacy. Their financial suite of products and ultimately being that trusted brand that can serve these consumers you know from the moment they enter education through the day that they retire. So.

Alejandro Cremades: Now for the people that are listening to get up and understanding on the scope and size of strye today I mean anything that you can share like number of employees or anything else that you’re comfortable sharing.

Tess Michaels: Yeah, of course so as a company. Ah we grew over 6 x this past year we have you know over 10.000 students that we have supported to date and that’s growing very very quickly. Um, as far as how we think about you know the business evolution this last quarter was by far our best quarter yet. We had a seven X year on year increase in our bookings. Um, and as far as the team we’ve tripled the teams size over the last nine months and are continuing to grow. We’re a Boston -based company and um, it’s been really special honestly for me just hearing you know the students stories every day and knowing that I get to build something huge and meaningful and that actually matters right? so.

Alejandro Cremades: Now imagine if I was to put you into a time machine and I bring you back in time you know, maybe back to that moment where you were still there in Philadelphia walking around the campus there in Wharton and.

Tess Michaels: Yeah, yeah, yeah.

Alejandro Cremades: And you know dreaming out and and and figuring out you know what kind of company you were you were going to launch you know on your own and if you had the opportunity of sitting. You know that younger self and and having a chat and most importantly giving a a piece of advice before launching a business. What would that be and why given what you know now.

Tess Michaels: Yeah, man, there’s a lot of advice I would give to my former self but um I would say you know the primary things are one. It is so important to be bold at any age any stage of your life and to realize that. You will find supporters to back you as long as you bring that confidence around you know conviction of what you are building. Second is you know, just ask a ton of questions early in life at every step of the way I think this is one of the things that I Um. At this point in my life. Really think about my team always jokes that they’ve never met someone who’s more of a ah question Asker than I am but I think there’s so much you can gain from just absorbing and learning and then knowing how you fine tune how you apply what you do the last pieces of advice I would think through is one. You You know people say you’re the average of who you surround yourself with that is so true whether that is the case in building a company and thinking about the executive team that you surround yourself with or thinking about the peer set of founders and supporters and investors that you surround yourself with. Constantly you know, find folks who they think in the mind frame of does this raise the bar am I raising the bar. How do I make sure that what I am doing is continuously moving forward and not just flat lining right? But again.

Tess Michaels: It’s been really special building a business and just knowing that you know you can be bold and you don’t have to know the most in the room candidly if you do know the most in the room you’re probably in the wrong room and so that that would be my advice to my former self. Yeah.

Alejandro Cremades: I Love it so test for the people that are listening. What is the best way for them to reach out and say hi.

Tess Michaels: Yes, look I am super responsive on email my emails test t e ss at strideffundinging.comstr I d efunding dot com um or at me on Linkedin but would love to you know, just. Exchange thoughts and and get to know any of you.

Alejandro Cremades: Amazing well tes. Thank you so much for being on the deal maker show today. It has been an honor to have you with us.

Tess Michaels: Oh absolutely, it was such a pleasure. Thank you.

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