How a Pile of Student Debt Inspired a Venture-Backed Startup

Rod Ebrahimi watched his girlfriend finish graduate school with a hefty amount of debt. The two created a spreadsheet to help plot how to tackle repaying her student loans and the other debts they had accrued. As they worked, it occurred to Ebrahimi that this was a widespread problem that technology could solve--the perfect opportunity for a Silicon Valley startup.

His own personal finance hurdle was the catalyst for ReadyForZero.com, a San Francisco-based company that helps consumers manage debt. At the time of his light-bulb moment, Ebrahimi had been accepted to Y Combinator, a Mountain View, Calif., incubator that helped launch social news site reddit and document-sharing service Scribd. Ebrahimi and Ignacio Thayer, a former senior software engineer at Google, decided to ditch their idea for a news-aggregating service and instead use their time at the incubator to develop the debt-relief concept.

ReadyForZero, which launched in February 2011, differs from traditional debt-management and credit-counseling services in its approach, which involves collecting users' account credentials (user names and passwords) to access balance and payment information directly from credit card companies, loan servicers and mortgage holders. Users report their income, and ReadyForZero makes recommendations about how to best pay down their bills. The vision was not to take over management of the debt but to provide tools consumers would need to get control of their debt on their own. And ReadyForZero's data shows that this system is successful: Its users are paying off their debt in half the time of the average consumer.

Americans have dug a deep hole. U.S. consumer debt made its biggest jump in a decade in November 2011, rising nearly 10 percent to $2.48 trillion. ReadyForZero users contributed about $170 million of that debt--and have paid down about $7.5 million so far.

But not everyone "gets it," Ebrahimi says, especially in the world of venture capital. "Believe it or not, you go around [to investors] and say that people have debt in America, and some of them are like, ‘They do?' One investor said his house was paid for and he couldn't understand why people have debt. That was the wrong guy."

Ryan Spoon, principal of Polaris Venture Partners, a Boston-based venture capital firm, learned about ReadyForZero through Movity, a real estate information company in which Spoon was an investor. (Movity was also part of Y Combinator.) The decision to invest was obvious for Spoon, because ReadyForZero met his three key criteria: It had a good management team, a solid market and a high level of user engagement.

Polaris led ReadyForZero's $4.5 million Series A venture round, which closed in June 2011. The money is being used to market the site to attract more users, in addition to adding more debt-management tools and information resources.

In a sector with scammers and unscrupulous debt-management companies preying on vulnerable people, building a reputable brand is crucial. But Spoon isn't worried. "ReadyForZero is different from those ads on early morning television where people are asking you for money or making unreasonable promises," he says. "We're giving you a personal [profit and loss statement] for each user. The key is to put the user in control and do that in an incredibly transparent and honest way."