Upstart, a nearly five-year-old online lending company that prides itself on quickly identifying people who are less likely to default on money leant them, has raised $32.5 million in fresh funding that brings its total funding to date to around $85 million. Partly, the company plans to use the capital to further fuel its current growth trajectory. In fact, according to CEO (and former president of Google Enterprise) Dave Girouard, Upstart expects to turn profitable this year.
But the company also sees a huge opportunity in licensing its technology to banks, credit unions and even retailers that are eager to make low-risk — and profitable — loans to their own customers.
Rakuten is certainly buying into its vision. The Japan-based internet services giant just co-led Upstart’s newest round with an undisclosed U.S.-based asset manager. Earlier backers Third Point Ventures, Khosla Ventures and First Round Capital also joined the financing.
We talked yesterday to Girouard to learn more about Upstart’s new software-as-a service offering, online lending’s perception problem and how the Trump administration is likely to impact his 100-person company. Our chat has been edited for length and clarity.
TC: Congrats on the funding. Is Upstart turning into a SaaS company?
DG: No, we still have and continue to grow our direct lending business. It’s how we learn and grow. This [SaaS arm] will grow alongside it.
TC: What’s its “value proposition” to potential customers?
DG: It’s very similar in nature to any SaaS business; it’s the whole idea of people saying, “We’re not going to try to build something ourselves.” We’re strongly on the tech and data science end of the spectrum. We don’t come from financial services, as do a lot of other [lending] companies. We apply very modern data science to the question of who gets a loan and at what price; that’s the heart of what we’re known for.
TC: You’re targeting existing lenders, as well as hoping to help retailers and others get into the lending business. Is that right? And what you will be charging them?
DG: Yes, and we’ll charge a monthly fee, then a smaller fee per loan that captures the cost of originating a particular loan.
TC: You started your direct lending business by targeting millennials. Is that still your target market?
DG: It’s still our sweet spot, young adults. Our average borrower is 28. The most common use of [our loans] is to pay credit card debt, though it’s really a personal loan that you can use for anything.
TC: How do you market to this demographic?
DG: Our approach is predominately digital. Our borrower is typically online, so [we advertise on] Facebook and Google; we have high marks on the [personal finance platform] Credit Karma. We still do some offline direct mail; our industry is dominated by it. But we don’t do nearly as much as others.
TC: What are your default rates? Do you share those publicly?
DG: We have very low default rates — a couple percent or thereabouts. Our model ensures that we’re not giving you more of a loan than you can afford. Our machine-learning-based system can approve more people, too, because it’s learning more while also reducing default rates.
What’s really interesting about this effect of applying machine learning and modern data science is that you are lowering rates for people. The more you can avoid lending to people who will default, the lower the interest rates that everybody else pays.
TC: Your site says you charge between 4.96 percent and 29.99 percent APR.
DG: Our borrowers pay us 12 percent on average for a fixed-term loan, compared with the 22 percent they are paying on average for their credit cards. And there’s no penalty if they pay off their loan early.
TC: How much money is moving through your platform every year?
DG: We originated about $650 million in loans in our first two-and-a-half years. We aim to originate about $1 billion this year. So it’s growing nicely.
TC: Where is all this money coming from that you’re lending?
DG: We fund some ourselves. We also have a relationship with Goldman Sachs and other big institutions; they help us make a lot of loans. And about 10 percent of our loans come from individuals who can come on to the platform to loan money; it’s a nice way to invest and make a good return.
We’re also just a couple of months from doing a securitization, meaning taking huge pools of loans and selling them off into the credit market out there. If you’re in the credit business and you want to access the trillions of dollars out there to fund your loans [this is the way to do it].
TC: I think people outside of banking hear “securitization” and cringe, dating back to the financial crisis of 2008. Do you think online lending suffers from a perception problem? Has it recovered from what happened last year with Lending Club?
DG: When that Lending Club stuff came down, it definitely set the industry back. It raised questions: are these companies trustworthy? Are they for real? Is tech really a differentiator here or not? We were caught in the flak of Lending Club’s problems.
But our models performed really well and we had no similar issues and our industry has rebounded since. I think [everyone] is on stronger footing now.
TC: Do you think the new U.S. administration will help? Obviously, there’s been a lot of talk about deregulation, which would seem to be good news for you.
DG: I think everyone is in wait-and-see mode, but generally, a pro-business administration has a lot of benefits to us. We don’t need repeal of regulation or anything like that; in many ways, we’re just looking for clarification of the regulatory environment.