Freelancing and consulting are the core employment options for over 35 million Americans – some involuntarily, but a growing number of people are voluntarily making this work-related lifestyle choice. The range of socially and professionally acceptable work options has expanded substantially, with win-wins for both parties, as workers gain flexibility and corporations benefit from focused resources fulfilling targeted needs. However, the ecosystem surrounding 1099 workers is still missing vital elements compared to the employer-centric environment supporting full-time employees.
These gaps – such as healthcare, credit, loans, and retirement plans – present a significant opportunity for those who can take advantage of this growing trend of part-time, fractional (i.e., part-time senior roles), consulting, and project workers.
Entrepreneurs and investors are realizing the need for solutions focused on individual professionals, rather than employees who receive fringe benefits through their employer. Independent contractors are still at a significant disadvantage for accessing important services, such as home mortgages, particularly at affordable terms, due to their non-traditional employment.
One hindrance to developing a comprehensive benefits ecosystem for independent workers has been a lack of political acknowledgment of the reality of less-secure jobs, more fragmented careers, and shorter-term work situations. The overall system is still geared for traditional full-time work, and the government hasn’t encouraged other models. The Bureau of Labor Statistics isn’t gathering specific data on the independent contractor population, and without the data to get clarity and monitor growth, changes in labor and employment policies will continue to lag.
Meanwhile, the Freelancers Union has long-rallied for viable solutions to meet independent workers’ needs. Since progress has been slow and government intervention has been lacking, compelling opportunities exist for entrepreneurs and thoughtful investors to fill the gaps. I spoke to Kathleen Utecht, a managing partner at venture capital firm Core Innovation Capital, about the fintech startups they invest in. One specific area of interest for Core is backing entrepreneurs seeking to equip and support the burgeoning 1099 economy.
Wade: Why does Core focus on the 1099 economy?
Utecht: Technology is at the core of exponential change – improving transparency, reducing risk, and leveling overhead costs. This is leading to the potential for transformative financial products and services. In researching areas of opportunity, we started paying attention to how people were earning money and realized we wanted to be part of everyone’s paycheck and part of the value chain as they receive and spend it. We look for well-designed financial products that save people time and money as well as create upward mobility and scale broadly.
Wade: How does it relate to your overall investment thesis?
Utecht: The fundamental premise of Core is to create economic value as a function of providing significant social value. As Arjan [Schütte, Core’s founder and a managing partner] said, one entrepreneur we backed is “neither heartless mercenary nor helpless missionary” and is a visionary, too. We are committed to empowering small business and everyday Americans.
Wade: What is the specific investment strategy that guides you in this area?
Utecht: We look at marketplaces by sector and prefer platform plays in general. We do not want to bet on who wins. With our approach, we are more interested in inserting ourselves into the payroll system and enabling others to try different concepts, as there are many ways to serve different demographic groups. We look at benefit administration plays, such as benefits for part-time workers. We also like ventures that create better user experiences for contractors as well as full-time employees, like helping people find the right health insurance plan.
Wade: Why do credit-related ventures feature heavily in the deals you seek out and invest in?
Utecht: Credit is so important for every individual participating in the U.S. economy. We found that an important segment of the population doesn’t have access to reasonable, or perhaps any, credit based on their contract status or irregular income. However, there are incredible opportunities. For example, there are tens of millions of people that are misclassified as non-prime credits. Many of these people are actually great credit [risks], there is just too little information out there about them. One of our companies has been able to reach millions of misclassified people, lending billions of dollars with single-digit default rates. We are also working on a platform of mortgage companies working on both standard and non-conforming mortgages. In addition, for those coming from overseas, not having a FICO score is a major impediment to building a fully functioning life in the U.S. We invested in a company looking at how people will be able to transfer credit ratings from overseas.
Filling out the 1099 ecosystem
Wherever and however they are currently employed, the professional U.S. workforce is waking up to the reality of individual-centric, fragmented careers over their lifetime, comprising short- and long-term jobs and projects. As Utecht and Core understand, everyone needs access to the full breadth of service offerings, including people in these new employment models and dynamics. New data and metrics are needed to appreciate different psychographic profiles and develop appropriate risk models.
Let’s develop policies and companies utilizing accurate data and new criteria to understand and support the lives and needs of everyone who makes up the evolving labor force.
For more on effectively managing the new workforce, see Everything You Know About Leadership Is Wrong.